The federal government released the final report of the Rail Freight Service Review process in Friday. The review was launched in 2008 to address ongoing issues with rail freight service, raised by users of the rail supply chain. The report of the Review is posted on the Transport Canada web site.
The government accepts the panel’s commercial approach and intends to implement the following steps to improve the performance of the entire rail supply chain:
- initiate a six-month facilitation process with shippers, railways and other stakeholders to negotiate a template service agreement and streamlined commercial dispute resolution process;
- Table a bill to give shippers the right to a service agreement to support the commercial measures;
- establish a Commodity Supply Chain Table, involving supply chain partners that ship commodities by rail, to address logistical concerns and develop performance metrics to improve competitiveness;
- in collaboration with Agriculture and Agri-Food Canada, Transport Canada will lead an
in-depth analysis of the grain supply chain to focus on issues that affect that sector and help identify potential solutions.
The initial response to the contents of the final report appear to be mixed. On one hand, the Winnipeg Free Press reported that shippers were pleased with the addition of a commitment by the government to table legislation to guarantee their right to service agreements with railways. The Western Grain Elevator Association (WGEA) is reported to be cautiously optimistic:
“The announcement that legislation be drafted immediately and implemented as soon as possible is very different from the recommendations made in the Rail Freight Service Review Panel’s Interim Report, and we are pleased that the government has rejected the “wait and see” approach initially proposed by the Panel,” said Wade Sobkowich, Executive Director. The WGEA maintains that the effectiveness of the proposed legislation will be determined as Service Level Agreements (SLAs) are finalized and put into effect.
The availability of SLAs to shippers is different than what has been recommended by the WGEA. “The solutions put forward by the WGEA would have placed immediate legislative and regulatory disciplines in the system, however, the direction being taken is encouraging and we look forward to trying to make this approach work,” said Sobkowich, who added that WGEA members are open-minded to the possibility that arbitrated SLAs could be a workable vehicle for putting in place clear and measurable rail service levels with meaningful financial penalties being triggered when those service obligations are not met. Railways currently use financial penalties set out in tariffs as a means to incite efficient behaviour by shippers.
On the other hand, CN expressed its serious concerns about the final report of the Rail Freight Service Review. Claude Mongeau, president and chief executive officer, said:
“CN disagrees with the focus and tenor of the panel’s recommendations. Like the dissenting panel member, we are concerned that the panel’s recommendations are drifting backward toward more regulation instead of encouraging the current momentum for positive change….
…In the end, supply chain partners need to embrace change to drive better service and efficiency gains. Burdensome regulation targeting railways alone is not the solution. Greater supply chain collaboration and more service innovation are what is needed to foster Canada’s prosperity.”
It appears that the government has pursued an intermediate path between the regulated approach requested by some shippers and a value-chain, commercial approach desired by rail companies. This intermediate path calls for “service agreements” or “service level agreements” that specify the working relationship between shippers and rail companies. As specified in the final report, elements of service agreements may include:
- services and obligations of the railway and obligations of the other party;
- communication protocols and escalation;
- traffic volumes;
- key performance metrics;
- performance standards;
- consequences of non-performance (including penalties);
- dispute resolution; and
- force majeure.
Other key elements of the recommendation include Consultation and Prior Notification of Proposed Service Changes, Establishment of a Dispute Settlement Process, and Enhanced Performance Reporting procedures. The Performance Reporting process is to operate at two levels, namely, confidential bilateral reporting and public reporting at a sector level. The Panel believes that balance in negotiating service agreements can only be achieved if there is a fair and reasonable dispute resolution process.
Service Level Agreements have been employed in the provisioning of computing and telecommunications services for a number of years. In those sectors, there can be different types of agreements, including customer-level/based SLA, service-level/based SLA, corporate based SLA and multi-level SLA. SLAs commonly include segments to address: a definition of services, performance measurement, problem management, customer duties, warranties, disaster recovery, termination of agreement.
One challenge in the transportation sector will be balancing transparency and non-discriminatory service provision with the desire for confidentiality and non-disclosure of proprietary information on the part of shippers. In particular, attention has to be paid by the system to ensure that new customer-level SLA’s terms are reported to and known to the broader customer community so they can be incorporated into service-level SLA terms and conditions. Unlike tariff-based reporting systems, SLA’s specify items beyond price, thus in addition to a dispute settlement system, care will be required that the equivalent of a “price discovery mechanism” that exists in the tariff regime is created to convey information to the customer community about evolving SLA terms and conditions. Market efficiency is generally improved and transaction costs reduced if customers and providers have access to an equal base of information of prior transactions and established precedence.
It will be interesting to observe over time how this Canadian approach to rail policy works in comparison to other jurisdictions like Europe and Australian that have pursued structural separation of infrastructure and service provisioning in the rail sector. Under a structural separation approach, customer bargaining power is enhanced if large shippers or groups of smaller shippers can present a credible threat to forward integrate their operations to include running their own rail services or to otherwise dis-intermediate some elements of the logistics chain. Market efficiency, adherence to service standards, and price discipline is further enhanced if barriers to entry for new competitors are reduced so both price and service-based competitive alternatives are possible. Overall, it is reported by the OECD that “structural separation of rail from other operational parts of a railway is more likely to be successful on less congested lines.”
The Canadian model appears to rely more on regulatory oversight and dispute settlement procedures instead of the reliance on competition discipline and structural separation-based commercial solutions employed in other jurisdictions. Hopefully, the enhanced reporting requirements and dispute settlement systems envisaged in the report will compensate for the competitive structural problem of shippers being captive customers of a single rail service provider.