Final Terms of Reference for a Review of Rail Freight Service

BACKGROUND

The government tabled proposed amendments to the shipper protection provisions of the Canada Transportation Act (CTA) on May 30, 2007. At the same time, it announced a commitment to commence a review of railway service within 30 days of the passage of the amendments. Bill C-8 received Royal Assent on February 28, 2008.

The objective of this paper is to describe the scope and approach for conducting a review of the performance of the rail freight transportation supply chain and its impact on rail service to shippers in Canada.

CONSIDERATIONS

The review will take into consideration that:

  • An effective supply chain is critical to meeting the government's objectives related to strategic gateways and trade corridors and to helping shippers compete in domestic, continental and international markets.
  • Shippers need an effective, efficient, consistent, and reliable rail transportation supply chain in order to remain competitive and prosper in domestic, continental, and international markets.
  • Some shippers, especially bulk commodity shippers, have few, if any, practical alternatives to rail.
  • Railways need sufficient revenues to maintain and improve existing rail services and to invest in additional capacity (infrastructure, equipment and crews) in order to respond to the current and future needs of shippers.
  • Commercial solutions are preferable to increased regulation, although effective legislation and regulation can foster an environment that will encourage commercial solutions to service problems and disputes.
  • While the railways are a key component of the logistics system, other stakeholders (such as shippers and freight forwarders, terminal operators, vessel operators, and ports) also impact the efficiency, effectiveness, consistency and reliability of the supply chain. Many rail movements begin or end at a port or intermodal facility. Therefore, the total movement may involve other stakeholders besides the railways. The interface between elements is an important dimension of the overall effectiveness of the logistics system.
  • There are a number of constraints that impact on railway capacity and operations including: availability of land to expand yards and facilities, especially in urban centres; geographical constraints in the busiest rail corridors; and the behaviour and expectations of municipalities and adjacent landowners.
  • There is limited infrastructure, which serves a variety of commodities shipped by rail. Therefore, setting priorities can be important.
ISSUES

The review will address such issues as:

Shipper size : The review will address the needs of shippers of all sizes - small, medium, and large - across all sectors, including shippers with particular needs, e.g. dangerous commodities. The review will consider how shipper size impacts supply chain efficiency and capacity.

Car Supply : Good service means 1) providing reasonably consistent, timely, and reliable car supply, in terms of condition, type and numbers, to meet shipper demand; and 2) moving cars efficiently and effectively from origin to destination.

Demand Forecasting  - How do shippers and railways coordinate demand forecasting in both the short term (one year and less) and long term and the corresponding impact on service needs -fleet size, crews, locomotives - as well as infrastructure requirements of both railway and shipper? How are differences in demand forecasts and service/infrastructure needs addressed?

Peak movements  - Most shippers experience seasonal demand for their products and many experience cyclical demand. It is unreasonable for railways to provide sufficient resources to meet 100 percent of peak demand since it is expensive to "park" resources during off-peak or off-cycle periods. The challenge is to find a balance between the needs of shippers and railways that allows railways to provide effective service to shippers during peak periods while minimizing costs.

Operating practices  - There may be railway service and operating practices that adversely impact the effectiveness and reliability of service to shippers. The review will identify and assess which practices are effective and which are adversely impacting service to shippers (e.g. co-production and scheduled railway service). The review will also consider the operating practices of others that may have an adverse impact on the logistics chain.

Shortline railways  - Shortline railways originate approximately 25% of rail traffic in Canada. Where shippers served by shortlines are experiencing service problems, the review will examine the relationship between shortlines and the main line carriers to determine whether such problems are attributable to service, operating, or marketing practices of the main line carriers.

Surge Capacity/Recovery  - Changes or surges in demand for capacity stem from two distinct causes. One driver for surge capacity is market demand that impacts the dynamics and/or timing of trade flows. The review will identify how such surges are taken into consideration during the forecasting process and what is considered an acceptable amount of surge capacity to ensure adequate service is provided and maintained in the event of a market driven surge in demand.

The second cause of a surge in demand for capacity is related to the interruption of the smooth flow of operations; alterations in capacity demand that come about because of system failures which may be attributable to a number of causes, some of which are within the railways' control and others which are not (weather, labour disruptions, marine vessel arrival schedules and poor performance by shippers or terminals). The management of regular capacity must take into account both causes of surges in demand for service so as to allow for adequate service during market-driven surges and a rapid return to normal service when the demand surge related to operational problems is over. The review will identify best practices that facilitate quick recovery as well as the contingency and recovery plans that are deployed by the railways, shippers, and terminal operators; the effectiveness and adequacy of these plans; and additional cost-effective measures and resources (i.e. people, equipment, and facilities) that could be considered.

Transportation Alternatives  - The review will examine the extent to which service issues are a function of practical transportation alternatives, or lack thereof, that are available to shippers.

Communications  - Good service requires effective communications so that shippers and railways are aware of issues that arise with respect to demand and traffic movement and can address them quickly. The review will survey stakeholders (shippers, railways and terminal operators) to identify best practices and flag where improvements may be required.

Financial impacts  - Unreliable service can have significant financial implications for shippers including costs related to demurrage, performance penalties paid by shippers and railways, lost revenues due to missed sales opportunities/discounting, avoidable labour costs when cars are not spotted on time, etc. Railways may also experience adverse financial impacts including performance penalties, lost customers, and increased operating costs (e.g. idle labour and equipment). The review will attempt to quantify these impacts, even for a selected sector or group of shippers, to help demonstrate the cost to shippers, terminal operators, and railways of unreliable service or poor performance. This information would be essential to address issues such as reciprocal penalties and the need for investment.

Data Acquisition and Confidentiality  - To conduct an objective review, significant amounts of confidential data will need to be collected from shippers, railways, and terminal operators. Transport Canada will need to assure all stakeholders that confidential data will be protected as part of the contracting process and that information released will be aggregated to protect the identity of shippers and carriers. This will be essential to ensure the full cooperation of all parties.

Dual railway/shipper accountability for poor performance  -The review will assess the degree to which performance penalties and incentives exist today for both shippers and railways and whether they are effective in ensuring reliable and consistent service.

Other issues  - Any other issues that impact system efficiency and reliability may also be addressed as part of the review.

OBJECTIVES OF THE REVIEW

The objectives are to:

  • Conduct a review of the rail-based logistics chain (including railways, shippers, terminal operators, ports, and vessel operators,), with a focus on service provided to Canadian shippers and customers by Canadian National Railway (CN) and Canadian Pacific Railway (CPR) within Canada, including to and from ports and border crossings;
  • Identify problems and issues with respect to railway service including those stemming from other elements of the logistics chain;
  • For shippers located on shortlines, determine if there are any problems with logistics and, if so, the source of the problem including service, operating, or marketing practices of the main line carriers;
  • Identify best practices and how these can be expanded to address service issues; and
  • Make recommendations on how to address these problems and issues, including both commercial and, if necessary, regulatory solutions.

The review will examine the full logistics cycle from customer/railway demand forecasting; customer demand for service (e.g. car or train orders); railway acceptance and commitment to demand, to the spotting, loading, release and pickup of cars at origin; the movement of loaded cars to destination (including the switching of cars between CN, CPR and shortlines); the spotting, emptying, release and pickup of cars at destination; and the return of empty cars for loading at origin. It will examine the interaction between railways and other logistics stakeholders (e.g. shippers and domestic end users, terminal operators, ports, and vessel operators) and the effect of third parties on operations and capacity.

APPROACH

The review be conducted in two stages. The first stage will consist of quantitative and analytical work. In the second stage, draft recommendations will be developed by a Panel of three eminent persons based on the results of the analytical phase and any other relevant information that is available. The Panel will consult stakeholders on the draft recommendations and submit a final report to the Minister of Transport, Infrastructure and Communities.

PHASE 1: ANALYTICAL WORK

The analytical phase will consist of four projects:

1) Data gathering and analysis;

2) Assessment of logistics system operational issues;

3) Survey on railway best practices and issues; and

4) Assessment of how service issues are addressed in other transportation sectors and in regulated industries in Canada and the United States.

Consultants will be engaged to conduct the work under the first three projects. Transport Canada will undertake the work on the fourth one. This work is expected to take a minimum of six months, depending on the availability of required data and the extent of cooperation from railways, shippers, and terminal operators in providing such data.

1) Data Gathering and Analysis Project

This project is expected to be the most challenging, expensive, and time-consuming. The data phase is intended to help identify and quantify the magnitude of the problems with rail service and other elements of the logistics chain so that appropriate solutions can be developed. Good data analysis will be essential and will complement anecdotal information.

The intention is to assess historical information over a two to three year period for a broad range of commodities. (See proposed commodity list in Annex 1.) Sampling techniques will be used as appropriate to minimize costs, ensure data reliability, and address biases.

It is assumed that, from a shipper's perspective, good service consists of two main components - i) providing sufficient and consistent supply (track capacity, cars, locomotives, and crews) to meet shipper demand in a reasonable manner; and ii) moving traffic in an efficient, timely, orderly and reliable manner.

With respect to demand, key indicators include: number of cars required by shippers (i.e. car orders), number of cars committed by the railway, and number of cars actually delivered. The review will assess whether car order and allocation systems impact the railways' ability to meet shipper forecast demand in a reasonable manner.

There are a couple of demand-related issues that need to be addressed - "phantom" orders (ordering more cars than required in anticipation that less than 100 percent of the orders will be filled) and the availability of reliable and verifiable demand information.



Movement indicators are more readily available and will answer questions such as:

  • Did shippers provide timely, reasonable and accurate forecasts of shipping requirements and did the railways accept and agree to such forecasts?
  • Were cars spotted, loaded/unloaded, and picked up on a timely basis at origin and destination?
  • Were transit times reasonable and consistent?
  • Were dwell times reasonable and consistent?
  • Were cars loaded in blocks at origin and delivered in the same blocks at destination?
  • Did cars arrive in "bunches" at origin and/or destination, i.e. did several blocks of cars arrive unexpectedly at the same time and create congestion? What were the causes of such bunching?
  • Were empty transit times reasonable and consistent?
  • Do performance indicators vary by type of train, e.g. unit trains vs. manifest trains?

The analysis will indicate that problems occur from time to time. It would be unfair to assume that the railways are responsible for all problems in transit or that shippers and receivers, terminal operators, ports, or vessel operators are similarly responsible for all problems at the facilities where goods are loaded or unloaded. The analysis will have to include an assessment of the cause of the problems. This may be challenging since determining cause can be very subjective. However, it should be possible to identify disruption factors such as derailments, accidents, weather events, lack of vessels at port, strikes, and system outages that would have severe impacts on system performance.

A final report will indicate where there were service problems (nature, frequency and magnitude), causes (railway performance, weather, other stakeholder performance, etc.) and how they were addressed by the various parties.

The report will also describe the types of financial impacts that are experienced as the result of poor performance, including impacts on shippers, terminal operators, railways and others. Selective examples may be provided for illustrative purposes.

This information should be helpful in developing recommendations as part of the second phase related to the effectiveness of system recovery procedures.

This work will be conducted by consultants with experience in collecting and analyzing complex data from shippers and carriers and a thorough understanding of the supply chain from origin to destination.

2) Logistics System Operational Issues

A separate project will examine the operating practices of railways, shippers, vessel operators and terminal operators and assess the extent to which they create service problems. For example, while long block trains are assembled at origin, some trains are broken up on route and, as a result, some cars do not arrive at destination in the same block as they were loaded. This can potentially create handling and operational problems within a port if all the cars in a block are required at the same time to meet a particular vessel.

The fact that CN and CP operate different lengths and configurations of trains can create problems in ensuring equitable treatment under their co-production agreements. This also creates operational problems at the port. However, co-production appears to have improved some operating efficiencies. How can these problems be addressed? Could this concept be expanded elsewhere? Are there labour implications associated with changing operational practices?

Railway and shipper/receiver resource levels have been changing over time, e.g. number of locomotives, storage capacity at destination, number of cars by category, and number of employees by category. How has this affected railway service?

  • Other questions that will be examined include:
    • Are capacity constraints affecting service and operations, i.e. insufficient infrastructure, equipment, or crews?
    • Should there be surge capacity to handle peak or unexpected demand and to facilitate recovery when there are system problems? Who decides and on what basis? Who should pay for surge capacity?
    • Can port congestion be addressed through expansion of off-dock storage or off-dock marshalling facilities?
    • Are railway practices related to traffic priorities reasonable, such as when service or capacity must be rationed?
    • Are railway practices related to asset utilization and velocity reasonable?
    • What practices, if any, of other parties such as shippers and terminals adversely affect system performance?
    • How do railways determine and negotiate operational changes in their service levels? To what extent do railways consider shipper needs in establishing operational changes?
    • How do community/proximity issues impact the efficiency and capacity of the logistics chain?
    • Others?


This project will be conducted by consultants familiar with railway operations. The consultants will identify potential adverse impacts of operational practices within the logistics chain, in particular railway practices, on service to shippers and consult with shippers, railways, and terminals on the impacts and possible solutions. A report on findings and recommendations will be prepared for Transport Canada.

3) Survey of Railway Best Practices and Issues

A representative sample of shippers and terminal operators will be surveyed about their views on railway service and the performance of the logistics chain. This will include views on key service concerns as well as best practices of the railways and others who are part of the logistics chain. The survey will seek views on the nature and extent of accountability that exists for the various stakeholders within the logistics system. The survey will also seek views on the frequency that CTA remedies are contemplated and used and on their effectiveness, as well as commercial dispute resolution mechanisms.

Work will be done by a consultant and a report prepared for Transport Canada. The consultant will be asked to propose the best approach for obtaining this information.

This information will be instrumental for Phase 2 to help narrow down the key system issues that need to be addressed.

4) Service Issues in Other Regulated Industries

A review will be conducted on how complaints about service are addressed in other modes of transport, in regulated network industries such as telephone, television, gas, hydro-electricity, etc., and in the United States (rail). The study will look into the process/structure for handling complaints and the remedies that are available to determine if there is anything that may be applicable to railway service in Canada.

This study will be done by Transport Canada officials unless workload pressures require that a consultant be engaged.

PHASE 2: RECOMMENDATIONS STAGE

This stage will commence about one month before the data project report is submitted and will be led by a panel of three eminent persons, preferably consisting of one member with a railway background, one with a shipper background, and one member that is "neutral". This phase will last about 6 months.

Draft recommendations will be developed based on the results of the analytical projects. In addition, interested parties will be invited to submit comments on railway service and other logistics chain issues, which the panel will also take into consideration.

The draft recommendations and reports from the analytical stage will be circulated to interested parties. The Panel will consult with stakeholders after these documents are circulated. A final report will be submitted to the Minister after the consultations were completed.

ANNEX 1

COMMODITY GROUPS

Agriculture
Coal
Fertilizers including potash and sulpher
Forest products including solid wood and pulp and paper
Fuel and chemicals
Grain
Intermodal including retail
Machinery and automotive
Manufactured and miscellaneous
Metals
Minerals