The institutional aspects of competitive access in the Western Canadian rail system

Abstract

Rail rates and system costs are important to the profitability of Western Canadian agriculture. This importance is due to the high cost of transporting grain to export position combined with rail’s cost advantage in relation to other modes of bulk transportation. World grain markets are competitive and any increase in freight rate caused by inefficiency or market power can not be passed on consumers. This thesis introduces and discusses a way to create competition in the rail industry through vertical separation of rolling stock and track. The discussion is motivated by a transactions cost framework, whereby key features of a vertically integrated railway such as we have in Canada are contrasted with those of a vertically separated railway, as is the case today in Sweden. The two systems share common characteristics, but the way system participants interact are ultimately very different. Canada’s vertically integrated railway system creates strong incentives for infrastructure investment along with maintenance and congestion management, but a vertically integrated system discourages new competition in the industry. Conversely, the vertically separated Swedish system creates strong incentives for inter-rail competition and improvements in customer service. Canada’s rail system is now less subsidized than ever, while the Swedish system still requires significant public outlay, and will need continued government support. Due to its cost structure, the choice of regulation in the rail sector continues to be a trade-off between railway cost recovery and fair rates for shippers. As applied to Canada, the example of Sweden illustrates that a limited access regime in rail can operationally function and reduce market power concerns. An access regime can achieve this reduction by supporting contestable pricing that will limit the ability of railways to price discriminate.