Ottawa is trying to curb the market power of Canada’s two major railways, setting the stage for a nasty public battle in the Prairies.
The railways have launched an aggressive campaign in response, with Keith Creel, chief executive of Canadian Pacific Kansas City Railway Ltd., calling the government plans “short-sighted and damaging,” and warning that they could clog the rail network that Canada depends on to get billions of dollars worth of commodities to ports for export.
But shippers say they’ve put up with subpar service from the railways for long enough, and the new rules deliver a desperately needed dose of competition into a Canadian rail system that is essentially controlled by two companies: Canadian National Railway Co. (CNI) and Creel’s CPKC Railway (CP).
In the careful world of rail and government policy, this back-and-forth amounts to a rock-em, sock-em slugfest. And the subject of all the turmoil is an obscure concept in federal transportation law called “interswitching.”
What is interswitching?
Interswitching is a rule meant to help “captive shippers” — shippers in regions that are only served by a CN line or a CPKC line, and not both. About 94 per cent of all grain elevators are captive shippers, according to report commissioned by the federal government. Grain lobbyists argue those shippers are stuck negotiating with a monopoly. Interswitching gives them the chance to switch over to the other railroad — something less than perfect competition, but at least a choice.
“It really speaks volumes about the state of affairs that we’re working hard to get a duopoly,” said Wade Sobkowich, executive director of the Western Grain Elevators Association.
Here’s how it works. If a shipper was sending freight from its facility on a CN line but wanted to use CPKC instead, the shipper would have the right to ask CN to take its railcars to a nearby intersection, where CN then would be obliged to transfer the cars onto rival tracks. CN would drop off the cars, CPKC would pick them up at the interchange, and the shipper would pay CN a regulated rate for its troubles.
But as it currently stands, federal rules only allow for interswitching if the the shipper is within 30 kilometres of an intersection.
Some shippers argue the 30-kilometre limit is too small to do any good, since rural facilities tend to be much farther than 30 kilometres from the closest intersection. Sobkowich, whose lobby group represents the country’s top grain exporters, said the interswitching zone needs to expand to 500 kilometres to include the most remote grain elevators, in places such as Alberta’s Peace River region.
The Canadian railways counter that expanding that zone will allow rival railroads from the United States to capitalize on regulated interswitching rates — which they say are cheaper than market rates — to siphon traffic out of the Canadian system.
In March, the government took a side. Prime Minister Justin Trudeau said dysfunction in the supply chain was hurting Canada’s reputation with its trading partners. “We work really, really hard to develop new markets,” he told the Canadian Federation of Agriculture’s annual meeting in Ottawa. “Then a year or two in, there’s a jam in the system and they turn away for another market and will never come back to Canadian produce.”
Trudeau’s government included an item in the 2023 budget announcing that it would expand interswitching to “support competition among rail carriers.”
The interswitching limit will increase to 160 kilometres on an 18-month trial basis as soon as the budget bill passes — though the change will only apply in the Prairies, to avoid congestion on high-traffic routes in British Columbia and from Ontario to Quebec, according to federal Transport Minister Omar Alghabra’s office.
“While some traffic may move onto U.S. carriers, based on the previous experience with this measure, CN and CPKC should be able to retain the vast majority of their traffic by providing competitive rates and service,” Alghabra’s spokesperson, Nadine Ramadan, said in an email.
Why is this happening?
Last fall, Western Canada grew a bumper grain crop — one of the biggest and most anticipated harvests in memory because Russia’s invasion of Ukraine had led to food security concerns around the world. Exporters wanted to get their grain to port to capitalize on high prices in global markets. But for the first few weeks, the railways sagged. Grain elevators couldn’t get all the railcars they needed to bring their cereals, oilseeds and pulses from elevators in the Prairies to ships waiting at the Port of Vancouver.
“This is the heavy shipping period and they’re already behind,” John Heimbecker, head of the Winnipeg-based grain company Parrish & Heimbecker Ltd., said in October. “It’s not that the railways can’t move the grain, it’s that they won’t move it.”
Around the same time, Alghabra’s national supply chain task force — which he formed in the wake of the war in Ukraine — released its final report, warning the system was in crisis. As part of its recommendations, the task force told the government to expand interswitching immediately to address “power balance issues” between railways and shippers. The government took notice.
“The agricultural sector has been asking for the return of extended interswitching for some time,” said Ramadan.
Will it work?
Not everyone thinks so.
“This is shortsighted and damaging,” Creel wrote in a blunt op-ed in the Financial Post earlier this month. “Extended interswitching isn’t about competition; it’s about some shippers wanting to manipulate regulation to pay less.”
The railways have made up ground since the early days of last year’s harvest, breaking internal records for grain movement through the fall and winter. Creel said the new rule “needlessly and recklessly jeopardizes” that success.
“It will drive up prices for goods at a time when Canadians are already coping with high inflation,” Creel wrote.
CPKC and CN, as well as some shippers, are afraid more interswitching will slow everything down. Shippers seem to always want to get their hands on more rail cars to fill with product. Grain lobby groups publish weekly report cards on how the railroads are keeping up with car orders. But if those cars are stuck waiting to get picked up at an interswitch area somewhere in the Prairies, that means more delays and congestion in the rest of the system.
“I’m concerned it’s going to have ripple effects,” said Murad Al-Katib, chief executive of the Saskatchewan grain processing giant AGT Food and Ingredients Inc., which owns a short-line railway in the province. “We’re not in favour of supply chain measures that benefit very few shippers yet can have a very serious impact on the supply chain.”
After the task force released its report last year, Heimbecker also questioned whether expanding the interswitching zone would actually benefit his operation. “I’m worried about the detail,” he said in October. “How does that work? And when am I going to get those cars? The railways won’t co-operate. If I order (rail cars) in next week, do I get them? Or do I get them in two or three weeks?”
The pro-interswitching camp isn’t satisfied either. Flip the Switch, a campaign backed by a coalition of agriculture lobby groups, is pushing Ottawa to widen the interswitching zone to 500 kilometres and let the pilot run for five years. On its website, the coalition argues that the move won’t increase costs because railways get to charge a regulated fee for the service.
Why does this sound familiar?
We’ve been here before. The government tried extended interswitching in 2014, and almost nobody used it. The pilot project, which also expanded the interswitching radius to 160 kilometres, was cancelled in 2017 after a review, commissioned by government, found only a handful of grain shippers took advantage of the new limits.
“Shippers may simply believe that CN and CP are unwilling to compete for such traffic and that interswitching is therefore ineffective,” former federal cabinet minister David Emerson wrote in the 2015 report. “Alternatively, the new distances may still not be long enough to capture most non-grain ‘captive’ shippers of commodities such as forestry, or coal.”
CPKC’s Creel urged parliamentarians to reject “resurrecting” a failed policy.
But Sobkowich, the grain lobbyist, said you can’t judge an interswitching rule on how many times shippers actually exercise those rights. “It’s used to create competitive tension,” he said.
For example, if a railway told a grain elevator it wouldn’t be able to provide the railcar capacity it needed, the grain elevator could threaten to interswitch. “And then the first primary carrier would say, ‘OK everybody let’s just back away from the ledge. I think we can get you those cars this week,’” Sobkowich said.
John Corey, chair of the Coalition of Rail Shippers, said in a statement that railways are having an “allergic reaction” to interswitching because it gives shippers leverage in negotiations.
CN questioned why the grain industry has been pushing so hard for interswitching, when it already has a list of federal protections at its disposal. Federal rules allow for grain shippers to take the railways to binding arbitration if they don’t like their deal. The government also puts a cap on the amount of money that CN and CPKC can make from transporting Western grain to provide some price protection for shippers, a program known as the maximum revenue entitlement.
“It’s not clear why the grain lobby in particular is so strongly advocating for extended interswitching,” CN spokesperson Jonathan Abecassis said in an email. “Forcing an increase of traffic onto an already busy corridor is not a viable or sustainable solution.”