Submission to the Canada Transportation Act Review Panel

By the Commissioner of Competition

Competition Act

February 27, 2015

Disclaimer

This document has been modified slightly from its original version to make it accessible to the public via the web. The original document was submitted to the CTA Review Panel in PDF and contained formatting that is not suitable for HTML. In addition, some minor corrections have been made, including to the translation in the French language version of the document. If you would like a copy of the original PDF version that was submitted to the CTA Review Panel, please contact the Bureau.


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Executive summary

Recent issues with Canada's transportation system, most notably with respect to grain deliveries by rail, have resulted in the Honourable Lisa Raitt, Minister of Transport launching a statutory review of the Canada Transportation Act (the "CTA").Footnote 1 Pursuant to section 125 of the Competition Act,Footnote 2 the Commissioner of Competition (the "Commissioner") wishes to respond to the invitation for advice of the Chair of the CTA review and of its advisors (collectively the "Panel"). Section 125 of the Competition Act provides that the Commissioner may, at the request of any federal board, commission or other tribunal or on his own initiative, make representations in respect of competition.

Transportation services in Canada are essential to Canadian consumers and to the Canadian economy, from tourism to the shipment of grain, oil, minerals and manufactured goods. An effective transportation network is essential to the maintenance of Canada's ability to attract visitors. Competitive freight rates and high quality transportation services are critical to ensuring that exporters of Canadian products remain competitive in world markets.

The Competition Bureau (the "Bureau") believes that reliance on market forces and competition is to be preferred whenever feasible to achieve viable and effective outcomes. Where market forces alone are insufficient to achieve certain policy objectives, a regulatory framework may be appropriate to oversee the practices of railways and air carriers and to address problems associated with market power, including high prices, insufficient supply and inadequate service.

Freight shippers are Canada's largest users of the rail transportation system; however, not all freight shippers have equal access to competitive freight rates.Footnote 3 Shippers served by a single rail line and with no cost‑effective alternatives may be at risk of high prices and low levels of service, given that prices charged by the railways vary depending on the alternative forms of competition available to shippers. The mining, agricultural and forestry industries are especially vulnerable as they rely heavily on rail transportation to move their products to export positions where prices are set internationally.

Most of the Canadian market for freight rail services is served by either the Canadian National Railway Company ("CN") and/or the Canadian Pacific Railway Company ("CP"). Rail freight shippers have limited competitive alternatives. Smaller regional and shortline railways deliver traffic to and from the long‑haul lines operated by CN and CP for long‑distance hauling. Thus, they offer complementary services to those of CN and CP rather than competing substitute services. Major American railways, which could provide a competitive alternative to CN or CP, have only limited trackage in Canada.

The high barriers to entry that characterize rail markets make it unlikely that shippers will obtain competitive relief from a new facilities‑based railway or from the expansion of existing Canadian or foreign railways.

The Bureau recommends that provisions intended to provide competitive alternatives to shippers and to address the imbalance in negotiating power between the railways and the shippers be maintained and modified to enhance their effectiveness.Footnote 4 The Bureau also recommends an amended pricing approach to grain transportation in order to encourage investments in capacity. More generally, the Bureau recommends that any extraordinary measures be implemented in such a way as to minimize their impact on competition in rail markets. The Bureau's recommendations support greater competitive options for users of Canada's rail transportation system, which will most likely result in lower prices and increased levels of service for such users.

While rail transportation is a topic that resonates especially with freight shippers, air transportation is a subject that strongly resonates with Canadian consumers as the importance of the travel industry continues to grow. Airfares charged by Canadian air carriers have come under great scrutiny in recent years, with Canadians increasingly questioning the components of airfares.

Market concentration remains high in most Canadian domestic markets. In 2013, passenger traffic at Canadian airports reached 85.2 million enplaned and deplaned passengers, with Air Canada and WestJet carrying 35.8 million and 18.5 million passengers, respectively. Almost half of the domestic city‑pair routes in the top 100 markets can be characterized as duopolies serviced by Air Canada and WestJet, and certain domestic city‑pair routes remain monopoly routes serviced by only one of either Air Canada or WestJet. Porter Airlines commenced operations in 2006 and now effectively services a niche market on eastern routes. However, its ability to compete vigourously with Canada's two major carriers on longer routes is limited by its aircraft fleet in the short‑term.

New carriers that intend to attract price sensitive consumers appear to be poised to enter certain Canadian domestic markets.Footnote 5 The new carriers' ability to challenge Air Canada and WestJet in domestic markets remains to be seen. A string of failed entrants over the last two decades have proven that achieving sustained profitable operations in Canadian markets is risky, and by no means assured.

Mandatory Canadian ownership of air carriers offering domestic services in Canada, Canada's significant land mass and low population density as well as the current Canadian fee and tax structure create specific challenges for air carriers.

New entrants, as well as established players, would benefit from greater access to foreign capital through relaxed foreign ownership rules. Canadian travellers would also benefit from liberalised air transportation policies opening Canadian skies to foreign air carriers, as such policies would most likely result in lower prices and increased levels of service.

Airline liberalisation has brought benefits to the countries that have implemented legislative changes in this regard. The emergence of low‑cost carriers, an increase in the number of routes operated and network connectivity are among the benefits reported by jurisdictions with liberal policies in place. The Bureau believes that the Government should enable Canadian consumers to reap similar benefits.

The Bureau recommends that increased foreign ownership of airlines be permitted, that Canada's air agreements be liberalised, and that airport fees and access to airport facilities be implemented in an equitable and non‑discriminatory fashion.

Other legislationFootnote 6 pertaining to the economic regulation of marine transportation appears to serve interests other than competition and prevents market forces from fully achieving efficient outcomes. The Bureau recommends the liberalisation of domestic maritime transportation services, and the removal of legislation that exempts certain aspects of marine transportation from competition laws.

Recommendations as to how the Government can help to ensure a competitive playing field in three transportation sectors — rail, air and marine — through proposed changes to the Government regulatory framework are further described in the Competition Bureau's submission.

The Bureau is pleased to respond to the Panel's invitation for advice. The Bureau applauds the considerations being made by the Minister of Transport to improve Canada's national transportation system by taking into account the broader goal of a commercially based, market‑driven multi‑modal transportation system. This approach will ensure that Canadians enjoy the benefits of greater competition in the transportation industry, including lower prices, higher quality service and greater innovation.

The Bureau's recommendations are:

Rail transportation

1. That the Government maintain the regulatory provisions in the CTA relating to competitive access and shipper negotiations with railways to minimize the need for emergency measures to address capacity and level of service issues in the future.

2. That sunset clauses, such as those in Bill C‑30, be used in the event emergency measures are required.

3. That the section 47 requirement for consultation with the Minister responsible for the Competition Bureau (currently the Minister of Industry) be retained to best ensure that extraordinary measures are as much in keeping with the competition principles of the National Transportation Policy as possible.

4. That the existing Maximum Revenue Entitlement formula be reviewed to introduce incentives for the railways to maintain excess capacity.

5. That regulated interswitching provisions be maintained. The Panel should consider whether the current interswitching radii of 30 km generally, and 160 km for shippers within the Prairie provinces, appropriately balance the benefits and costs to shippers and railway operators.

6. That the statutory requirement in the competitive line rate provision, section 131 of the CTA, that captive shippers and connecting railways reach an agreement on rates and services beyond the interchange point be removed. In other words, connecting carriers should be required to accept freight made available at the interchange point as a result of competitive line rate applications. Under this provision, shippers should have the option of using final offer arbitration with respect to the rates and level of services offered by the connecting carrier.

7. a) That the public interest test in section 138 of the CTA be amended to include a list of factors that should be considered by the Agency when determining whether to grant a running rights application. In the interim, the Canada Transportation Agency could issue a document providing guidance on the factors it considers when determining whether to grant a running rights application.

7. b) That the onus for demonstrating a lack of public interest be placed on the railway from which the running rights are sought.

8. That the CTA be amended so that any person meeting the specified fitness test and qualifications be eligible to apply for running rights even if they are not a railway company as defined by the CTA.

9. a) That the final offer arbitration provision remain in place.

9. b) That the Government consider extending the duration of final offer arbitration decisions to two or three years to help reduce the costs associated with repeated final offer arbitration proceedings.

10. That the CTA be amended to explicitly allow an arbitrator to include penalties for non‑performance of service level obligations in an arbitrated service level agreement.

11. That the railways be required to release all relevant confidential data to adjudicators during final offer arbitration or level of service complaints that are brought against them by the shippers. Adjudicators should maintain the confidentiality of information provided in the course of proceedings brought before them.

Air transportation

  1. That the Government bring into force the provisions of the CTA providing for regulations permitting up to 49% of the voting shares of a Canadian carrier to be held by foreigners and gradually seek the elimination of all foreign ownership restrictions with Canada's trading partners, either on a bilateral or multilateral basis.
  2. That the Government create a new class of licensee under the CTA to allow 100% foreign ownership of carriers that carry passengers and goods only within Canada.
  3. That the Government seek to negotiate cabotage rights on a reciprocal basis.
  4. That the Government continue to liberalise Canada's air agreements and to exclude from such agreements coordination among carriers regarding pricing and capacity.
  5. That the Government, in examining issues of airport governance, emphasise the importance of equitable and non‑discriminatory allocation of airport fees among carriers, and access to slots, counters and services for all carriers in accordance with best international norms.

Marine transportation

  1. That the Government end the exemption to shipping conferences from competition law.
  2. That the Government negotiate maritime cabotage rights on a reciprocal basis; in the interim, the Government should work towards the simplification of the process to obtain a Coasting Trade License to import foreign‑registered vessels.
  3. That the Government abolish the statutory monopoly of the Pilotage Authorities in providing pilotage services.

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I. Introduction

Transportation services in Canada are essential to Canadian consumers and to its economy — from the shipment of grain, oil, minerals and manufactured goods to tourism. Freight transport is indispensable to Canada's domestic market and international trade. Availability of choice and competitively priced transportation services are critical to freight shippers and passengers because of Canada's significant land mass, low population density and the importance of its tourism sector.

An examination of the current state of competition in Canadian transportation markets is essential to guide any changes to the CTA. The Bureau advocates that regulators and policy makers regulate only where and to the extent that it is necessary to ensure an effective transportation network for Canada. The Bureau acknowledges the need for regulation where certain industry characteristics may lead to market failure,Footnote 7 as may be the case in certain rail and air markets. The Bureau makes this submission to assist regulators in implementing policies that achieve their objectives in a minimally intrusive way.

The Bureau's submission is divided into three sections: rail, air and marine. A competition review of Canada's transportation system is presented for each of the rail and air sectors. In each section, the Bureau makes recommendations concerning potential changes to the CTA to promote viable and efficient transportation services.

The Bureau's recommendations are guided by the key principle that, in the absence of characteristics leading to market failure, market driven decisions are the best means of allocating resources and attaining competitive prices, higher quality services and greater innovation.

With this in mind, the Bureau's recommendations focus on:

  • ensuring the benefits of competition in transportation markets by relying on market forces; and
  • maintaining or improving regulatory remedies that inject some competition or limit the exercise of market power in markets that are dominated by one supplier because market characteristics limit the ability of market forces to achieve efficient and desirable outcomes.

A. Competition analysis — Analytical framework

The CommissionerFootnote 8 is responsible for the administration and enforcement of the Competition Act, the Consumer Packaging and Labelling Act (except as it relates to food), the Textile Labelling Act and the Precious Metals Marking Act.Footnote 9 The Bureau, as an independent law enforcement agency, ensures that Canadian businesses and consumers prosper in a competitive and innovative marketplace.

Pursuant to section 125 of the Competition Act, the Commissioner wishes to respond to the Panel's invitation for advice. Section 125 of the Competition Act provides that the Commissioner may, at the request of any federal board, commission or other tribunal or on his own initiative, make representations in respect of competition. Market forces should be relied upon as much as possible to achieve the benefits of competition, such as lower prices, higher quality service and increased levels of innovation in the Canadian economy.

The Competition Act is a framework law of general application that applies to all sectors of the economy, except those sectors that are specifically exempted from the Competition ActFootnote 10 or are subject to specific economic regulation.Footnote 11

The Competition Act includes both criminal and civil provisions aimed at preventing anti‑competitive practices in the marketplace, including provisions that apply to price‑fixing, bid‑rigging, mergers, abuse of dominance and deceptive marketing practices. In most cases, the civil provisions require that the conduct in question result in a substantial lessening or prevention of competition or an adverse effect on competition. A description of the key provisions of the Competition Act can be found in Appendix 1.

The following section briefly describes the general analytical framework used by the Bureau to assess market powerFootnote 12 and the effects of anti‑competitive acts on the level of competition in a market. In assessing market power the Bureau usually defines the relevant geographic and product markets and examines whether there are any factors that could discipline the exercise of market power. Indicators considered by the Bureau when assessing market power and examining anti‑competitive acts include, but are not limited to:

  • supra‑competitive pricing or excessive profitability;
  • market shares;
  • effectiveness of remaining competitors;
  • barriers to entry; and
  • countervailing power.

The Bureau generally assesses competition in the various product and geographic markets that together make up an industry. Market definition is based on substitutability, and focuses on demand responses to changes in relative prices.

For the purpose of product market definition, the Bureau assesses buyers' ability or willingness to switch from one productFootnote 13 to another product in response to changes in relative prices.Footnote 14 A product market is defined as the smallest set of products in which a small but significant price increase can be sustained without causing buyers to switch their purchases to other products in sufficient quantity to render that price increase unprofitable.Footnote 15

For the purpose of geographic market definition, the Bureau assesses buyers' ability or willingness to switch their purchases from suppliers in one location to suppliers in another location in response to changes in relative prices. A geographic market is defined as the smallest set of areas over which a small but significant price increase can be sustained without causing buyers to switch their purchases to other locations in sufficient quantity to render that price increase unprofitable. In circumstances where sellers charge different prices to different groups of buyers (i.e., can price discriminate between groups of buyers), geographic markets are defined according to the location of each targeted group of buyers.

Market power can be measured directly and indirectly. Direct indicators of market power include performance measures such as excessive profitability or supra‑competitive pricing, as well as exclusionary behavior and, under some conditions, price discrimination. Indirect or "structural" indicators that may imply market power are discussed in the following paragraphs.

Market share is an important indicator of market power. While there is no definitive numeric threshold, high market share is usually a necessary, but not sufficient, condition to establish market power.Footnote 16 Market shares can be calculated using various units of measurement, including as a percentage of revenues (dollar sales), demand units (unit sales) and capacity. The measurement unit used by the Bureau depends on the characteristics of any given market and is selected to ensure that it best reflects the competitive significance of market players.

The examination of barriers to entry and exit is a key component of the Bureau's analysis when assessing market power in any market. The Bureau examines whether any attempt to exercise market power could be thwarted by expansion or entry of existing and/or potential competitors offering lower prices or better products. In a market characterized by the absence of any barriers to entry and exit, the number of market players is not a determinant of the vigour of competition in that market: a credible threat of "hit and run" entry can be sufficient to discipline incumbents.Footnote 17 In addition, vigorous competition "for the market" by potential entrants can lead to competitive performance even though only one firm is effectively present in the market at any one time. As such, the benefits of perfect competition can theoretically be achieved in a perfectly contestable market, regardless of the number of sellers.Footnote 18

The Bureau examines if a firm's customers have the ability and incentive to constrain that firm's attempt to exercise market power. Buyers may exercise countervailing power through any of the following means: vertically integrating their own operations; refusing to buy other products from that firm; refusing to buy the same product from that firm in other geographic markets where the competitive conditions are different; or encouraging the expansion or entry of existing or potential competitors.

The Bureau assesses the extent to which market power can be exercised on a unilateral basis and on a joint basis. Coordinated behaviour is likely to be sustainable only in the following circumstances:

  • when firms are able to
    • individually recognize mutually beneficial terms of coordination;
    • monitor one another's conduct and detect deviations from the terms of coordination; and
    • respond to any deviations from the terms of coordination through credible deterrent mechanisms; and
  • when coordination will not be threatened by external factors, such as the reactions of existing and potential competitors not part of the coordinating group of firms or the reactions of buyers.

The Bureau examines whether factors necessary for successful coordination and factors conducive to coordination are present in a market. Factors that facilitate coordinated behaviour include:

  • high levels of market concentration;
  • high barriers to entry;
  • product homogeneity;
  • cost symmetries among firms;
  • market maturity;
  • high degree of market transparency; and
  • high degree of multi‑market exposure.

The mere presence of any single factor or group of factors listed above is insufficient to conclude that coordinated conduct is occurring in a market; rather, these factors are examined by the Bureau to assess the likelihood of effective coordinated behaviour.

The Bureau has previously applied the analytical framework presented above to transportation industries. A summary of formal or public Bureau enforcement actions in the transportation sector can be found in Appendix 2.

In preparing this submission, the Bureau has completed interviews with a broad range of industry stakeholders, including both suppliers and consumers, and has reviewed information supplied on a voluntary basis by market participants. Interviews with market participants, such as customers, suppliers and distributors, as well as the review of business records are key sources of information that are used by the Bureau to inform its understanding of markets, whether in the context of a market study or of a formal inquiry. Subject to confidentiality restrictions, market contacts enable the Bureau to test various hypotheses, theories and claims.

It is important to note that the Bureau's findings, as reflected in this report, are not findings of fact or law that have been tested before a tribunal or court. Further, the conclusions discussed in the report are specific to the present matter and are not binding on the Commissioner. Readers should exercise caution in interpreting the Bureau's assessment.

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II. Rail transportation

A. Background and overview of the Canadian rail sector

1. Legislative context

Historically, Canadian railways were considered a form of public utility and were heavily regulated, with regulated rates and obligations to maintain all branch lines, including unprofitable lines. Regulations partly stemmed from the Government's acknowledgement that the rail industry exhibits certain elements of a natural monopoly.Footnote 19 A regulatory framework may be prescribed to oversee the practices of a natural monopolist and address problems associated with monopoly power, including high prices, insufficient supply and inadequate service.Footnote 20

The National Transportation Act (the "NTA") was enacted in 1967 and set out a legislative policy statement and principles to address the needs and capabilities of the national transportation system.Footnote 21 Movement towards increased reliance on market forces gained momentum in the mid‑1980s with the publication of the discussion paper "Freedom to Move" by the Minister of Transport. The NTA was amended in 1987 to eliminate some key elements of regulations in the Canadian railway sector; in particular, collective rate making was abolished and confidential contracts were permitted. Amendments made to the NTA in 1987 also included provisions intended to provide shippers with greater leverage in a rail market led by two main carriers. For instance, competitive line rates ("CLRs") were introduced, final offer arbitration ("FOA") was introduced, and regulated interswitching was extended from 4 miles to 30 kilometres ("km"). A glossary of terms and expressions used in this submission is provided under Appendix 3.

The CTA came into force in 1996 and replaced the NTA. The CTA introduced provisions that significantly eased the transfer and discontinuance of individual rail lines. The removal of regulatory barriers to exit allowed CN and CP to transfer many of their less profitable lines to private entrepreneurs (often referred to as shortline and regional railways). In addition, a "substantial commercial harm" test was introduced in 1996, which applied to extended interswitching, CLRs and complaints involving railway services (sections 113-116 of the CTA). Shippers applying for a remedy to the Canadian Transportation Agency (the "Agency") were required to prove that the railway company's freight rates or levels of service would cause them substantial commercial harm unless relief was granted by the Agency.

The enactement of Bill C‑8 in February 2008 resulted in two significant amendments to the CTA.Footnote 22 First, the remedies available under the CTA were made more accessible to shippers by the removal of the requirement that shippers must prove that they would suffer substantial commercial harm.Footnote 23 Second, the amended CTA required railways to publish a list of rail sidings available for grain producer car loadings and to extend final offer arbitration to groups of shippers.

After Bill C‑8 came into force, the Government initiated a review of the rail freight service (the "Rail Freight Service Review"). A review panel was appointed in 2009 to conduct a review of service issues and problems related to the rail‑based logistics system in Canada and to submit recommendations. The Rail Freight Service Review culminated with the publication of a final report in January 2011, which found that shippers were still reporting continuing issues with rail service levels.Footnote 24

The process towards balancing the railways' and shippers' negotiating power continues. Recent legislative amendments have added additional regulatory provisions designed to help shippers in their negotiations with the railways.

The Fair Rail Freight Service Act (Bill C‑52) received Royal assent on June 26, 2013.Footnote 25 Bill C‑52 amended the CTA to require a railway company to enter into a service level agreement ("SLA") with a shipper at the shipper's request, along with an arbitration process to establish the terms of such a contract if the shipper and the railway company are unable to agree on them.Footnote 26

The Fair Rail for Grain Farmers Act (Bill C‑30) received Royal assent on May 29, 2014.Footnote 27 Bill C‑30 was aimed at promoting greater shipments of grain following a severe backlog during the winter of 2013‑2014, caused by a combination of harsh winter weather and a record grain crop of 76 million tonnes, an estimated 37% increase over the previous year's harvest. Bill C‑30 followed an Order in Council issued in March 2014 pursuant to the extraordinary disruptions power under section 47 of the CTA. The Order in Council directed CN and Canadian Pacific Railway Company to each move at least 500,000 tonnes of grain per week for export. Bill C‑30's provisions gave the Governor in Council the ability to impose obligations on CN and CP to move a minimum amount of grain each week and provided the Agency with the authority to extend interswitching limits in the Prairie provinces from 30 km to 160 km for all shippers. Bill C‑30 contained a number of provisions related to service levels, including amending the Level of Service ("LOS") provisions to require railways to compensate shippers for expenses incurred due to the railway's service failures.

2. The importance of rail transportation to the economy

Canada has one of the largest rail networks in the world,Footnote 28 with Canadian railways carrying over 336.5 million tonnes of freight in 2012 alone and employing 33,646 people.Footnote 29 In 2012, Canadian rail freight services earned approximately $12.3 billion in operating revenues while VIA Rail Canada, a Crown corporation, reported $26.4 million in net income, and $277.6 million in revenues for intercity passenger rail services.Footnote 30 According to the Railway Association of Canada ("RAC"), Canadian railways move roughly half of Canada's exports and handle the fourth largest volume of goods in the world.Footnote 31

The composition of Canadian non‑intermodal freight loaded on rails for the past eight crop years (i.e. August 1, to July 31) is shown in the table below:

The composition of Canadian non‑intermodal freight loaded on rails for the past eight crop years
Railway carloading components (number of rail cars) 2006
-
2007
2007
-
2008
2008
-
2009
2009
-
2010
2010
-
2011
2011
-
2012
2012
-
2013
2013
-
2014
Total non‑intermodal traffic loaded 3,168,983 3,082,118 2,754,882 2,844,375 2,987,008 3,156,211 3,245,682 3,326,590
Wheat 234,669 189,914 232,869 233,041 205,898 225,542 218,202 264,595
Other Cereal Grains 48,586 76,081 60,573 54,273 54,244 56,536 57,075 58,785
Canola 73,879 74,436 101,676 91,981 97,617 118,032 93,974 116,323
Iron Ores & Concentrates 353,248 384,066 348,546 367,099 370,279 354,935 376,147 382,947
Coal 322,253 342,032 279,817 335,037 332,186 355,861 362,659 377,485
Fuel Oils and Crude Petroleum 66,016 66,969 62,191 64,482 64,035 89,288 148,721 181,660
Potash 178,489 183,442 88,921 129,162 175,203 155,339 162,315 163,460
Fertilizers (excluding potash) 57,168 52,597 55,672 51,162 55,994 53,079 52,406 46,093
Lumber 174,009 131,213 98,129 82,142 94,174 117,536 124,660 124,984
Other Wood Products 74,094 48,818 35,203 31,628 34,092 45,481 49,537 51,232
Wood Pulp 117,284 116,872 97,108 81,58 97,904 101,009 98,164 88,884
Other 1,469,288 1,415,678 1,294,177 1,396,210 1,405,382 1,483,573 1,501,822 1,470,142

Source: CANSIM table 404‑0002

Non‑intermodal freight loaded on rails in 2013‑2014

Fret non-intermodal transporté par rail en 2013-2014
Table – Non‑intermodal freight loaded on rails in 2013‑2014
Non‑intermodal freight loaded on rails in 2013‑2014
Iron Ores & Concentrates Coal Wheat & Other Cereal Grains Lumber, Wood Products & Would Pulp Potash & Fertilizers Fuel Oil & Crude Petroleum Canola Other
11.5 11.3 9.7 8 6.3 5.5 3.5 44.2

Source: CANSIM table 404‑0002

As shown in the pie‑chart above, non‑intermodal freight moved in 2013‑2014 consisted largely of bulk commodities, such as iron ores and concentrates, coal, wood and wood products, wheat and potash. The volumes of lumber and other wood products shipped by rail have been subject to great variations in recent years. Shipments of fuel oil and crude petroleum have increased drastically over the last two years and are expected to fluctuate with international crude oil prices.

As the products listed in the above‑paragraph are each fairly homogenous, Canadian producers must compete with a large number of suppliers and have no ability to influence market prices on a unilateral basis. Canadian producers face buyers that will not buy from a producer charging prices above market prices. Canadian producers of commodities must internally absorb any increase in their costs as they are price takers. As such, competitive freight rates and effective rail services are critical to ensuring that Canadian exports remain competitive in world markets.

Rail freight revenues derived from various commodities and products are presented below:

Freight Revenue per Revenue Ton‑Mile for CN (in cents):Footnote 32

Freight Revenue per Revenue Ton-Mile for CN (in cents)
Table – Freight Revenue per Revenue Ton‑Mile for CN (in cents)
Freight Revenue per Revenue Ton‑Mile for CN (in cents)
Petroleum & Chemicals Metals & Minerals Forest Products Coal Grain and Fertilizers Intermodal Automotive Average
2012 4.38 5.60 4.49 3.02 3.50 4.70 19.54 4.44
2013 4.34 5.70 4.77 3.11 3.73 4.68 20.03 4.56

Freight Revenue per Revenue Ton‑Mile for CP (in cents):Footnote 33

Freight Revenue per Revenue Ton-Mile for CP (in cents)
Table – Freight Revenue per Revenue Ton‑Mile for CP (in cents)
Freight Revenue per Revenue Ton‑Mile for CP (in cents)
Forest Products Coal Grain Fertilizers & Sulphur Intermodal Automotive Consumer Products Average
2012 4.10 2.69 3.54 3.05 5.51 17.12 4.16 4.11
2013 4.46 2.71 3.82 3.14 5.51 17.27 4.09 4.15

Freight Revenue per Carload for CN ($):Footnote 34

Freight Revenue per Carload for CN ($)
Table – Freight Revenue per Carload for CN ($)
Freight Revenue per Carload for CN ($)
Petroleum & Chemicals Metals & Minerals Forest Products Coal Grain and Fertilizers Intermodal Automotive Average
2012 2761 1106 2991 1637 2663 1145 2423 1767
2013 3173 1160 3168 1666 2815 1156 2473 1847

Freight Revenue per Carload for CP ($):Footnote 35

Freight Revenue per Carload for CP ($)
Table – Freight Revenue per Carload for CP ($)
Freight Revenue per Carload for CP ($)
Forest Products Coal Grain Fertilizers & Sulphur Intermodal Automotive Consumer Products Average
2012 2881 1786 2707 2938 1338 2623 2704 2079
2013 3132 1904 2964 3083 1324 2758 2982 2226

The geographical situation of shippers, as well as the type and the volume of commodity moved, affect freight revenues derived by the railways. Certain commodities tend to be shipped in unit trains, which benefit from rail freight efficiencies and dedicated rail service, while others are usually shipped in manifest trains, which are best suited to reach niche production areas.Footnote 36

With increasing production and shipment of commodities, the importance of effective rail competition is expected to grow over time. This is particularly true given the strong demand for agricultural commodities from emerging markets, and the increasing use of agricultural commodities for bio‑fuel purposes.Footnote 37

B. Competition analysis applied to rail transportation

1. Market definition

As discussed above, many factors are considered when defining relevant markets, which include both a product and a geographic dimension.

The Bureau has considered the extent to which other modes of transportation, notably trucks, could be used in substitution for rail transportation. Intermodal competition from trucks, where feasible, does appear to constrain rail rates. Nevertheless, for the following reasons, trucking is prohibitively expensive for many shippers:

  • large volumes and low per unit value of the commodities produced;
  • remote production locations;
  • delays in loading and unloading trucks as compared to rail cars;
  • limits on the number of hours that a truck driver can drive; and
  • lack of availability of trucks and operators in remote communities.

Any analysis of the substitutability of other modes of transportation must be conducted at competitive price levels.Footnote 38 In circumstances suggestive of the existence of market power, prices that prevail in the market may be above competitive levels.Footnote 39 Information about the use of trucking should be used cautiously,Footnote 40 as customers may resort to other modes of transportation as substitutes if prices for rail transportation rise above competitive levels or if railcar availability is insufficient.

For freight transportation, the Bureau generally considers origin and destination pairs to be individual geographic markets. This is because, especially in Canada, many shippers produce commodities in relatively remote locations (e.g. coal mining operations, forest products), and are thus limited to a single origin point. At the other end, shippers that produce bulk commodities for export often have a limited number of ports or other destinations from which they can ship their goods overseas.

2. Market concentration

In Canada, approximately 95% of rail transportation revenues come from rail freight operations, with the remainder coming from commuter, intercity and tourist passenger rail services.Footnote 41

Most of the Canadian industry for freight rail services is divided between Canada's two Class I railways, CN and CP, although shares differ somewhat depending on the metric used.

CN accounted for over 50% and CP for approximately 35% of total rail transportation revenues in 2011.Footnote 42 By comparison fifty‑three shortline and regional railways accounted for 5.6% of total revenues in the railway sector in 2012.Footnote 43

In terms of quantity, CN and CP together represent approximately 95% of Canada's annual rail tonne‑kilometres.Footnote 44

In term of trackage, CN and CP together represent more than 75% of the industry's rail tracks,Footnote 45 shortline and regional railways collectively account for a little over 22% of the industry's rail tracks and the remainder is owned by Canadian subsidiaries of American railroads and passenger and commuter railways. CN's share of track ownership is particularly significant in the Maritime provinces and Québec due to CP's limited or non‑existent presence in these provinces. CN's share of track ownership is also significant in British Columbia, Alberta and Ontario, although CP is present in these three provinces. In Manitoba and Saskatchewan, CN and CP's share of rail tracks operated is comparable, with CN operating approximately 37% of total rail tracks in Manitoba and 44% of total rail tracks in Saskatchewan, and CP operating approximately 39% of total rail tracks in Manitoba and 43% of total rail tracks in Saskatchewan.Footnote 46

Although the number of regional and shortline railways has varied over the years, CN's and CP's combined share of revenues, track ownership and quantity of freight transported has remained fairly constant throughout the last decade, with rather small fluctuations.

These shares are given on a national or provincial basis. It is important to note that CN and CP may have higher market shares in individual relevant markets. Shares presented above may overstate the importance of regional and shortline railways for the reasons discussed below.

Regional and shortline railways operate over relatively short distances on lower density rail lines. They provide services to regional and remote markets.Footnote 47 Regional and shortline railways cannot be considered as effective competitors to the Class I railways. Regional and shortline railways deliver traffic to and from the long‑haul lines operated by the Class I railways for long‑distance hauling. Thus, they currently offer complementary services to those of the Class I railways rather than competing substitute services whose prices could constrain prices charged by CN and CP. In addition, their ability to compete with Class I railways is constrained by their limited ability to generate sufficient revenues to invest in additional railway infrastructure. Regional and shortline railways' limited revenues also make them vulnerable to retaliation given that the Class I railways could lower their rates to shippers if they did try to compete. The Class I railways could also retaliate against the regional and shortline railways by refusing to interline trafficFootnote 48 on commercially reasonable terms.

In addition, major American railways, which could provide a competitive alternative to CN or CP, have only limited trackage in Canada. Given the economies of scale associated with the size of their American operations, they may represent a competitive alternative for some shippers located in close proximity to their tracks. Burlington Northern Santa Fe, LLC ("BNSF") in particular has some operations in Western Canada. Operating ratios achieved by BNSF in recent years are comparable to those of Canada's Class I railways and tend to be in the low 70% range.Footnote 49

Whether a railway possesses market power in relation to a particular relevant market depends largely on the alternative forms of competition available to shippers. Prices charged by the railways vary based on the price elasticity of demand of shippers. Shippers for which close substitutes are available have a more elastic demand curve than those who have no cost‑effective alternatives. To maximize profits, railways charge a lower price to customers with a high price elasticity of demand than to customers with a low price elasticity of demand. Railways have the ability to price discriminate among shippers because targeted shippers cannot engage in arbitrage with other shippers.

Another indication of the railways' market power over certain shippers is their ability to influence some shippers' destination choices by splitting the market into preferable and non‑preferable routes, charging higher prices for shipments moved to less favourable destination points and lower prices for shipments moved to more desirable points. The desirability of any given route may depend on factors such as ownership of key infrastructure at destination and route velocity.

Both of Canada's Class I railways for freight services have operating ratios that indicate profitable operations.Footnote 50 CN's operating ratios for the past 6 years are well below comparative ratios achieved by CN during the decade that preceded the 2000‑2001 CTA review. On average, CP's operating ratios for the past 6 years are below comparative ratios achieved by CP in the 1990s.

CP's operating ratios for the past 6 years
Year CN Operating RatioFootnote 51(%) CP Operating RatioFootnote 52(%)
2008 65.9 78.9
2009 67.3 79.1
2010 63.6 77.6
2011 63.5 81.3
2012 62.9 77.0
2013 63.4 69.9

3. Barriers to entry

The rail sector is characterized by high barriers to entry. In Canada, railway companies are generally responsible for providing their own infrastructure, including track and roadbed, signalling and terminals.Footnote 53 These investments are both large and sunk as once they are made they cannot be re‑deployed elsewhere and have minimal scrap value. Rail markets involve economies of scale and scope. Essentially this means that marginal or incremental costs are below average costs, so that a railway's average cost of transportation decreases as it gets larger, either from an increased scale of production or a more diverse traffic base. In addition, railways may struggle to obtain the necessary land or rights‑of‑way to build new tracks or infrastructure, especially within urban areas or at high‑congestion ports and terminals.

These high barriers to entry make it unlikely that a new facilities‑based railway will enter the Canadian market, and limit the ability of existing Canadian or foreign railways to expand into additional markets.

4. Rail captive shippers

Shippers served by a single rail line and with no cost‑effective transportation alternatives are often described as being “captive” to a railway.Footnote 54 The Rail Freight Service Review acknowledged the need to encourage competition for captive shippers,Footnote 55 but did not provide an estimate of the proportion of Canadian shippers that were served by a single rail line. A detailed analysis of shipment data at the shipper level would be necessary to reach a definitive conclusion on the proportion of Canadian shippers that are served by a single rail line and on how such captivity affects prices and levels of service.Footnote 56 In rail markets where shippers are captive, railways may charge higher prices without the risk of losing their customers to a competitor and may provide lower levels of service.

In the course of preparing its submission, the Bureau contacted over 10 associations of shippers and heard widespread concerns regarding the degree of captivity of certain of their members. Concerns were especially acute among resource‑based shippers located in remote regions and responsible for large volumes of rail shipments. Shippers of commodities destined to export markets require an effective rail transportation system to remain competitive in global markets, where prices are set internationally. High shipping costs have a negative impact on these shippers’ revenues, which in turn can hurt incentives for these shippers to invest and expand.

Most shippers do not own their own railcars or engines. Shippers are largely dependent on the railways to provide cars to be loaded and engines to move them in a timely manner. Shippers want the railways to hold some amount of cars and engines beyond what is required to transport the average amount of traffic (“excess capacity”), so as to minimize service disruptions in the event of unforeseen circumstances such as a spike in demand for rail services (as seen in the 2013‑2014 bumper grain crop) or disruptions in supply such as mechanical breakdowns. In contrast, the railways wish to run their operations as efficiently as possible, which means ensuring that all of their resources are fully used at all times. As noted by the Agency in its Louis Dreyfus decision,

The interest of the railway companies is embodied in the industry phrase "sweating the assets", which implies meeting the demand with the lowest possible cost in terms of infrastructure, car supply, crews and motive power. High efficiency operations with low operating ratios provide the best return to railway company shareholders; however, running a very lean operation has implications for the railway company's ability to manage surges in demand or operational challenges such as infrastructure outages or adverse weather

The Agency is of the opinion that where competitive pressures are low or absent and where there is a relatively low cost to the railway company for delaying traffic or otherwise reducing the level of service, the supply of cars and motive power will then to be set at a level that favours railway company preferences over shipper preferences.Footnote 57

A wide range of shippers of various commodities who identified themselves as captive indicated that receiving sufficient railcars and engines in a timely and reliable fashion is an ongoing challenge for them. Shippers said that, in addition to limited capacity in times of unexpected demand, railways regularly ration the number of cars available in the winter season. Even where a railway has agreed to supply a given number of cars on a certain date, the railway may not provide those cars on time, causing shippers considerable expense in the form of extra wages and demurrage fees. Harder to quantify are the damages to the reputation of the shippers caused by breaches of contract with their buyers when goods cannot be reliably delivered. The railways are generally not contractually obligated to pay any reciprocal penalties for their performance failures, while shippers must pay significant penalties to the railways for performance failure on their part (e.g. failure to release cars on time).

Demand spikes may be particularly acute in the case of grain. While other commodities may be produced at a fairly constant rate throughout the year, all grain producers harvest their goods around the same time, in the fall of each year. If there is a situation of high demand, such that a railway has insufficient capacity to serve all shippers, a railway may decide to delay its service to captive grain shippers.Footnote 58 While such delays to captive shippers may not affect the total amount of grain ultimately shipped by that railway and may thus be of limited concern to the railway, grain shippers and grain producers may suffer greater financial losses as they may not be able to sell when world prices are favourable.Footnote 59

5. Source competition

Railways may be constrained by "source competition". This means that if a railway charges excessive prices or provides consistently poor service, the captive shippers could lose significant business or possibly be forced out of business due to competition from other producers. This would ultimately result in significant revenue losses for the railway.

While source competition can be a disciplining factor in certain situations, rail monopolies have strong incentives to reduce output and raise prices, especially for those shippers with large sunk costs, who have a strong incentive to continue production in the face of rising costs. In such circumstances, source competition is much less effective in constraining rail prices.

6. Countervailing power

Some of the customers served by the railways are large and sophisticated. Under such circumstances, shippers might have the ability to constrain any attempt by the railways to exercise market power.

The ability of shippers to vertically integrate into railway operations is limited due to the high barriers to entry associated with facilities‑based entry and the requirement that an applicant for running rights be a railway company as defined under the CTA.

Shippers may be successful in securing competitive tariffs at a captive location by threatening to leverage competitive alternatives at locations where such alternatives exist. However, only shippers with locations served by more than one railway can attempt to influence negotiations in this manner. As indicated earlier, no information on the proportion of Canadian shippers that are served by more than one railway is publicly available.

Shippers located in close proximity to the rail line of another railway company may encourage expansion by committing to move large volumes of freight on any newly built rail infrastructure. Shippers located within a reasonable distance of BNSF's tracks may be able to encourage expansion plans; however, BNSF's network is concentrated in southern areas of Western Canada, limiting this alternative, especially since a number of rail captive shippers are located in remote Northern locations.

7. Coordinated conduct

Circumstances conducive to coordination are more likely to prevail in markets characterized, among other things, by:

  1. high levels of market concentration;
  2. high barriers to entry;
  3. product homogeneity;
  4. cost symmetries among firms;
  5. market maturity;
  6. high degree of market transparency; and
  7. high degree of multi-market exposure.

As previously indicated, individual rail markets may be highly concentrated as a direct consequence of high barriers to entry and expansion. While information about the movement of railcars and other market conditions is generally available only on an aggregated basis, since many rail freight markets are monopolies or duopolies, carriers may be able to infer information about the operations of a competing carrier. Furthermore, the identity of customers served is easily observable.

The presence of multiple facilitating factors suggests that Class I carriers may have the ability to overcome the impediments typically associated with coordinated behaviour. Refusals to quote connecting railway prices that would enable shippers to apply for the issuance of CLRs and limited use of running rights are considered by certain stakeholders as being indicative of Class I carriers' conscious avoidance of direct competition.

The presence of various facilitating factors limits the effectiveness of the provisions designed to introduce greater competition into Canadian rail markets. The Panel should therefore assess the impact of any potential regulatory or legislative changes on the factors described above.

The next section presents various ways in which regulatory or legislative changes could address concerns arising from a natural monopoly and its associated problems, including high prices, insufficient supply, inadequate service and absence of entry.

C. Recommendations

The National Transportation Policy set out in section 5 of the CTA provides that reliance on market forces and competition is to be preferred whenever feasible to achieve viable and effective transportation services. In this context, regulatory measures would be appropriate only where market forces cannot satisfactorily achieve these objectives — that is, where there is a risk of market failure. In certain rail markets, the presence of large sunk costs and elements of natural monopoly are sources of market failure that may justify targeted rate and entry regulations.Footnote 60

The CTA contains a number of provisions that seek to provide greater competitive options for shippers and to address the imbalance in negotiating power between the railways and the shippers in order to bring rates and service levels closer to those that would be prevalent in fully competitive markets. These provisions, in brief, include:

  • The Maximum Revenue Entitlement ("MRE"), which sets a limit on the overall revenue that can be earned from CN and CP for shipping western grain to specific export positions.
  • Competitive access provisions, including regulated interswitching and CLRs, that attempt to promote more competitive pricing by facilitating shippers' access to competing railways.
  • FOA, a process for resolving disputes between railways and shippers.
  • The LOS provisions, which impose service level obligations on the railways, authorize the Agency to investigate complaints, and provide authority for the Agency to order corrective action if needed.

In addition, several stakeholders have suggested that the running rights provision, originally intended to avoid duplication of railway construction, could be revisited to introduce greater competition into Canadian rail markets.

These provisions provide important mechanisms that can address or mitigate market failures in rail markets. At the same time, care must be taken to ensure that such regulatory measures are restricted to what is necessary and reasonable to impose on the railways. Deregulation has brought important benefits to the rail sector and its stakeholders in the form of greater efficiencies and lower rail rates, and these gains could be jeopardized if regulations are not carefully considered before being implemented. As railways operate networks and must be responsive to the needs of many users, they must have some flexibility in terms of setting rates and service levels to ensure that they can run effective and responsive services.

1. Extraordinary disruptions

Section 47 of the CTA provides that where the Governor in Council is of the opinion that there is "an extraordinary disruption to the effective continued operation of the national transportation system", the Governor in Council may take such steps as necessary to "stabilize the national transportation system, including the imposition of capacity and pricing restraints". As previously mentioned, following the 2013‑2014 backlog in grain deliveries, an Order in Council pursuant to section 47 was implemented requiring CN and CP to each move 500,000 tonnes of grain per week. The first Order in Council was followed by a second Order in Council, which extended grain shipping obligations to November 29, 2014, and a third Order in Council, which extended grain shipping obligations to March 28, 2015.Footnote 61

Certain extraordinary market circumstances may require intervention by the Federal Government, including the use of orders pursuant to section 47 of the CTA. Additional collection of information on a temporary basis would allow the Governor in Council to correctly assess a critical situation and could consequently inform the imposition of any emergency regulatory measures and enhance their effectiveness.Footnote 62 Such measures should be limited to those directly necessary to address the immediate situation and should be reviewed as soon as practically possible. The use of sunset clauses (as was the case for the Orders in Council mentioned above and for Bill C‑30) ensures that emergency regulatory measures are comprehensively reviewed once the immediate crisis necessitating their implementation has passed.

Emergency measures requiring that certain commodities be transported at a certain price, or the preferential transport of certain commodities over others, may, however, lead to significant market distortions and inefficiencies, especially if these measures are in operation for a significant length of time. They may impose costs on both railways and on shippers of other commodities, who may face additional challenges in terms of rates and level of service as less capacity and infrastructure becomes available for their use. Emergency measures may have unintended consequences for shippers of the very commodity that policymakers intended to aid. For instance, several stakeholders indicated that since the Order in Council did not specify which corridors CN and CP should use for their grain deliveries, the railways prioritized moving grain to the ports in Vancouver and Thunder Bay at the expense of grain intended for southern markets in the U.S. and Mexico, as these shipments have a longer turnaround time. Such unintended consequences may have been avoided had the Order in Council expressed the minimum amount of grain to be moved in tonne‑kilometres rather than simply in tonnes, although this remains uncertain.

For these reasons, where long‑term regulations and policies are necessary for improving capacity, infrastructure and resources for the transport of certain goods, they should be designed and implemented in consultation with a variety of stakeholders. It is important to ensure that the regulations achieve their desired goals, minimize unforeseen consequences, and have as small an impact on market forces and competition as possible.

An effective regulatory framework that balances the needs of shippers and railways, including effective provisions to promote competition and rebalance commercial relationships between shippers and railways, may help reduce the need for emergency measures in the future.

Recommendations:

  • That the Government maintain the regulatory provisions in the CTA relating to competitive access and shipper negotiations with railways to minimize the need for emergency measures to address capacity and level of service issues in the future.
  • That sunset clauses, such as those in Bill C‑30, be used in the event emergency measures are required.
  • That the section 47 requirement for consultation with the Minister responsible for the Competition Bureau (currently the Minister of Industry) be retained to best ensure that extraordinary measures are as much in keeping with the competition principles of the National Transportation Policy as possible.

2. Maximum revenue entitlement

MRE is a limit on the overall revenue that can be earned by CN and CP for shipping regulated grain. Grain shipments subject the MRE provisions are those that originate from Western Canada or the United States and that are destined to ports in British Columbia or to Thunder Bay and Armstrong. Grain shipments that move under commercial rates are those destined to the United States, to interior points within Western Canada (including Churchill) and east of Thunder Bay and Armstrong.

Class I railways enjoy a monopoly position over a number of grain shippers. A rail monopoly has a natural incentive to reduce output and raise prices. MRE is an attempt to restrain the railways' ability to raise prices to certain captive grain shippers. The effectiveness of the MRE provisions is a subject of debate among participants in the rail market.

Under current conditions, any additional revenues earned from premium peak‑load pricing must be offset by equivalent reductions in off‑peak pricing. In a regulated environment shaped by the MRE provisions, the railways' market power over captive grain shippers appears to result in sub‑optimal levels of service during peak periods. The appropriate response to unintended consequences of regulation should not be increased direct regulatory intervention, but rather a change to existing regulations to introduce incentives for railways to provide the optimal level of capacity, and, consequently, service.

The Bureau proposes that the existing MRE formula be modified to a nonlinear MRE formula pursuant to which railways would gain more revenue for grain shipped at levels above trend and would suffer a penalty for not meeting excess demand. A nonlinear MRE formula that rewards railways for maintaining excess capacity and internalises the costs imposed on shippers for a railway's failure to perform would create incentives for railways to provide the optimal level of capacity with limited direct intervention. The approach being proposed by the Bureau is further discussed in Appendix 4 of this submission.

Recommendation:

  • That the existing MRE formula be reviewed to introduce incentives for the railways to maintain excess capacity.

3. Competitive access provisions

As previously mentioned, the competitive access provisions of the CTA are designed to promote competition in rail markets by allowing shippers to arrange for their goods to be moved at regulated rates to the nearest interchange point, in the expectation that, from there, the shipper will benefit from competition between two or more railways to move its goods over the more significant portion of the journey to the final destination.

a. Regulated interswitching

While regulated interswitching was originally intended to avoid the overbuilding of railway lines in urban areas, the provision serves a secondary purpose of promoting competition by providing shippers with opportunities to choose from two or more railways at their nearest interchange point.Footnote 63

Following amendments made to the NTA in 1987, regulated interswitching was extended from 4 miles to 30 km to reflect the growth of urban centres. Using the powers granted to it in Bill C‑30, the Agency introduced regulations that extended interswitching limits to 160 km for all commodities shipped to an interchange location within Alberta, Saskatchewan and Manitoba,Footnote 64 significantly increasing the number of grain elevators that are within the interswitching limits in these provinces.

Shippers have mixed opinions regarding both the effectiveness of regulated interswitching as a competitive access provision and the impact of extending interswitching to 160 km. Some shippers described interswitching as an effective means of introducing competition into otherwise captive markets, and also indicated that the possibility of interswitching can serve as an important factor in shippers' negotiations with railways. Others said that interswitching was of limited use because its effectiveness is dependent on CP and CN being willing to compete with each other over the next segment. There was a perception that CN and CP do not vigorously compete for each other's captive shippers as they reportedly fail to quote competitive prices on shipments originating from or departing to an interchange point. This may particularly be the case in times of high demand, when railways are already stretching their capacity to service existing customers. A shipper receiving poor service in these circumstances would be unlikely to find a competing railway with sufficient available capacity to serve its needs. Interswitching was seen as a more effective remedy where competition was available from American railways such as BNSF, but only a small number of shippers fall within this category. Interswitching was seen as more attractive for shippers moving products on manifest trains, as interswitching requires additional time and logistics to move railcars on the sidings.

Regulated interswitching plays an important role in providing more competitive options for shippers that are located within the interswitching limits. Furthermore, the interswitching limits should be the same for all Canadian shippers, as extending interswitching to shippers in some locations, but not others, may create market distortions. Captive shippers that fall outside of interswitching extensions may be charged higher rates by the railways to make up for shippers that can take advantage of interswitching.Footnote 65

As well, setting optimal limits for regulated interswitching is a complex matter that merits considerable research and consultations. Extending interswitching to 160 km or even further increases the number of shippers who can use the provision to improve their competitive options. Interswitching does not need to occur to provide competitive relief to shippers; the mere possibility of exercising this option can allow shippers to negotiate lower rates. Since regulated interswitching rates are cost‑based, interswitching along a longer portion of the track means that railways have a smaller amount of their network from which to generate revenues at market prices. This has led some market participants to express concerns over unintended consequences of expanding interswitching limits, namely an increase in operational costs and a negative impact on the railways' ability and incentive to invest in maintaining or expanding infrastructure on affected routes. These consequences are a result hardly intended by shippers.

Recommendation:

  • That regulated interswitching provisions be maintained. The Panel should consider whether the current interswitching radii of 30 km generally, and 160 km for shippers within the Prairie provinces, appropriately balance the benefits and costs to shippers and railway operator
b. Competitive line rates

In some circumstances, shippers whose facilities do not fall within the interswitching limits may nevertheless wish to have their goods transported to an interchange point for carriage by a competing railway. Such shippers may apply to the Agency pursuant to the CTA for a CLR under which their originating railway will move goods to the interchange point for transfer to the competing railway (referred to as the "connecting carrier").

Prior to 2008, shippers were required to prove that they would suffer substantial commercial harm before a CLR could be granted by the Agency. This requirement was removed through legislative amendments to the CTA in 2008; however, the removal of this requirement proved to be insufficient in making the CLR remedy more accessible to shippers.

Before a shipper may apply to the Agency for a CLR, the shipper must have an agreement with the connecting carrier for the movement from the interchange point to the destination. In practice, this requirement has proved to be a major obstacle to shippers seeking a CLR, as neither CP nor CN has yet agreed to enter into such an agreement. The Rail Freight Service Review said that the provision was not being used “because the competing railways will not provide a rate or, at least, not a competitive rate. The non‑use of this provision suggests railways may not aggressively compete even where rail‑to‑rail competition exists”.Footnote 66

The CTA should be amended to grant shippers a right to request a CLR agreement from a railway, similar to the right to request a SLA provided pursuant to Bill C‑52. In the event that a shipper and a railway are unable to reach mutually agreeable terms, arbitration under the existing FOA process or a separate arbitration process for such disputes should be mandated.

Recommendation:

  • That the statutory requirement in the competitive line rate provision, section 131 of the CTA, that captive shippers and connecting railways reach an agreement on rates and services beyond the interchange point be removed. In other words, connecting carriers should be required to accept freight made available at the interchange point as a result of competitive line rate applications. Under this provision, shippers should have the option of using final offer arbitration with respect to the rates and level of services offered by the connecting carrier.

4. Running rights

Pursuant to section 138 of the CTA a railway company may apply to the Agency to obtain running rights — rights to operate its own trains on the tracks of another railway where it has been unable to obtain such rights through commercial negotiation.  The Agency may grant the rights and impose any conditions “as appear just or desirable to the Agency, having regard to the public interest”.

Historically, running rights were intended to avoid duplication of railway construction where existing railway tracks could be used, and to promote efficient routing patterns by reducing mileage.Footnote 67 Although running rights were not introduced specifically for the purpose of increasing competition, some stakeholders have suggested that allowing potentially competing railways to obtain running rights on lines serving captive shippers could introduce competition into these markets. So far, Class I railways, however, have not used running rights to compete for each other’s captive customers. Furthermore, if running rights were made available to “any person”, rather than strictly to railway companies, they could allow shippers to operate their own cars and engines. Shippers would thus have greater control over when and how much capacity is available to them. Running rights could effectively lower barriers to entry and stimulate competition by creating a credible threat of entry.

In the Agency’s most recent decision relating to running rights, the 2002 Ferroequus decision, the Agency characterized running rights as an “exceptional remedy”Footnote 68 that should be granted only if there is evidence of market abuse or market failure. Despite having received a number of applications for running rights, the Agency has yet to grant one.

As running rights may have significant implications in terms of operational efficiencies, investment incentives for host railways, and other policy considerations, it is appropriate that the Agency should have discretion concerning whether a particular application for running rights should be granted. However, in order to improve consistency and transparenc y, guida nce should be provided concerning the factors that the Agency takes into account when considering an application. The Bureau notes that as the term “public interest” is not defined in the CTA or other federal transport legislation, the requirement that running rights be in the public interest provides little guidance for the Agency, shippers or railways. The CTA should provide a fuller description of what is intended to be considered under the public interest test to provide greater transparency and consistency for all stakeholders.

Accordingly, the Bureau recommends that the CTA be amended to provide a list of factors that the Agency should consider when assessing whether granting a running right would meet the public interest requirements. In addition to the Ferroequus decision, Recommendation 5.13 of the 2001 CTA review Panel Report provides a starting point for consideration of what could be a suitable list of such factors, including:

  • the adequacy of existing service,
  • the existence of competitive alternatives,
  • the impact on all users and shippers on lines where running rights are sought,
  • the impact on system efficiency,
  • the financial and operational capability of the applicant,
  • the willingness of the applicant to allow reciprocal access to its lines where applicable, and
  • the impact on the financial viability of the infrastructure owner.

However, in order to ensure that running rights are an effective remedy and are available to shippers who have genuine need of them, the Bureau recommends that the Panel consider whether it would be appropriate to reverse the onus of the public interest test, such that host railways, which often have greater access to both resources and relevant information, must demonstrate that the granting of the requested running rights would not be in the public interest.

The Panel should consider whether applications for running rights should be available to any person that meets the specified fitness test and qualifications, rather than being limited to railway operators. This would ensure that shortline or regional railways, some of which may be owned by shippers, would have the option to apply for running rights. In this regard, the Bureau believes that the significant costs, resources and technical expertise required in preparing an application should be sufficient to discourage frivolous uses of the provision.

Recommendations:

  • That the public interest test in section 138 of the CTA be amended to include a list of factors that should be considered by the Agency when determining whether to grant a running rights application. In the interim, the Agency could issue an information document providing guidance on the factors it considers when determining whether to grant a running rights application.
  • That the onus for demonstrating a lack of public interest be placed on the railway from which the running rights are sought.
  • That the CTA be amended so that any person meeting the specified fitness test and qualifications be eligible to apply for running rights even if they are not a railway company as defined by the CTA.

5. Final offer arbitration

FOA was reported by some stakeholders as the only effective limit to excessive rates charged by railways to captive shippers, effectively serving as a “last resort” in the event that a shipper cannot obtain satisfactory terms through commercial negotiation.Footnote 69 Even where a shipper does not ultimately resort to FOA, the threat of initiating the process serves as an important bargaining tool for shippers in their negotiations and serves to limit the rates proposed by the railways.

However, FOA is not without challenges. The process is generally complex and costly for all parties. Costs incurred by a shipper in relation to a single FOA application are estimated to be in the range of $500,000 to $1,000,000. Further, the arbitrator's decision remains in effect for only one year, after which the process may have to be repeated. This has led several stakeholders to suggest that FOA decisions should apply for two or three years. In addition, FOA may be unavailable in cases where the shipper and the railway have entered into a confidential contract pursuant to section 126 of the CTA. Transport Canada's Rail Freight Service Review found that shippers used FOA primarily for rates, as introducing service conditions significantly complicated the process.Footnote 70

While the Panel should consider whether changes could be made to the FOA process to improve its effectiveness, the FOA provision remains an important regulatory tool that considerably strengthens shippers' negotiating power with railways and should remain in the CTA.

Recommendations:

  • That the final offer arbitration provision remain in place.
  • That the Government consider extending the duration of final offer arbitration decisions to two or three years to help reduce the costs associated with repeated final offer arbitration proceedings.

6. Level of service provisions

Even if a shipper is able to obtain a reasonable rate through commercial negotiations or one of the other regulatory remedies contained in the CTA, rate relief is largely meaningless if the shipper cannot also obtain an adequate level of service for the transport of its goods. While rates remain an item of concern for shippers, most market participants contacted by the Bureau in the course of preparing this submission indicated that levels of service were a greater concern for them in recent years.

Sections 113 to 116 of the CTA allow shippers to apply to the Agency for corrective action if a railway does not provide an “adequate and suitable” level of service, including accommodation of traffic, availability of necessary facilities and equipment, and timeliness of service.

In its Louis Dreyfus decision, the Agency specifically refers to the LOS provisions as a shipper remedy, observing that:

One of the purposes of the provisions is to enable the Agency to establish the level of service, which, in a normal competitive environment, would be expected to be set naturally by market forces. That is to say, the provisions are intended to ensure that the level of service is not established solely on the basis of a railway company's interests and preferences, especially where railway companies can exercise monopoly power over captive shippers.Footnote 71

While shippers consider the LOS provisions to be an important part of the CTA, several expressed that there were challenges with their practical application. First, with commodities such as grain where producers and shippers are separate entities, producers that have a legitimate interest in how and when their goods are shippedFootnote 72 may lack standing to bring forward a LOS complaint. Second, even for shippers that have access to these provisions, LOS complaints can be expensive and time‑consuming. Third, since the provisions are retroactive in nature — that is, shippers can use them only after they have already experienced service failures — they do not allow shippers to proactively plan and secure the specific capacity that they will need. Finally, some shippers have expressed concern that the standard of "adequate and suitable" in the LOS provisions is overly vague, and places too much focus on the railways' operations and insufficient consideration on the needs of shippers, and have suggested that these provisions be amended to more strongly emphasize shippers' needs.

a. Service level agreements

Section 126 of the CTA allows shippers to negotiate a confidential SLA with a railway company concerning rates, conditions and the manner in which the company will fulfill its service obligations under section 113. As a result of amendments described earlier in this submission, shippers now have a right to a SLA through arbitration if they are unable to obtain one through commercial negotiation, and the Agency may make regulations specifying what constitutes operational terms to be included in a SLA achieved through arbitration.Footnote 73

Under many current agreements, shippers are held accountable for their own performance failures as they must pay penalties to the railways for failure to load and release railcars on time. In circumstances where a shipper has made reasonable forecasts concerning its needs and the railway has agreed to supply a certain amount of cars and engines at certain dates, the shipper should similarly be able to expect reciprocal penalties from the railway for performance failures on its part.  Such penalties may incentivize railways to ensure that they take the necessary steps to deliver capacity in a timely manner, including holding sufficient excess capacity to respond to reasonably foreseeable adverse circumstances. As a result of the imbalance in negotiating power between the railways and the shippers, shippers have largely been unable to secure agreements through commercial negotiation that include reciprocal penalties for performance failures.Footnote 74

Shippers indicated that, where they are captive, railways may use their market power to force shippers to accept unfavourable terms in SLAs, especially where these terms are not considered to be operational terms subject to arbitration. Such terms may include an absence of reciprocal penalties for non‑performance of service level obligations on the part of the railway, excessive liability for dangerous goods, and the exclusion of recourse to other regulatory provisions such as regulated interswitching.

Recommendation:

  • That the CTA be amended to explicitly allow an arbitrator to include penalties for non‑performance of service level obligations in an arbitrated service level agreement.
b. Access to information in the rail sector

Currently, the terms of the railways' contracts with individual shippers, including information about prices, are set down in confidential contracts. The railways keep operational information, such as information relating to the capacity of their networks, confidential. This information may not be made available to either the shippers or the adjudicators appointed to rule in FOA cases or LOS complaints.

Market contacts claim that providing shippers with information that is currently held by the railways could make it easier for them to bring a case against a railway for charging prices that are too high or for providing levels of service that are too low. On the other hand, other market contacts have informed the Bureau that the release of such data could harm the railways' competitive positions, especially the position of CN relative to CP and vice versa.

Transparency can help markets run more efficiently. Adjudicators appointed to rule in FOA cases or LOS complaints would benefit from increased access to confidential information. Nevertheless, in markets exhibiting a high degree of market concentration, the sharing of information can facilitate coordinated behaviour. Balancing the risks and benefits associated with increased transparency of information is a complex exercise; therefore, the sharing of information should be limited to parties that have no participative interest in the industry.

Recommendation:

  • That the railways be required to release all relevant confidential data to adjudicators during final offer arbitration or level of service complaints that are brought against them by the shippers. Adjudicators should maintain the confidentiality of information provided in the course of proceedings brought before them.

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III. Air transportation

A. Background and overview of the Canadian air sector

From the 1930s until the late 1970s passenger airline services in Canada were closely regulated, with the Government maintaining control over service providers, routes schedules and fares. A gradual shift, in keeping with similar developments in other countries including the United States, began in the mid to late 1970s. The Air Canada Act of 1977 turned Air Canada into a Crown corporation, and by 1988 Air Canada had been fully privatized.

In terms of infrastructure, in 1994, the Government turned over the control of 90 airports covered by the National Airports Policy to locally‑run, not‑for‑profit corporations known as Canadian Airport Authorities, and in 1998 Canada’s air navigation services were as turned over to NAV Canada, a privately run, not‑for‑profit corporation.Footnote 75

Transborder traffic increased significantly with the signing of the significantly liberalised Canada‑U.S. air transport agreement in 1995.Footnote 76 The agreement provided for unrestricted first and second freedom traffic rights, and unrestricted third and fourth freedoms for carriers of both countries.Footnote 77 The 1995 Canada‑U.S. Open Skies Agreement maintained limitations on fifth, sixth and seventh freedoms of the air.

Air transportation between Canada and the U.S. was further liberalised with the 2005 negotiation of the Canada‑U.S. full open skies agreement, which came into force in 2007.Footnote 78 This open skies agreement incorporated pricing freedoms on fifth and sixth freedom activities, as well as unrestricted seventh freedom rights for cargo operations.

In 2006, the Government launched its Blue Sky Policy, which calls for a proactive approach for Canada to liberalise its air transport agreements with other countries “when it is in Canada's overall interest to do so”. The policy further identifies the factors considered when identifying priorities, namely:

  1. Canadian airline and airport priorities and interests;
  2. Likelihood and extent of new Canadian and foreign carrier services (giving preference where early launch of services is planned);
  3. Size and maturity of the air transportation markets and room for future g rowth;
  4. Foreign government requests for negotiations;
  5. Canada's international trade objectives;
  6. Safety and security issues;
  7. Canada's foreign relations, and
  8. Bilateral irritants and current disputes.

Since the Blue Sky Policy came into effect, Canada's number of bilateral partners increased by 55%.Footnote 79

In 2009, Canada and the European Union signed a new bilateral air services agreement that came into force on July 26, 2011. This comprehensive agreement sets out the framework under which Canadian airlines and airlines of the European Union must operate. The agreement allows for unrestricted direct services between Canada and the European Union, without any limitations on the number of flights operated or the prices to be offered. The agreement also provides for improved flexibility for all‑cargo airlines.Footnote 80

Deregulation means that the CTA is now focussed on the licensing of air carriers and ensuring that safety and security concerns are appropriately addressed. It no longer regulates the capacity, routes and pricing of air carriers, provided they meet the licensing and safety requirements of the CTA. Its key provisions, supported by the Air Transportation Regulations, relate to licensing and continue to require persons operating an air service to hold a licence, a Canadian aviation document and to have the prescribed liability insurance coverage. There are certain notice requirements for carriers that are discontinuing service or reducing service to less than one point a week. The CTA also provides for the manner in which tariffs, including the terms and conditions of carriage, are to be displayed or published.

B. Competition analysis applied to air markets

1. Market definition

The Bureau generally considers different modes of transportation — e.g. air, rail and marine — to be in separate product markets from each other, although exceptions may exist in certain circumstances (e.g. where the distance is very short). Freight cargo services and passenger services form separate markets. The Bureau typically considers business travel to be distinct from leisure travel and direct flights to be in a separate market from indirect flights. However, the degree to which the Bureau draws such distinctions depends on the particular characteristics of the individual markets being studied, and such determinations are made, where necessary, on a case‑by‑case basis.

As submitted earlier, the Bureau considers that geographic markets in transportation industries are usually defined as origin‑destination pairs (e.g. Montreal to Vancouver), as service to a different origin‑destination pair is generally not considered an adequate substitute.Footnote 81 This holds equally for freight and passenger services.

With respect to passenger services, the Bureau has investigated the extent to which two or more reasonably proximate destinations could be considered sufficiently substitutable by travellers such that they would be part of the same geographic market, but has not made a general determination to this effect. Assessments of the extent to which two or more proximate destinations should be considered as part of the same geographic market are done, as necessary, on a case‑by‑case basis, and depend on the specific facts of a matter.

Peripheral smaller airports and American airports are often characterized by different cost structures than Canada's major airports. Value air carriers attempt to leverage these differences to attract price sensitive travellers. Information collected suggests that less time‑sensitive travellers, such as leisure travellers, may be more willing to use road transportation to access cheaper options located outside traditional urban boundaries. Some evidence indicates that travellers located within Montreal's metropolitan area drive to the airports in Plattsburgh, NY and Burlington, VT, while those located within the Greater Toronto Area drive to the airport in Buffalo, NY and those located in Vancouver may drive to the airport in Bellingham, WA.

2. Market concentration

In 2013, passenger traffic at Canadian airports reached 85.2 million enplaned and deplaned passengers. Further, freight traffic at Canadian airports in 2013 was 832,000 tonnes, with the value of Canada's international air cargo trade reaching $111.3 billion.Footnote 82

The first CTA review, in 2000‑2001, took place at a tumultuous time in the Canadian scheduled airline industry — Canadian Airlines, facing failure, had been acquired by Air Canada in 2000 with full integration of the two airlines completed by the end of that year. What remained was one national airline providing scheduled service, with little or no competition on a significant number of routes, particularly in eastern Canada. In 2000, the majority of the city‑pair routes in the top 200 domestic markets could be characterized as monopolies.

Today, Air Canada remains Canada's largest provider of domestic and international scheduled air services; however, the extent of its share on domestic routes has decreased since 2001. In 2013, Air Canada reported revenues of $12.4 billion, carrying 35.8 million passengers (including affiliates and subsidiaries) and maintaining an average load factor of 82.8%. With respect to domestic service, Air Canada offers limited service to Northern communities, only serving larger cities and relying on interline agreements with smaller local carriers to service the more remote northern communities. Air Canada's international operations are strengthened by its participation in Star Alliance, a global alliance offering interline agreements, code‑sharing agreementsFootnote 83 and frequent flyer programs. In 2013, Air Canada launched rouge, to cater to the Caribbean and European leisure markets.

WestJet entered the western Canadian market in 1996 and is now Canada's second largest carrier. In 2013, WestJet reported revenues of $3.7 billion, carrying 18.5 million passengers (including affiliates and subsidiaries) and maintaining an average load factor of 81.7%. WestJet offers service to Whitehorse and Yellowknife and entered into an interline agreement with Canadian North to service smaller Northern Communities. In 2013, WestJet launched its regional carrier, Encore, and developed new routes to service smaller regional markets in British Columbia, Alberta and Manitoba. WestJet has developed a growing list of international code‑share partners serving the Americas, Europe and Asia, as well as carriers with whom it interlines.

Market concentration remains high in most Canadian domestic markets. This may result from the limited traffic that exists between certain origin and destinations points within Canada. Almost half of the domestic city‑pair routes in the top 100 markets can be characterized as duopolies serviced by Air Canada and WestJet. While charter carriers such as Air Transat and Sunwing Airlines service a few of these routes on a seasonal basis, the limited capacity made available by these carriers is unlikely to have any significant competitive impact. Certain domestic city‑pair routes in the top 100 markets are serviced by only one of either Air Canada or WestJet. In the summer of 2014, only Air Canada provided direct passenger service on the following city‑pairs: Deer Lake — Halifax, Fredericton — Toronto, Halifax — Sydney, Montreal — St. John's, London — Toronto, Victoria — Toronto, Vancouver — Penticton, and Kootenay — Vancouver. In the summer of 2014, only WestJet provided direct passenger service on the following city‑pairs: Edmonton — Kelowna, Edmonton — Abbotsford, Edmonton — Victoria, Hamilton — Calgary, Halifax — Calgary, Comox — Calgary, London — Calgary, and Abbotsford — Calgary.

Porter Airlines ("Porter") commenced operations in 2006 and began to compete on eastern routes that were previously only served by Air Canada and, to some extent, WestJet. Porter's service offer successfully attracted business travellers, such that Porter now effectively services a niche market. However, Porter's ability to compete vigorously with Canada's two major carriers on longer routes is limited by its aircraft fleet in the short‑term. Porter's fleet is comprised of turboprops, which constrains, by distance, the locations to which Porter can provide services. Consequently, Porter is unlikely to have a constraining influence on prices charged by Air Canada and WestJet on longer domestic routes in the short term.

First Air and Canadian North operate primarily in the north, linking those areas to the larger network carriers in the south. Limited traffic and specific aircraft requirements render northern city‑pair routes unattractive for many air carriers.

New carriers appear to be poised to enter certain Canadian domestic markets. These new carriers intend to maintain a low cost structure and attract price sensitive consumers with prices significantly lower than those currently being charged by Air Canada and WestJet.Footnote 84 The new carriers' ability to challenge Air Canada and WestJet in domestic markets remains to be seen. In the past, new carriers have sometimes avoided direct competition with Canada's major carriers by targeting a niche market or using airports located outside traditional urban markets served by the major carriers.

The Blue Sky Policy led to increased air service on international routes by facilitating open air transportation agreements and was therefore beneficial for consumers. From 2006 through 2011, Canadian carriers increased the total number of out-bound international flights by 56% and the number of direct international destinations by 11%.Footnote 85 Market participants contacted by the Bureau reported that international air carriers are increasingly serving Canadian cities, thereby representing an additional source of competition to Canadian carriers on international routes.

3. Barriers to entry

Especially given the small number of incumbent carriers, competition in Canadian airline markets is crucially dependent on entry conditions. The magnitude of barriers to entry in turn is dependent upon a number of factors and is likely to differ across relevant markets. Entry by WestJet and Porter demonstrates that barriers to entry can be overcome in some markets. However, a string of failed entrants (e.g. Canada 3000/Royal Airlines, Roots Air, Jetsgo and Zoom) have proven that achieving sustained profitable operations in Canadian markets is risky, and by no means assured.

The following section discusses how existing regulations and legislation interact with market conditions to create or amplify barriers to entry.Footnote 86

To operate on a viable scale, a potential entrant requires an ability to attract feeder traffic at both ends of a route. Incumbent carriers develop flight networks that centralize large volumes of passenger traffic into hubs and consequently limit a potential entrant's access to the volume of feeder traffic necessary to compete effectively. Canada's current foreign ownership restrictions and prohibition on cabotage hinder the airline industry's ability to generate greater feed traffic beyond the major international gateways.Footnote 87

Access to capital is of primary importance for new carriers or existing carriers wishing to expand their operations or renew their fleet. New carriers must raise a significant amount in capital or, in the alternative, show their ability to raise capital in order to obtain the required regulatory approvals from the Agency and Transport Canada. Carriers looking to expand their network and enter into international routes often benefit from securing international alliances to attract travellers.Footnote 88 Members of international alliances need to rely on a Global Distribution System for reservations; such systems are more expensive than smaller systems and may be cost‑prohibitive for smaller‑sized airlines. Issues surrounding access to capital are rendered more complex as a result of Canada's current foreign ownership restrictions.

Successful entry is conditional on access to essential airport facilities such as gates, take‑off and landing slots, counters, and ground‑handling services at origin and destination points.Footnote 89 Control over access to scarce airport resources could represent an advantage for incumbent carriers and deter entry. Additionally, incumbent air carriers may exercise significant influence on airport authorities and engage in strategic behaviour to limit airport policies that would facilitate entry. Such strategic behaviour by incumbent carriers may take the form of restrictive slot allocation agreements and gate leasing agreements that limit access by other carriers, even to unused gates. Undue influence exercised by incumbent carriers over infrastructure use and expansion plans may also deter entry.

4. Coordinated conduct

Certain circumstances conducive to coordination are present in Canadian air transportation markets, including high concentration levels on a number of routes and high barriers to entry. Additionally, information on prices charged and routes served by competitors is readily available.

As indicated earlier, Canada's major carriers interact on numerous city‑pair routes, thereby providing for multiple opportunities to exercise retaliation in case of deviations from coordinated behaviour. Entry by one of Canada's two major carriers on monopoly routes served by the competing carrier has occurred on limited occasions over recent years. While such situations seem suggestive of tacit coordination, it may simply be reflective of limited feed traffic existing on these routes and route maturity.

Hurdles to coordinated behaviour, including product differentiation and cost asymmetries, exist in Canadian air transportation markets and impede the carriers' ability to reach profitable terms of coordination. Canadian air carriers attempt to attract customers through differentiated product offerings, with distinct classes of cabins, frequency levels, connectivity, meal offerings, baggage policies, frequent flyer programs and access to airport lounges. Canadian carriers have different cost structures due to, among other things, differences in aircraft fleets and labour agreements.

From the Bureau's perspective, the mo st important step that the Government can take to ensure competition in Canada's air services markets is to minimize any barriers that are within the Government's jurisdiction in terms of legislation, regulation or policy. Various ways in which regulations could be modified to alleviate some of the barriers to entry described above are explored in the next section.

C. Recommendations

1. Liberalisation of air transportation

Parliament, in its Budget Implementation Act 2009,Footnote 90 amended the CTA to allow the Governor in Council to make regulations permitting foreign ownership levels up to 49%; however, more than five years later, these amendments have not yet been brought into force. Such amendments would ensure that certain rights in the 2009 Canada‑Europe Air Services Agreement, contingent on the existence of higher foreign ownership levels, will come into force and be available to Canadian carriers. As discussed above, higher foreign ownership levels would provide Canadian carriers with greater access to international capital. This, in turn, may lower the barrier to entry that results from limited accessibility to capital.

As it has done in the past through submissions to the 2000‑2001 CTA review panel and 2008 Competition Policy review panel, the Bureau continues to voice its support for the reduction or elimination of foreign ownership restrictions on Canadian air carriers.

Internationally, there exist examples of jurisdictions with relaxed foreign ownership restrictions. The European Union and Australia, for example, both have foreign ownership restrictions of 49%. While the United States maintains a 25% limit, the availability of significant levels of capital is higher in the United States, as a function of the size of the its economy.

In respect of domestic routes, Canada should allow for wholly foreign‑owned carriers that only serve routes within Canada. Under this model, a specific type of "Canada‑only carrier" would be licensed to serve only domestic routes and could be up to 100 percent foreign‑owned. A Canada‑only carrier would use Canadian crews, be required to comply with all Canadian laws and regulations, and be subject to the same competitive conditions and input costs as any other Canadian carrier operating domestically. Pursuant to such a policy, foreign carriers could draw upon their knowledge and expertise to establish new operations in Canada. Such a policy has been implemented in Australia and New Zealand, allowing foreigners to acquire up to 100% of a domestic airline.

The Bureau supports cabotage. Permitting foreign air carriers to provide services between points in Canada has the potential to further promote competition on routes within Canada. Airlines in European Union member states are permitted to fly all routes within the European Union, including domestic routes in another member nation, without any pricing restrictions. Australia and New Zealand, as well as the Caribbean Community and Common Market ("CARICOM") nations, are groups that enjoy the benefits of a single integrated market within their respective regions.

Airline liberalisation has brought benefits to the countries that have implemented legislative changes in this regard. The emergence of low‑cost carriers, an increase in the number of routes operated and network connectivity are among the benefits reported by jurisdictions with liberal policies in place.Footnote 91

New entrants, as well as established players, would benefit from greater access to foreign capital through relaxed foreign ownership rules. Travellers would benefit from liberalised air transportation policies since opening Canadian skies to foreign air carriers would create a credible threat of entry and potentially generate greater feed traffic beyond the major international gateways, which, in turn, would result in lower prices and/or increased levels of service.

Recommendations:

  • That the Government bring into force the provisions of the CTA providing for regulations permitting up to 49% of the voting shares of a Canadian carrier to be held by foreigners and gradually seek the elimination of all foreign ownership restrictions with Canada's trading partners, either on a bilateral or multilateral basis.
  • That the Government create a new class of licensee under the CTA to allow 100% foreign ownership of carriers that carry passengers and goods only within Canada.
  • That the Government seek to negotiate cabotage rights on a reciprocal basis.
  • That the Government continue to liberalise Canada's air agreements and to exclude from such agreements coordination among carriers regarding pricing and capacity.

2. Airport access

It is critical that airport governance continues to emphasise access as a means of maintaining and fostering competition. In terms of airport governance, the equitable and non‑discriminatory allocation of airport fees — particularly landing and terminal fees — to the various carriers, as well as access to slots, gates, counters and other necessary services for all carriers in accordance with best international norms, are critical for ensuring a level playing field for competitors.Footnote 92

Fees and taxes imposed by federal, provincial and municipal governments, in addition to fees and taxes imposed by airport authorities, should be assessed in consideration of Canada's proximity to the United States. Examples of fees imposed by the Federal Government include airport rents and security charges; taxes imposed by provincial governments include fuel excise taxes; and fees imposed by airport authorities include the airport improvement fees. A high fee structure may render Canadian airports unattractive and induce potential entrants to service markets in close proximity to the border from U.S. airports rather than from Canadian airports. It is uncertain whether such entry is sufficient in scale and scope to provide effective competition to incumbent carriers, particularly in the time‑sensitive business market; therefore, such entry onto routes from "border airports" may not provide the full force of competition, even where it may appear that entry has taken place. The current Canadian fee and tax structure partially contributes to higher air fares on routes originating or departing from Canadian airports.

In addition to considerations given to the allocation of fees among the various carriers and the magnitude of fees and taxes, attention should be given to the method used to collect fees and taxes. In markets characterized by imperfect competition, consumers bear a larger share of the tax burden for per unit consumption taxes than for ad valorem consumption taxes.Footnote 93 Under such circumstances, ad valorem taxes are more favourable to consumers than taxes per unit as they reduce market distortions resulting from imperfect competition.

Recommendation:

  • That the Government, in examining issues of airport governance, emphasise the importance of equitable and non‑discriminatory allocation of airport fees among carriers, and access to slots, counters and services for all carriers in accordance with best international norms.

IV. Marine

In addition to the CTA, other relevant transportation laws affect competition in Canada's transportation sectors. Recommendations on how changes to the Shipping Conferences Exemption Act, the Coasting Trade Act and the Pilotage Act could increase competition in Canada's marine sector are presented in this section.

A. The Shipping Conferences Exemption Act

Shipping conferences are associations of shipping companies that adopt a number of common policies. Certain activities of shipping conferences are exempted from certain provisions of the Competition Act, notably the use of common tariffs; the use of patronage contracts; establishing terms and conditions regarding service contracts; the allocation of ports; the regulation of times of sailing and service; pooling arrangements; and the regulation of conference memberships.

The rationale for shipping conferences laws is outdated. Tariffs resulting from market driven decisions lead to a more efficient allocation of resources than tariffs established on a common collaborative basis. The special privilege that international shipping is given does not apply to other sectors of the economy. For instance, collective rate making was abolished in 1987 in the railway sector. The increased trends toward globalization of trade reinforce the need to instill greater competitive forces into the shipping industry, including marine transportation. By way of comparison, in 2006, the European Union repealed its block exemption from European competition law for liner shipping conferences. The repeal ultimately went into effect in October 2008 after a two‑year transition period.

Recommendation:

  • That the Government end the exemption to shipping conferences from competition law.

B. The Coasting Trade Act

The Coasting Trade Act regulates the use of foreign‑registered vessels in Canadian domestic maritime service. Under the Coasting Trade Act, Canadian maritime cabotage is practically limited to Canadian registered vessels, unless no Canadian registered vessel is suitable and able to perform the service required. In such circumstances, a Coasting Trade License may be issued to allow a shipper to temporarily import a vessel into Canada and get temporary work permits for the vessel's crew.

Maritime cabotage regulations have been relaxed in Australia, New Zealand and within the European Union. Relaxed cabotage regulations led to lower freight rates in Australia and New Zealand and, more generally, to a more effective and efficient use of marine transportation equipment in countries that have liberalised marine transportation. Australia's and New Zealand's sailing distance from other countries is significant; consequently, the impact of relaxed cabotage regulations in Australia and New Zealand must be interpreted accordingly.Footnote 94 The United States continues to have a highly protectionist cabotage regime in place. As is the case with the airline industry, the Bureau does not see any compelling economic reason to restrain competition in Canadian domestic maritime services. Relaxed cabotage regulations would provide expanded choice to shippers and expanded opportunities for Canadian flag ship operators, so long as cabotage rights are negotiated on a reciprocal basis. The marine sector would benefit from increased exposure to international competition.

Recommendation:

  • That the Government negotiate maritime cabotage rights on a reciprocal basis; in the interim, the Government should work towards the simplification of the process to obtain a Coasting Trade License to import foreign‑registered vessels.

C. The Pilotage Act

Marine pilotage is governed by the Pilotage Act of 1972 which establishes four pilotage authorities, each with a statutory monopoly for the accreditation of pilots and the provision of pilotage services.

The Bureau's concerns, as initially voiced to the 2000‑2001 CTA review panel, are with a) uncompetitive tariffs due to the limited powers of the Agency to deal with the existing tariff structure; b) the potential for cross‑subsidization of ports or regions under the jurisdiction of an authority; and c) the absence of competition in the provision of pilotage services.

The provision of pilotage services in Canada does not display any of the typical characteristics, such as economies of scale or natural monopoly, missing markets, etc. that justify the provision of such services through a regulated monopoly. The production of goods and services is best achieved under a competitive regime. The elimination of the statutory monopoly of the Pilotage Authorities to provide pilotage services would address the inadequacy of the tariff structure, remove the possibility of cross‑subsidization and achieve cost efficiencies.

Recommendation:

  • That the Government abolish the statutory monopoly of the Pilotage Authorities in providing pilotage services.

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V. Conclusion

The Commissioner is of the view that competition in a free market system best provides consumers — whether passengers or shippers — with lower costs, better quality services and increased innovation. As Canadians' use of transportation services continues to grow, ensuring that the regulatory framework governing such services promotes competition is of critical importance.

Regulation should be implemented only where it is needed to address market failures or achieve other policy objectives, including safety, accessibility and environmental protection. Where restrictions on competition are needed to achieve these goals, the Commissioner would urge that regulatory measures be implemented in such a way as to minimally impede competition.

The Commissioner presents the recommendations set out in this submission in order to help the Panel consider possible changes to the CTA and other legislation that could promote competitive and healthy transportation markets. The Commissioner may offer additional comments on particular proposals as they arise in the course of the Panel's consultations. He would likewise be pleased to offer any further assistance that the Panel may find helpful.

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Appendix 1: Key provisions of the Competition Act

Mergers

On application by the Commissioner, section 92 of the Competition Act allows the Competition Tribunal (the "Tribunal") to issue a remedial order in respect of a merger or proposed merger that prevents or lessens, or is likely to prevent or lessen, competition substantially. The Tribunal may not make this finding solely based on concentration or market share; instead, it may consider a range of factors laid out in section 93 of the Competition Act, including acc eptable product substitutes, barriers to entry, effective remaining competition, or any other factor that is relevant to competition in a market. If the Tribunal chooses to issue an order, the remedy may include dissolution of the merger, disposition of certain assets or shares, or an order that the merger, or part of it, not proceed. Section 105 of the Competition Act allows the Commissioner and respondent(s) to come to a consent agreement, which will be registered with the Tribunal and be enforced in the same way as an order.

Section 96 of the Competition Act provides an efficiency defence to the merger provisions. When a merger creates, maintains or enhances market power, subsection 96(1) creates a trade‑off framework in which efficiency gains that are likely to be brought about by a merger are evaluated against the anti‑competitive effects that are likely to result. The categories of efficiencies that are relevant to the trade‑off analysis include allocative efficiencies, technical efficiencies and dynamic efficiencies. For the purposes of the trade‑off analysis in litigated proceedings before the Tribunal, the Bureau must show the anti‑competitive effects of a merger, while the merging parties' burden includes proving that the gains in efficiency are likely to occur, are brought about by the merger or proposed merger, are greater than and offset the anti‑competitive effects, and would not likely be attained if an order under section 92 were made.

Transactions involving a "transportation undertaking" that are subject to notification under the Competition Act must also be notified to Transport Canada for review.Footnote 95 The transportation‑specific merger review process contemplated in the CTA functions in parallel to the general pre‑merger notification and review provisions in the Competition Act. In particular, where a proposed transaction involving a transportation undertaking is subject to mandatory pre‑merger notification under the Competition Act, it must also be notified to the Minister of Transport, who considers whether the proposed transaction raises issues with respect to the public interest at is relates to national transportation. If a public interest review is triggered under the CTA, this process will take the place of the general merger review process under the Competition Act. The Minister of Transport may direct the Agency or another person to examine public interest issues and deliver a report which, along with a report from the Commissioner on competition issues, will inform the Minister of Transport's recommendation to Cabinet regarding whether the proposed transaction should be approved.

Abuse of dominance

On application by the Commissioner, section 79 of the Competition Act permits the Tribunal to issue a remedial order in respect of an abuse of a dominant market position. Under the Competition Act, abuse of dominance occurs when:

  1. a dominant firm or a dominant group of firms in a market;
  2. engages in a practice of anti‑competitive acts;
  3. with the result that competition has been, is being, or is likely to be prevented or lessened substantially.

Where the Commissioner establishes each of these three elements, the Tribunal may issue an order:

  1. prohibiting the practice of anti‑competitive acts;
  2. directing the respondent(s) to take actions that are reasonable and necessary to overcome the anti‑competitive effects of the practice, including the divestiture of assets or shares; and/or
  3. requiring the respondent(s) to pay an administrative monetary penalty of up to $10 million on a first order, and up to $15 million for each subsequent order.

Subsection 78(1) of the Competition Act sets out a non‑exhaustive list of nine types of conduct that are deemed to be "anti‑competitive acts" for purposes of section 79, including predatory pricing. Because the list is non‑exhaustive, other practices, such as the pre‑emption of essential facilities, could be examined under section 79.

Competitor collaborations

Section 90.1 of the Competition Act allows the Tribunal, upon application by the Commissioner, to issue an order regarding agreements or arrangements between competitors that prevent or lessen, or are likely to prevent or lessen, competition substantially. The Tribunal may prohibit any person from doing anything under the agreement or arrangement, or require any person with their consent and the consent of the Commissioner to take any other action.

Section 90.1(4) provides an efficiency defence, which bars the Tribunal from making an order if it finds that the agreement or arrangement has brought about, or is likely to bring about, gains in efficiency that will be greater than, and will offset, the effects of any prevention or lessening of competition that will result or is likely to result from the agreement or arrangement, and that the gains in efficiency would not have been attained if the order had been made or would not likely be attained if the order were made.

Conspiracy

Under section 45, it a criminal offence when two or more competitors or potential competitors conspire, agree or arrange to fix prices, allocate customers or markets, or restrict output of a product. This offence is punishable by a fine of up to $25 million, or imprisonment for a term of up to 14 years, or both.

The Bureau recognizes that some desirable business transactions require explicit restraints on competition to make them efficient or even possible. As a result, the Competition Act provides an "ancillary restraints defence" to ensure that strategic alliances or other types of legitimate collaborations between competitors are not treated as criminal offences.

To qualify for this defence:

  • the agreement must be "ancillary" to a broader or separate agreement that includes the same parties;
  • the agreement must be directly related to and reasonably necessary for giving effect to the objective of the broader or separate agreement; and
  • the broader agreement must itself be legal.

When the ancillary restraints defence applies, the Commissioner may seek a remedy in respect of the agreement under the civil agreements provision in section 90.1 of the Competition Act if the Commissioner is of the view that the agreement is likely to substantially lessen or prevent competition.

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Appendix 2: Competition Bureau enforcement in the transportation sector since 2001

Inquiries under the Competition Act are conducted in private and information provided to the Commissioner is treated as confidential. Inquiries typically become public once charges are laid, an application is made before the Tribunal or some other public action is taken. Since 2001, the Bureau has publicly investigated the following transportation matters:

Rail

Canadian National Railway Company civil investigation

In 2014, the Commissioner announced that he had discontinued his inquiry into whether CN engaged in conduct contrary to the civil provisions of the Competition Act and whether this alleged conduct resulted in a substantial lessening or prevention of competition in certain markets related to the transportation of lumber. During its inquiry, the Bureau examined whether CN possessed market power in the transportation of lumber from certain lumber mills in Western Canada to Vancouver, and whether CN leveraged any such market position to gain market power in lumber transloading in Vancouver. Based on the evidence gathered, the Bureau believed that certain lumber mills in Western Canada relied heavily upon CN to transport lumber to destinations in Vancouver. After examining all available information before it, the Bureau concluded that CN's conduct did not contravene the Competition Act because the conduct had not resulted in a substantial lessening or prevention of competition in lumber transloading in Vancouver.

CN‑BC Rail merger

In July 2004, the Commissioner, CN and the British Columbia Railway Company ("BC Rail") entered into a Consent Agreement allowing CN to operate BC Rail subject to various commitments to address and remedy the substantial lessening and/or prevention of competition that otherwise would have likely resulted from this merger transaction. To ensure that BC Rail shippers continued to have access to rail competition from the rail carriers interchanging traffic with CN at Vancouver post‑transaction on shipments destined to various places throughout North America, CN agreed to abide by the following three price and service commitments:

  1. publish open gateway rates from/to various locations on the network of BC Rail to/from Vancouver, to be adjusted annually using the Rail Cost Adjustment Factor — adjusted for productivity gains, published by the Association of American Railroads;
  2. average transit times on traffic interlined with BNSF, CP and Union Pacific Corporation at Vancouver that are faster than BC Rail's average transit times achieved in 2003; and
  3. allocate and supply of rail cars by CN that do not discriminate against shippers who use competing interline rail carriers at Vancouver in preference to CN.

To ensure that the transaction did not enable CN to materially increase rates and/or curtail services levels in the Peace River area grain markets, CN also agreed to abide by the following additional measures requiring it to:

  • charge published single car rates for export grain from the Peace River area to Vancouver and Prince Rupert;
  • make interlined grain movements to the U.S. subject to the above‑noted open gateway rates and service commitments;
  • maintain the availability of published multi‑car incentive rebates in the Peace River area;
  • maintain minimum frequency of switching services to BC Rail grain shippers; and
  • not discriminate in the allocation and supply of grain covered hopper cars in the Peace River area.

Air

Air Canada — predation

In March 2001, the Commissioner brought an application to the Tribunal against Air Canada, alleging that Air Canada had engaged in predatory conduct on a number of passenger airline service routes between certain areas in the maritime provinces of Canada and cities in Ontario and Quebec.

The case was divided in two parts and in July 2003 the Tribunal issued its decision in the first part. Subsequent to Air Canada filing for bankruptcy protection in April of 2003, the application was discontinued on October 29, 2004. In October 2004, taking into account the Tribunal's decision, the Bureau released a statement clarifying its approach to future cases involving airline predation. The key points were as follows:

  • Reviews of alleged abuses of dominance in the airline industry would be triggered only by significant responses by a dominant carrier to existing competition or to new entry, not by a carrier's usual seasonal or operational practices;
  • The Bureau recognized that there could be legitimate business reasons for an airline to operate a flight below its avoidable costs. As such, operating capacity below avoidable costs would not necessarily give rise to enforcement action in all circumstances; and
  • As a general principle, the Bureau would not take enforcement action where a dominant carrier responded to competition by reducing its fares to match, but not undercut, the fares of a competitor. This signalled a qualified tolerance of fare matching, which was a softening of the Bureau's previous position on this key issue. However, the Commissioner's letter also stated that if such fare reductions were accompanied by a significant increase in capacity, or an increase in the number of seats available at the lowest price, the Bureau would consider whether enforcement action was appropriate.

Air Canada/United‑Continental Holdings — Merger and Strategic Alliance

In October 2010, Air Canada and United Continental Holdings announced their intention to enter into a joint venture that would have resulted in a merger of their operations on trans‑border routes between Canada and the United States. The Bureau reviewed the joint venture as well as three pre‑existing coordination agreements. It concluded that the joint venture would lead to a monopoly on ten trans-border routes, and substantially reduce competition on nine others. The Bureau filed an application with the Tribunal in June 2011 challenging the proposed joint venture under the merger provisions of the Competition Act, and seeking to unwind the three prior coordination agreements under section 90.1 of the Competition Act, which allows the Commissioner to challenge anti‑competitive agreements — whether existing or proposed — between competitors. In October 2012, a Consent Agreement was reached, pursuant to which the parties are prohibited from implementing their joint venture agreement, or coordinating pursuant to their prior agreements, with respect to 14 high‑demand trans‑border routes.

Air Cargo

A Bureau investigation into the fixing of fuel and other surcharges by suppliers of international air cargo services has resulted in over $25 million in criminal fines to date with nine companies convicted — Air France, KLM, Martinair, Qantas, British Airways, Cargolux, Korean Air, Cathay Pacific and LATAM Airlines Group. Similar investigations were also undertaken by many of the Bureau's international enforcement partners.

Marine

Ocean Freight cartel

An investigation into the ocean freight industry in Canada has been ongoing since 2009. On August 8, 2014, two individuals and one company pleaded guiltyFootnote 96 to two counts each under the conspiracy provisions of the Competition Act for their participation in a price‑fixing cartel related to various surcharges, including surcharges for currency exchange rate fluctuations and fuel. The guilty pleas relate to surcharges for the supply of non vessel operating common carrier ("NVOCC") export consolidation services from Canada to various foreign destinations. The company was fined $1 million. The two individuals were sentenced, respectively, to two concurrent conditional sentences of four months and 30 hours of community service, and to two concurrent three‑month conditional sentences and 20 hours of community service.

Liquid Transportation

In September 2008, the Federal Court of Canada issued a prohibition or der requiring th at Stolt‑Nielsen Transportation Group Ltd. abide by ongoing compliance measures in relation to Canadian competition laws and make a payment of $200,000 towards the cost of the Bureau's investigation into conspiracy and bid‑rigging activities.

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Appendix 3: Glossary of terms and expressions

Captive Shipper
A captive shipper is a firm that has no cost‑effective transportation alternative to the railway serving its location (either at origin or destination). It usually involves a resource‑based company that is located in a remote region of Canada and as a result is served by only one railway. Due to the nature of its product, as well as its location, other transportation modes such as trucking or water are not competitive transportation alternatives. Such a shipper is not only captive to the rail mode, but also to the rail carrier serving its location.
Class I Railway
According to Transport Canada's 2011 annual report, entitled "Transportation in Canada 2011: Comprehensive Review", Class I railways are generally defined to include CN and CP (in the case of freight railways), and VIA Rail (in the case of passenger railways). They have operating revenues exceeding $250 million in the past two years.
Competitive Line Rates
In some circumstances, shippers whose facilities do not fall within the interswitching limits may nevertheless wish to have their goods transported to an interchange point for carriage by a competing railway. Such shippers may apply to the Agency pursuant to the CTA for a competitive line rate under which their originating railway will move goods to the interchange point for transfer to the competing railway (referred to as the "connecting carrier"). Competitive line rates were intended, for the most part, to be used by captive shippers in remote locations, who are often long distances from the nearest interchange point.
Competitive line rates are set by the Agency based on a formula that considers 1) the interswitching rate for the portion of the route that falls within the regulated interswitching radius, plus 2) an amount for the balance of the distance based on the originating railway's average revenue per tonne‑kilometre for moving similar traffic over a similar distance. Competitive line rates differ most significantly from regulated interswitching in that the tariff over a portion of the route reflects market prices.
Final Offer Arbitration
Final offer arbitration is a process set out in Part IV of the CTA for resolving disputes between railways and shippers in respect of rates or conditions. Pursuant to these provisions, a shipper that is dissatisfied with the rates or service levels offered by a railway may apply to the Agency for arbitration. Within 10 days of submitting the issue to the Agency, the shipper and the railway make their final offers, including the proposed rates. An independent arbitrator then evaluates both offers and must select one. The arbitrator is not allowed to propose a compromise offer. The arbitrator's decision is binding.
Level of Service Provisions
Sections 113 to 116 of the CTA, commonly referred to as the "Level of Service Provisions", describe the railways' service obligations. The Level of Service Provisions allow shippers to apply to the Agency for corrective action if a railway does not provide an "adequate and suitable" level of service, including accommodation of traffic, availability of necessary facilities and equipment, and timeliness of service. Upon receipt of a complaint, the Agency may investigate and determine whether the railway is fulfilling its obligations. If it is not, then the Agency has a wide range of remedial powers to draw from to rectify the situation.
Regulated Interswitching
Regulated interswitching, as set out in section 27 of the CTA, allows a shipper served by a single railway at the origin or destination to transfer its traffic from the lines of that railway to the lines of a competing railway at a regulated rate set by the Agency, so long as there is an interchange point within 30 km, or a prescribed greater distance, of the shipper's facility. A shipper located outside of this limit may apply to the Agency for extended interswitching to include its facility, so long as it is reasonably close to the interchange point under the circumstances.
Running Rights
Running rights allow a railway to operate over the track, and to use the facilities (e.g. rail sidings) of another railway. The host railway is compensated by the other carrier for this right. Any disputes over compensation are settled by the Agency.
Pursuant to section 138, of the CTA a railway company may apply to the Agency to obtain running rights where it has been unable to obtain such rights through commercial negotiation. The Agency may grant the rights and impose any conditions "as appear just or desirable to the Agency, having regard to the public interest".
Service Level Agreement
A railway company and a shipper may agree, by means of a confidential contract, on rates, conditions, and manner in which the railway company will fulfill its service obligations under section 113 of the CTA. Shippers have a right to a service level agreement through arbitration if they are unable to obtain one through commercial negotiation.

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Appendix 4: Nonlinear MRE formula

The Bureau proposes that the existing formula be replaced by a nonlinear formula along the following lines, applied, as currently, to each affected railway:

MRE = P1 * Qa + P2 ( Qa - Qe ) - P3 ( Qr - Qa )

Where:

P1 is the current maximum average price, determined by adjusting the pre‑MRE average price for inflation.

Qa is the actual volume of total grain shipments carried by that railway. P1*Qa is thus the current MRE formula.

Qe is the volume of total grain shipments predicted for that shipper for a "normal" year from a trend line that reflects the long run growth rate for total grain shipments.

P2 is the premium received by a railway company for grain moved at levels above trend, (P2=0 if Qa<Qe).

Qr is the total volume of grain shipments requested by shippers for that railway, which can be estimated using regional production relative to trend as a proxy for requested volume if necessary to avoid exaggerated requests.

P3 is the penalty paid by a railway for grain it failed to move.

For example: Based on the long run growth rate for total grain shipments, the volume of grain shipments predicted for a given shipper in 2016 is Qe=100, however actual production (or shipper demand) in 2016 is Qr=150. Assuming the railway company has kept enough excess capacity to carry Qa = 130, the railway company would get an extra reward equal to (P2‑P1)*(130‑100) for maintaining the capacity to provide the additional 30, but a penalty equal to (P3*[150‑130]) for not having maintained the capacity to carry all 150 units of volume produced (or requested).

The approach proposed by the Bureau is market‑based and aimed at achieving an incentive structure that would appropriately reward investments in excess capacity. If desired, the adjustment can be made revenue neutral in expected values by setting P2 and P3 so that P2 (Qa‑Qe) equals P3 (Qr‑Qa) over the long term. If the amount of excess capacity under initial parameter values is too low (or too high), P2 and P3 can be increased (or lowered) to induce additional capacity (or less excess capacity).

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Appendix 5: Freedoms of the air

The following definitions are used by Transport Canada to describe the freedoms of the air and are accepted industry‑wide:

First Freedom of the Air
is the right or privilege for an air carrier to fly across the territory of another country without landing.
Second Freedom of the Air
is the right or privilege for an air carrier to land in the territory of another country for non‑traffic purposes, most commonly to refuel aircraft, to make unexpected repairs or to respond to an emergency.
Third Freedom of the Air
is the right or privilege for an air carrier from country A to put down, in the territory of country B, traffic coming from country A.
Fourth Freedom of the Air
is the right or privilege for an air carrier of country A to take on, in the territory of country B, traffic destined for country A.
Fifth Freedom of the Air
is the right or privilege for an air carrier of country A to take on traffic in the territory of country B and carry it to a third country as part of a service to/from country A.
Sixth Freedom of the Air
is the right or privilege for an air carrier of country A to take on traffic in country B and carry it to country C via country A.
Seventh Freedom of the Air
is the right or privilege for an air carrier of country A to carry traffic between country B and country C, without serving country A (stand‑alone service).

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How to contact the Competition Bureau

Anyone wishing to obtain additional information about the Competition Act, the Consumer Packaging and Labelling Act (except as it relates to food), the Textile Labelling Act, the Precious Metals Marking Act or the program of written opinions, or to file a complaint under any of these acts should contact the Competition Bureau's Information Centre.

Address

Information Centre
Competition Bureau
50 Victoria Street
Gatineau, Quebec
K1A 0C9

Telephone

Toll‑free: 1‑800‑348‑5358
National Capital Region: 819‑997‑4282
TTY (for hearing impaired): 1‑866‑694‑8389

Facsimile

819‑997‑0324

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