Consultation Paper - Regulated Interswitching: Proposed Changes To Rate-Setting And Billing

The Canadian Transportation Agency (CTA) sets the rates for regulated interswitching (within 30 kilometres). We propose improving the way we set these rates and the way they appear on waybills. In this paper, we identify four specific changes that we believe would make the rates simpler, fairer, more accurate, and more transparent. We invite you to read our proposals and give us your feedback.

Carrying out any of the four changes would mean amending our Railway Interswitching Regulations. We have been modernizing these, and all our regulations, for the past several years. We made initial updates in June 2019 (for example, to remove outdated information on interswitching rates). Then, over the summer of 2019, we held consultations on the way we set the rates.

We received comments and suggestions from a range of stakeholders – railway companies (railways), shippers, and others. Based on this feedback and additional analysis, we have identified four changes that we think would improve how regulated interswitching rates are set and billed. Specifically:

• Having one zone and rate would be simpler than four zones and rates. Shippers would always know their zone and what rate they should be charged. 
• Having an additional block car category for very long blocks of cars would make the interswitching rate fairer for high-volume shippers. Instead of one rate for all blocks of 60 or more cars, there would be two rates: one for 60-99 cars, and a lower one for 100 or more cars.
• Defining "car" would ensure everyone understands that term accurately. We would make it clear that "car" includes "platform" and that single car rates also apply to single platforms for intermodal shipments.
• Making sure railway companies show the interswitching rate they charged on the waybill would make billing more transparent.

This paper gives more information on each of these proposals, and asks you questions about them. Your answers and other comments will help us decide whether to move forward with any or all of the four proposed changes.

Proposal 1: One Zone and Rate

We propose moving from four interswitching zones to one, 30-kilometre zone. There would be one rate for the entire zone. It would continue to be a cost-based rate.

Discussion

The CTA will occasionally look at its interswitching zones and make changes, if the change helps us set more appropriate rates. We did this in 2010 by ending our use of linear regression, which made sure that rates were lowest in Zone 1, then got higher with each additional zone, in proportion to its distance from the interchange. 

We stopped using linear regression because rates set that way were not always accurate. For example, it did not make sense for the Zone 3 rate to be higher than Zone 2's in every case. In some places, sidings and yard facilities were better in Zone 3, making interswitching there faster and more efficient. Our cost-based rates needed to consider factors like that, and not just distance.

Now we set rates based on a broad range of factors. The zone's distance from the interchange is still one of them, along with volume (the number of cars and amount of commodity being interswitched). However, we focus much more now on how quickly and efficiently the railway company can carry out the interswitching. For example, we look at:

• how long it takes a railway crew to interswitch the cars or block of cars;
• the crew's wages during that time;
• how much fuel the railway uses to carry out that interswitching; and
• other issues affecting efficiency.

More recently, we also started considering how much railways may need to invest in things like new cars and track maintenance over the long term.

In our consultations last summer, most stakeholders said they were satisfied overall with our current approach. They said four zones with four rates is the system they understand.

We recognize that stakeholders are used to four-zone interswitching.  However, there is room for improving it now, just as we did in 2010. Our analysis shows benefits to collapsing the four zones into one, as follows:

One zone and rate would make interswitching easier to use.

• A 30-kilometre area is already small, and does not need four different distance and rate calculations. These are left over from the time when it seemed that distance from the interchange was the main driver of interswitching costs and, therefore, of the rate.     
• We now know that distance from the interchange, within the traditional and longstanding 30-kilometre zone structure, has little impact on the cost of interswitching. Of course, within a larger zone, that may not be the case, but in the current structure, distance is only a factor when a shipment is within 30 kilometres as measured in a straight line, but is 40 kilometres or more from the interchange as measured by line of track. This is discussed further below.

One zone and rate would make interswitching consistent and transparent.

• Shippers have told us that, sometimes, they are not sure what zone they are in, especially if they are close to the border of two zones. There would be less confusion in the single-zone system. 

For most interswitching movements, rates would stay largely the same.

• Most interswitching takes place in Zones 1, 3 or 4. Because we use a weighted average to set rates, the rate for a single zone would inevitably be close to the ones in these zones. Shippers in those zones would see little change to their rate, and the rate would continue to compensate railways fairly.

"Outlier" movements would have a smaller impact.

• Using a weighted average to set one rate for all shippers would improve some aspects of the four-zone system.
• For example, currently, outliers in each zone (the shippers responsible for only a minority of movements) have a greater influence over the rate in that zone than they would in a single zone.
• In a single zone that includes all shippers, outlier movements would be an even smaller proportion of overall movements. This means the cost of their movements would be an even smaller percentage of overall railway interswitching costs. As a result, they would have less impact on the rate.
• Also, a greater overall number of shippers with efficient sidings (high-capacity, modern facilities) would have a rate that better reflects this efficiency.
• Many of the most efficient sidings are in Zones 3 and 4. Those zones have the lowest rates, since it costs the railway less to serve efficient sidings.
• In Zones 1 and 2, rates are higher. Shippers in those zones are paying a rate that reflects the cost to the railway of serving the less efficient sidings there.  
• A system with one rate based on a weighted average will therefore be an improvement for shippers with efficient sidings, especially in Zone 2, as they would see their rate drop.
• At the same time, the system would also benefit railways. Applying just one rate would reduce their administrative burden. They might also handle fewer enquiries – for example, about particular shipments and what rate would apply. 

We would keep what works.

• The one zone rate would still be cost-based. We would still set it using all the factors we currently use, except we would not group shippers into different distance bands. We would view all shippers as being in a single zone, if their siding is within 30 kilometres of the interchange as measured in a straight line.
• Shippers whose siding is within the 30-kilometer zone, but more than 40 kilometres from the interchange as measured by railway track (the current Zone 4b), would continue to pay an added cost on top of the rate. 
• Keeping this per-kilometre surcharge is fair. It ensures railways are compensated for their costs, as evidence shows it costs them more to interswitch at sidings that are more than 40 kilometres from the interchange by track.   

It is important to note that there will also be drawbacks. For shippers, the rates for some movements will go up, including movements in Zones 3 and 4, whereas for railways, rates for some movements will go down.

However, there would not be a dramatic change in rates for any movement, and the rate would still be fair and reasonable. This is why we believe the benefits of having one zone outweigh the drawbacks.

For more information about how we would set the rate, see Annex A.

Questions

1. Can you think of any reasons why having one zone with one rate would hurt, rather than improve, regulated interswitching overall?

Proposal 2: New Block Car Category

We propose adding a new size category for car blocks being interswitched. Currently, a block means 60 or more cars coming from, or going to, a single shipper. We think there should be two categories: 60 to 99 cars, and 100 or more cars. The rate we set for 100+ cars would be lower than the rate for 60-99 cars.

Discussion

At one time, a block of 60 cars represented a very long unit train. Over the past decade, railways have been able to increase the length of these trains to 170 cars or more. This is economical for the railways because it takes the same number of railway crew and locomotives to move 100+ cars as it does to move 60, so the cost per car goes down. Despite this, shippers of very long blocks currently pay the same block rate as shippers with the shortest (60-car) blocks, even though it costs the railway much less per car to switch the very long blocks. In this way, shippers of very long blocks are subsidizing the shippers of shorter blocks.

Having a new block category for 100+ cars would:

• ensure each shipper is paying their fair share in rates; and
• compensate the railways fairly for moving blocks, no matter how long.

The regulations require us to set interswitching rates that are fair and reasonable for all parties. That would not change.

Some stakeholders we consulted last summer were satisfied with the current block car category. They pointed out a potential drawback to adding a second one, which is that having two categories is more complicated. We also heard that the current category is already fair to shippers from a range of industries.

That said, most shippers who gave feedback said that having the same rate for all blocks that are more than 60 cars long does not reflect the way the cost per car declines for the railways when they interswitch very long blocks. These shippers believe that if there are meaningful cost savings, these should be reflected in the rate.

Questions

1. Can you think of any reasons why having a new, very long block car category would hurt, rather than improve, regulated interswitching?
2. Is "more than 100 cars" the right starting point for such a category? Should it be some other number (for example, more than 90, or more than 125), and if so, why?

Proposal 3: A Clear, Accurate Definition of “Car”

We would make the meaning of "car" clearer for those interswitching intermodal traffic.

Discussion

Shippers who want to interswitch from one to fifty-nine cars would continue to pay the single car rate. However, the cars in these cases are not always box, hopper, or other traditional cars divided by couplers. Intermodal traffic moves instead on platforms, which may be welded together into sets of three or more.

We would write a new definition of "car" and make it clear that for intermodal traffic, “car” includes “platform”. This means:

• one platform would count as one car for interswitching rates; and
• in a set of platforms, each one would count individually. For example, a set of three platforms welded together would count as three cars.

This is a new proposal, but would be a minor update. In practice, shippers and railway companies already use "car" to mean "platform" when interswitching intermodal traffic. We would simply make sure the regulations reflect this reality.  

Questions

1. Do you have any concerns about our proposal to define "car" this way?
2. Is there anything we should keep in mind when writing the definition?

Proposal 4: More Transparent Billing

We propose requiring railway companies to show the regulated interswitching rate they charge on the waybill.

Discussion

Currently, railway companies do not have to show the interswitching rate charged on their waybills. We propose requiring railways to show the rate as a line item on the bill. This would:

• make billing consistently transparent for shippers; and
• allow shippers to check that the rate is correct, reducing the chance of billing errors.

In our summer 2019 consultations, a range of stakeholders supported showing the rate on the waybill. Others agreed that at minimum, it should appear on the bill if the shipper requests it. No shippers opposed the idea of showing the rate on the bill.

In addition, one railway company we consulted reported that it already shows the rate on its invoices if the shipper asks for it. This suggests that showing the rate is manageable for railways. It may involve an initial administrative burden, but the benefit would be ongoing billing transparency.

Question

1. Do you have any concerns about having waybills show the regulated interswitching rate?

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Thank you for participating in our consultation.

Please send your feedback to ferroviaire-rail@otc-cta.gc.ca by October 27, 2020.

Your input will be considered a public document. 

We will post it on the CTA website in the official language you used to write it, along with your name.

If your input includes information you think is confidential, see the Notes below.

ANNEX: CALCULCATING THE RATE FOR A SINGLE ZONE

How are rates calculated now?

As we mentioned in Proposal 1 of this paper, interswitching rates are based on how much it costs the railway companies to provide interswitching services. CTA research shows that distance from the interchange has little impact on costs within the traditional 30-kilometre zone structure, while other factors – such as the number of cars being shipped together and the track speeds and geography for each shipment – have a larger impact.

Using shipment-specific data instead of a distance-based approach results in rates that reflect: 

• The volume of cars each railway company is interswitching.
• Their operating and administration costs related to interswitching. These include, for example, fuel and labour costs.
• Relevant infrastructure costs, including capital costs – the amount each company invests in infrastructure, for example, to buy the locomotives used to go from the nearest yard to the interchange – and depreciation cost, to reflect wear and tear on the infrastructure, which causes it to lose value over time.
• An appropriate portion of fixed costs, which are the costs a railway company has to pay whether or not it is bringing in any interswitching business at a given time. For example, it still has to pay to keep the rail yard near the interchange ready for safe and efficient interswitching activities.
• An appropriate portion of each railway's interest and taxation costs.

Once we know how much it costs the railways to provide interswitching services in each zone, we use a weighted average to set zone rates that cover their costs and compensate them appropriately, yet are fair to shippers. "Weighted average" means we adjust the rate to account for differences between each railway's costs. They have different costs per car, and they each interswitch a different number of cars in each zone.

The factors above are the main ones affecting interswitching costs (and therefore, rates). While distance from the interchange plays a role – for example, because a longer distance means a higher fuel cost – it is not a key factor within the 30-kilometre structure. If it were, rates would always be lowest in Zones 1 and 2 and highest in Zones 3 and 4.

Instead, rates in Zones 3 and 4 are currently lower than rates in Zones 1 and 2. The main reason for this is that there happen to be many efficient shipper sidings in Zones 3 and 4. This makes interswitching there faster, which means lower labour and other costs. These operational savings outweigh the drawback of being farther away from the interchange.

How would the rate for one zone be calculated?

The rate for a one-zone system would still be based on costs. Instead of setting four separate rates, each based on the cost of interswitching within a  particular area, we would set one rate based on costs from the entire 30-kilometre zone.    

We would continue to use a weighted average to account for differences between each railway's costs, as explained above. This would include taking into account the number of carloads each railway handles at different interchanges. Using weighted averages will give us a single rate that reflects the actual cost to the railways of providing interswitching service.

We would also verify our information the same way we do now: by visiting a selection of rail yards across the country each year to watch cars being interswitched and talk to railway interswitching crews. We do this so we can see first-hand what is involved and accurately calculate the cost of different steps in the interswitching process, such as:

• moving a locomotive from the yard to the interchange;
• hooking it up to the unit train and travelling to the shipper's siding;
• dropping off/picking up cars at the siding;
• bringing cars back to interchange and dropping them off; and
• returning the locomotive to the yard.