# Rail Transportation Consultations: What We Heard

## Introduction

In May 2016,  the Canadian Transportation Agency (CTA) launched a process to update all regulations for which it is responsible, to ensure they keep pace with changes in business models, user expectations and best practices in the regulatory field.

This Regulatory Modernization Initiative (RMI) is composed of four parts: Accessible Transportation, Air Passenger Protection, Air Transportation, and Rail Transportation.

As part of the Rail Transportation part of the RMI, the CTA held consultations with key rail industry stakeholders, including passenger and freight railways; shipper, railway, and other industry groups and associations; users; and experts. These consultations looked at how best to update and clarify existing regulations, as well as related CTA guidelines and tools.

The consultations also took into account recent changes made to key freight rail provisions in the Canada Transportation Act (Act). These amendments affect the remedies available to shippers who have concerns about rail service or rates, as well as the provisions on dispute resolution, competitive access, interswitching rates and other rail-related matters.

In that context, the CTA's rail transportation consultations focused on six key themes:

• Railway Interswitching Regulations;
• Insurance filings for freight rail operations;
• Insurance requirements for passenger rail operations and railway construction;
• CTA guidance materials, including guidance on shipper remedies; and
• Recovery of costs related to a railway fire.

## Background and Consultative Process

The Act and other pieces of legislation give the CTA specific powers to regulate rail carriers under federal jurisdiction. The CTA does this by, for example:

• licensing rail carriers;
• approving railway line construction;
• setting railway revenue caps for moving western grain;
• establishing financial and costing frameworks for certain railways;
• setting interswitching rates; and
• establishing the net salvage value of railway lines to facilitate the sale or other orderly transfer of lines.

Many of the rail-related regulations for which the CTA has a responsibility date back 25 years or more. Modernization will ensure that these, as with the overall suite of regulations, are clear and predictable, only as heavy as they need to be to achieve their purpose, and facilitate the identification and correction of non-compliance.

To aid in the process, the CTA prepared a Discussion Paper on Regulatory Modernization for Rail Transportation, which was posted on its website with a link for sending in comments and submissions.

The consultation process included 20 formal bilateral meetings with representatives from Canadian and U.S. passenger and freight railway companies, rail tourist operators, industry associations, grain shipper associations, associations representing logistics and freight management, private companies who are users of rail, and other industry experts.

## What We Heard

### 1. Railway Interswitching Regulations

#### Background

Interswitching can be used by some shippers to give them access to railway companies that do not directly serve their facilities or sidings. It does this by requiring a railway company that does provide direct service to transfer cars with the shipper’s traffic to a different railway company with which the shipper has made transportation arrangements. The transfer occurs at an interchange (i.e. a place where the lines of two railway companies meet). A shipper can have its cars interswitched if the origin or destination of its traffic is within a radius of 30 kilometres of an interchange or is, in the opinion of the CTA, reasonably close to the interchange.

The CTA is responsible for establishing the terms and conditions and zone distances within the radius for interswitching through the Railway Interswitching Regulations. In addition, as a result of recent changes to the Act, the CTA is responsible for setting regulated interswitching rates annually, through a decision (the old provisions stating that the rates should be prescribed in the regulations were repealed). These rates are based on a system-wide average of the railway companies’ costs for switching movements, the number of cars being switched, and the zone. Under the existing approach, the rates are the same regardless of where in Canada the move occurs, and therefore do not vary by regional market conditions.

The recent amendments to the Canada Transportation Act also established a new type of interswitching called Long-Haul Interswitching (LHI), which is not limited to a 30 km radius. LHI allows a shipper to ask the CTA for an order setting out the rate and terms by which the shipper's local carrier must move the traffic to a competing carrier. Certain conditions apply. The CTA must provide its decision on an LHI application within 30 business days.

Stakeholders were asked to provide their views and comments on the Railway Interswitching Regulations and other regulations relevant to interswitching, such as a the Railway Costing Regulations. They were also asked whether the costing regulations could be replaced by guidance material, and more generally, what guidance material would be useful to them, including to help them better understand LHI and how the CTA will set LHI rates.

#### All Stakeholders

There was general agreement that the CTA should:

• Undertake a more in-depth, consultative review of its costing processes and methodologies.
• Produce plain-language guidance material and post it on its website, especially for LHI.

#### Shippers

Views from shippers using freight rail services included the following:

##### Regulated Interswitching
• Regulated interswitching is a useful, easily accessible, and widely used competitive access tool.
• The CTA's methodology for calculating regulated interswitching rates is sound and should not be fundamentally changed.
• The CTA could encourage access to this remedy by maintaining a publicly available database of interchanges, including their name and location.
• Guidance material could be more interactive or video-based, describing, for example, how interswitching works in practice under different scenarios.
##### Long-Haul Interswitching
• LHI guidance material and Rules of Procedure should be written in simple language. They should not be written in a way that requires the assistance of legal counsel.
• Related to this, shippers think the CTA should take measures to ensure LHI is accessible to the vast majority of shippers, especially smaller ones.
• It would be helpful to have easy-to-complete, online forms on the CTA website that a shipper can use to apply for an LHI order or to renew or extend an existing LHI order.
• Guidance material on LHI should clarify the eligibility requirements and explain what the CTA considers acceptable evidence that a potential LHI applicant made attempts with their local rail carrier to resolve the matter before submitting an LHI application.
• Guidance should also include clearly defined terms and more information on how LHI rates will be set. Such rates should not reflect monopoly conditions or include duplicative charges.
##### Railway Costing Regulations
• Guidance material should supplement, but not replace, the Railway Costing Regulations, which remain relevant and set out costing principles that serve as the foundation of the current regulatory costing system. They should be updated to refer to current legislation.

#### Railway Companies

Views from railway companies included the following:

##### Regulated Interswitching
• The methodology used by the CTA to set regulated interswitching rates results in rates that are not consistently compensatory, depending on the geographic area where the movement was performed and other factors, and the rates do not provide an adequate contribution to fixed costs.
• One reason for this is that rates are set using a system-wide average of the railway companies’ costs. The relatively low cost of interswitching in remote locales brings down the "average", to the detriment of railway companies performing frequent switches in localities where the costs of doing so are much higher.
• In light of the above, the CTA should review its interswitching rate-setting methodology to ensure that resulting rates reflect market considerations and are commercially fair and reasonable, as required by the Act. Considerations should include a railway company's long-term investments.
• The CTA should also consider following the practice in the United States, which puts information online that allows third parties to understand how a rate is determined. The CTA could also make its rate-setting methodology (and related guidance material) available for review and consultation by parties before finalizing it.
• Shortline railway companies note that they have unique characteristics that current regulated interswitching rates do not adequately recognize. These include generally lower traffic volumes than larger railway companies have, meaning shortlines cannot benefit from economies of scale. Regulated interswitching rates are non-compensatory to shortline operators.
##### Long Haul Interswitching
• Notwithstanding the fact that LHI rates will be set on a case-by-case basis and that various factors will be considered to identify "comparable" traffic, guidance materials should clarify how the CTA will account for factors like the rate reductions and other concessions offered to some shippers in negotiated commercial contracts, to ensure that the rate given to a LHI applicant truly reflects market conditions and not lower freight rates received by competitors in return for certain concessions.
• Traffic that is excluded from an LHI application should not be captured as part of the data the CTA uses to makes its determination of comparable traffic.
• Further, CTA rate determinations should take into account the accepted railway practice of differential pricing to reflect various market conditions, to avoid market distortions and other unintended consequences.
• Guidance material should clarify what is meant by the "continuous route" between origin and destination referred to in the LHI provisions. If this pertains to the specific route the traffic must take to execute the entire movement, then railway companies think the carriers involved should be consulted on what route would be most appropriate.
• Guidance material should be limited to explaining how LHI can be accessed, not how it can best be employed, and should include the impacts of LHI rates on shortline railway companies, to inform shippers' decisions about accessing the provision.
##### Railway Costing Regulations
• The Railway Costing Regulations should not be repealed and replaced with guidance material. They should be updated, given that they refer to legislation that is no longer in effect, but the costing methodology and associated concepts should remain enshrined in regulation.

### 2. Shipper Remedies

#### Background

Recent amendments to the Act include changes to the remedies available to shippers who have concerns about rail service and/or rates. For example, the Act now includes a new definition of "adequate and suitable" rail service and requires the CTA to process level of service complaints in a shorter timeframe. New provisions related to arbitration introduce an ability for shippers to seek reciprocal financial penalties in an arbitration related to level of service, and to have a rate obtained in the arbitration for rate disputes apply for two years (previously, an arbitrated rate applied for one year). Other new provisions expand the informal dispute resolution services available to shippers, including facilitation on an anonymous basis.

Stakeholders were asked what tools or information they would suggest be developed in light of these changes, and how the new remedies could be applied.

#### All Stakeholders

Stakeholders generally agreed that the following products would be useful:

• Videos or CTA-sponsored webinars that explain how each shipper remedy works, with specific examples.
• Statistics that users could access indicating which remedies were used, when, and whether or not they were successful in achieving their intended objectives.

#### Shippers

Views from this stakeholder group included the following:

• The CTA should leverage technology to make web information about the remedies more interactive. This should include more information about the various steps associated with the remedies, as well as timelines involved.
• Video-conferencing could be a way to expedite dispute resolution.  Timeliness is a major concern and a barrier to the use of many shipper remedies. Shippers indicate that the new, expedited timeline for resolving level of service complaints is encouraging, but many doubt its potential for success.
• The CTA could consider making greater use of its ability to issue interim orders. Associated guidance material could be developed with information on how to obtain interim relief in relation to service failures.
• Guidance materials should be in plain language. They should include a clear definition of what constitutes a "shipper" for the purposes of accessing the Act's shipper remedies. Materials should explain how the remedies work, how they can be accessed, and possible outcome scenarios. Also, it could be useful to have some guidance materials specific to level of service complaints, including the potential costs associated with the process and the types of information the CTA requires to launch an investigation.

#### Railway Companies

This stakeholder group is generally satisfied with the information, guidance materials, and tools made available by the CTA about shipper remedies, but some additional views included the following:

• Many stakeholders would benefit from more detailed information regarding the timelines (including key milestones) associated with the different shipper remedies.
• The CTA's website or its guidance material should clearly explain the CTA's mandate to act as an impartial adjudicator and regulator, with a role to provide information about available remedies, as opposed to advice about how the remedies should be used or applied.
• The provision of guidance should be limited to informal proceedings such as facilitation or mediation.

#### Background

The Canadian Transportation Agency Designated Provisions Regulations identify provisions that, if violated, may result in the CTA imposing a fine (called an "administrative monetary penalty" or AMP). AMPs are capped at a value of $5,000 for individuals and$25,000 for corporations per violation.

Stakeholders were asked which (if any) rail-related provisions of the Act or CTA orders should be made eligible for enforcement through AMPs.

#### Shippers

Views from this stakeholder group included the following:

• AMPs should complement – not replace – other tools available to shippers to ensure railway companies' compliance with the rules, regulations, legislation and decisions of the CTA.
• The regulations, or the guidance material, should clearly specify that the payment of an AMP by a railway company in no way prohibits a shipper from seeking costs or damages for the same infraction through other means, such as through the courts.
• There should be provisions allowing the CTA to impose additional or supplementary penalties for ongoing non-compliance, so that a company in violation of an order cannot simply pay the maximum penalty and then continue to be non-compliant. Related to this, the maximum penalty may not be high enough to serve as a deterrent.

#### Railway Companies

Views from railway companies included the following:

• The CTA should not go beyond what is required to ensure compliance. An over-reliance on AMPs could lead to greater acrimony between parties, reducing opportunities to solve problems collaboratively.
• AMPs should only apply to situations where the contravention of an order or provision was in the control of the railway company/carrier. In addition, AMPs should not be made available when other recourse mechanisms, such as civil courts, are available, as it is similar to "double dipping" if a railway company is subject to an AMP and then subject to another penalty through another mechanism for the same alleged infraction.
• Increasing the number of provisions in the Canadian Transportation Agency Designated Provisions Regulations that are subject to an AMP is not justified, given the various powers the CTA already has, including powers to compel certain behaviour and enforce its own orders.
• AMPs should be used for violations that are clear and unambiguous, and should not replace "thoughtful investigation" into alleged wrong-doings or non-compliance. Also, AMPs should apply to matters where non-compliance has serious consequences for the aggrieved party, not administrative issues such as not filing information by a given deadline.
• Guidance material should explain the process by which an AMP would be imposed on a company. This includes how, when, and under what circumstances violation notices would be issued; whether there is a graduated system (e.g. warnings only for first offences); how the CTA assesses the corrective measures needed; and whether there would be a system of escalating penalties imposed for multiple infractions or chronic non-compliance. Some stakeholders support retaining a graduated scale of penalties.

### 4. Insurance Filings for Freight Operations

#### Background

Since June 2016, the Act has included minimum third-party liability insurance requirements for federally regulated freight railway companies. These range from $25 million to$1 billion based on the type and volume of dangerous goods carried each year. Railway companies under federal jurisdiction can only operate in Canada if they hold the minimum insurance coverage required for their operations, as this is required in order to obtain an operating licence (called a "certificate of fitness") from the CTA. The CTA determines the minimum insurance coverage required for a proposed freight rail operation, and railway companies must provide the CTA with certain information each year to show that they continue to hold the required minimum.

Stakeholders were asked for their views on various CTA forms and documents related to insurance filings for freight operations. These include a new proposed Application to get or vary a certificate of fitness for railway operations in Canada, as well as the detailed forms used to collect the information the CTA needs to determine whether railway companies meet applicable insurance requirements (the Certificate of Insurance and Detailed Volume Report forms). Stakeholders were asked whether the documentation currently required by the CTA is appropriate for determining a railway company’s minimum insurance requirements; whether any additional information should be required; and whether these requirements should be formalized in regulation.

#### Shippers

There were few comments on these matters from this stakeholder group, although it supports the collection of information that shows freight rail companies hold appropriate levels of insurance to ensure a safe and reliable transportation system.

#### Railway Companies

Views from railway companies included the following:

• While the new insurance requirements represent an additional administrative burden for railway companies, it is manageable. The information and evidence currently sought about minimum insurance levels is appropriate, and more documentation is not needed.
• Providing proof of ongoing insurance at the specific times required by the CTA can be problematic given the complexity of the insurance market and the manner and timing in which policies are renewed.
• The insurance filing requirements and minimum levels should make a distinction between high-volume carriers and low-volume carriers, such as shortlines. This could be done in the "Detailed Volume Report" form. The requirements related to insurance adequacy determinations for low-volume carriers should consider their operations (size and volumes moved) and ability to mitigate risk.
• Insurance filing requirements should not be prescribed in regulation. They should be kept in guidance material to retain a degree of flexibility, as regulations are difficult to adapt to a changing market in a timely fashion.

### 5. Insurance Requirements for Passenger Rail Operations and Construction of a Railway

#### Background

The CTA is responsible for determining what third-party liability insurance coverage a federal railway company needs to operate passenger services or to construct a railway. The requirements, including coverage for third-party injuries, death, and property damage, are set out in the Railway Third Party Liability Insurance Regulations. These regulations also set out the factors the CTA must consider to determine what insurance is adequate. Factors include the volume of traffic or passenger ridership involved, train speed, the railway company's overall safety record, and others.

Stakeholders were asked whether any changes are needed, including whether components of the passenger liability insurance regime for the air sector should apply to rail, and whether a minimum "per passenger" insurance level would be appropriate. Stakeholders were asked what factors should be used to assess whether insurance coverage is adequate. They were also asked for their views on insurance coverage dealing with environmental risks, and whether insurance for passenger rail operations should cover the same risks as those covered by freight rail insurance.

#### Rail Users

This stakeholder group did not provide many comments other than to reaffirm the importance for railway companies to hold adequate levels of insurance coverage, whether it be for the transport of passengers or railway construction.

#### Railway Companies

Views from this stakeholder group included the following:

• The issue of adequate third-party liability insurance is a greater preoccupation for smaller passenger operations. The larger companies already carry high insurance levels, which are sufficient to cover major risks, including those pertaining to construction or potential environmental damages.
• The CTA could consider risk-based approaches to assessing adequate insurance coverage, instead of prescriptive, "one-size fits all" regulation, which is not appropriate for such a diverse industry.
• The factors for assessing whether third-party liability insurance coverage is adequate for a passenger rail operation could include: passenger ridership, geography, train speed, an operator’s business and safety record, and whether freight railways are using the tracks or other infrastructure of the passenger operator.
• A minimum "per passenger" insurance level would not be appropriate for a number of reasons, such as the fact that the number passengers per train can vary substantially, including over the course of a day or a season. Some railway companies added that coverage based on a "per accident" basis is potentially more appropriate.
• The risk factors and consequences of passenger rail accidents are in no way comparable to air accidents, which are more usually catastrophic, with huge loss of life. Consequently, insurance requirements should not be the same.
• Similarly, liability exposure from passenger rail operations and construction is very different than that for freight rail (e.g. environmental risks). Specific minimum insurance requirements for freight rail companies, taking into account whether they transport dangerous goods, were legislated as part of the response to the Lac-Mégantic rail derailment. Railway companies feel that as such a tragedy would not likely be replicated as a result of any type of passenger rail incident, the insurance requirements imposed on freight railway companies should not be imposed on passenger carriers.
• With respect to rail construction projects, these can vary significantly in size and often involve many parties (e.g. railway company, contractors, sub-contractors) that are likely to each have third-party liability insurance and to share the risks of any potential incident. This makes assessing the adequacy of the railway company's coverage challenging and something to be considered on a case-by-case basis.

### 6. Fire Provisions

#### Background

In June 2015, the Railway Safety Act (RSA) was amended to allow a provincial or municipal government to apply to the CTA to recover costs reasonably incurred in responding to fires resulting from railway operations. If the CTA determines that a fire was the result of railway operations, it will then decide the costs that were reasonably incurred by the relevant government in responding. "Responding" may include fighting, containing and/or suppressing the fire, or broader activities like preventative measures and environmental remediation.

Stakeholders were asked for their views on possible approaches for determining whether a fire was the result of railway operations and what costs should be eligible for reimbursement.

#### Shippers

Views from this stakeholder group included the following:

• It would be useful to have additional and improved guidance material on the CTA's role in determining the recovery of costs related to railway fires.
• In regard to determining whether a fire was the result of railway operations, it should be the appropriate attending fire agency (i.e. provincial or municipal) that investigates the cause of the fire. The fire agency's fact-based report should be sufficient evidence for the CTA.
• When determining what activities and costs should be considered part of the provincial or municipal government's response to the fire, the CTA could consider the relevant fire departments' bills for combatting and managing the fire, recognizing that services and billing rates vary across provinces and municipalities. Any guidance material related to cost recovery should reflect these differences.

#### Railway Companies

Views from this stakeholder group included the following:

• There is no need for the CTA to prepare guidance material related to evidence of whether a fire was due to railway operations. The CTA should undertake assessments of cause in its role as an administrative tribunal, and not leave assessments open to guidance material developed on the basis of public consultation. That is, railway companies consider that only the CTA, on a case-by-case basis, should make a determination about whether a fire was caused by railway operations. The parties to such an application should be permitted to make representations, with the burden of proof residing with the applicant making the claim for cost recovery.
• All evidence submitted to the CTA by the relevant province or municipality should be shared with the affected railway company. The evidence should be objective, fact-based, and include a solid analysis and rationale around any findings or conclusions.
• The activities and costs eligible for reimbursement should be assessed on a case-by-case basis and not generalized. They should be limited to the costs directly related to a specific fire.

## Next steps

The CTA plans to complete its consultations and finalize revisions to certain rail regulations by mid-2019.

Relevant guidance material is in the process of being updated.

Further stakeholder consultations on interswitching rate setting, including the costing methodology, will be held in 2019.

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