Lisitza, Lyndon D. M.Sc. University of Saskatchewan, Saskatoon, May 2012.
The Welfare Effects of Regulatory Change on the Western Canadian Grain Handling and Transportation System.
Supervisor: Dr. Murray E. Fulton
In 1996, the federal government took a significant step toward redefining the regulatory framework for grain transportation on the Prairies with the passing of the Canadian Transportation Act (CTA). The CTA contained two significant aspects that were to have a major impact on the GHTS. The first aspect concerned rail line abandonment. Under the CTA, protections afforded to the discontinuance of grain dependent branchlines were removed. Instead, railways were simply required to generate a three-year plan to indicate whether they intended to continue operating a branchline or whether they intended to sell, lease or abandon it. The second aspect was the introduction of regulated maximum freight rates, which removed the federal government from direct financial intervention in the GHTS. This policy was designed to replace the remnants of the long-standing Crow rate for Canadian railways.
In order to determine if regulatory change has led to an overall improvement in GHTS welfare, and to determine if farmers have benefitted from regulatory change, this thesis examined the regulatory changes that have occurred since the passing of the Canada Transportation Act (Act). To provide some context for this analysis, this thesis presents a historical overview of the legislation and regulations leading up to the passing of the Act and provided a historical and current description of the GHTS market structure.
Following the regulatory and industry overview, this thesis develops a theoretical framework capable of determining whether regulatory change has lead to an overall improvement in GHTS welfare and, if so, which industry participants have benefitted from this change. To help contextualize many of the concepts used in the theoretical framework, this thesis examines theories on the origin of regulation and looked specifically at two forms of thought: public interest theory and capture theory. As well, this thesis examines several ‘rate of return’ regulatory options available to the regulator, and provides an illustration of the ‘rate of return’ regulation of the WGTA in order to provide a regulatory baseline against which the 1996 CTA regulatory changes can be assessed.
The intent of this thesis is to quantify the changes in consumer and producer surplus associated with regulatory change. Specifically, this examines the welfare changes in grain and non-grain markets that can be attributed to the shift from the WGTA to revenue cap regulation, increased railway capacity, a reduction in railway marginal cost and the removal of grain dependent branch lines (GDBLs).
When considering the welfare effects solely attributed to the regulatory shift, the results indicate that the move from the WGTA to the revenue cap decreases the consumer surplus of farmers. Farmers experience an overall reduction in consumer surplus, largely due to the fact that the price farmers’ pay for grain transportation has risen and because the level of output they receive is less than that received under the WGTA.
As a result of the regulatory shift, shippers in the non-grain market see an overall gain in consumer surplus. This increase is principally due to a shift in capacity allocation from the grain to the non-grain market as the railways respond to the higher marginal revenues they are able to earn in the non-grain market as opposed to the revenue cap regulated grain market. As such, shippers in the non-grain market are made better off.
Although the railways experience a loss in producer surplus due to the regulatory shift, this loss is more than offset by the increase in producer surplus that the railways earn through a reduction in marginal costs. As such, the railways see an overall gain in producer surplus.
As well, the federal government also experiences a gain in overall surplus. These gains are the result of the elimination of the subsidy that was paid to the railways under the WGTA as well as the removal of the additional dead weight loss that is incurred by society resulting from raising the taxes required to pay the subsidy. As such, the government (i.e., taxpayers) are better off as a result of the regulatory change.||en_US