Spatial competition and regulatory change in the grain handling and transportation system in western Canada

Ann Reg Sci (2008) 42:929–944DOI 10.1007/s00168-007-0193-8

ORIGINAL PAPER

Spatial competition and regulatory change in the grainhandling and transportation system in western Canada

James Nolan · Jason Skotheim

Received: 29 August 2006 / Accepted: 16 November 2007 / Published online: 19 January 2008© Springer-Verlag 2008

Abstract The grain handling and transportation system (GHTS) has been a definingcomponent of the western Canadian economy since the early part of the last century.Only two major railways serve the grain handling industry, so the potential for theexercise of market power in transportation appears to be significant. In fact, spatiallyoriented regulations applicable to railways exist in Canada to mitigate this, but to datethey have not often been used by shippers. While the reasons for this are not com-pletely clear, we suggest that the regulations are now inadequate for the current stateof the GHTS. Using a unique data set from the year 2000, we assess the effect on thegrain handling industry of modifications to these regulations, and find that significantgains for shippers from these modifications are possible. These gains are computed tobe on the order of C$10–15 million per year for grain shippers alone.

JEL Classification L92 · R10

1 Introduction

The grain handling and transportation system (GHTS) has been a defining compo-nent of the western Canadian economy since the early part of the last century. As an

We would like to thank conference and presentation participants (Transportation Research Board,Canadian Agricultural Economics Society, University of British Columbia, University of Leeds andCalifornia State University, Long Beach) as well as the anonymous reviewers who commented on theearlier versions of this paper. We would also like to acknowledge support from the SaskatchewanDepartment of Highways.

J. Nolan (B) · J. SkotheimDepartment of Agricultural Economics, University of Saskatchewan,51 Campus Dr. Saskatoon, Saskatchewan, SK, Canada S7N 5A8e-mail: [email protected]

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930 J. Nolan, J. Skotheim

export-driven industry, grain production and handling in Canada occurs at numerouslocations (farms and elevators) yet there are just a few final destinations (ports) fromwhich all exported Canadian grain is shipped overseas. In fact, the majority of graingrown in western Canada is exported from the Port of Vancouver. While there havebeen significant changes in the system throughout the last decade, the dispersion ofgrain farms and elevators mean that the Canadian GHTS is still an excellent exampleof a truly spatial market.

Transportation remains a significant part of the total cost of grain handling. InCanada, rail is the primary means of moving grain to final destination—while trucksvery often handle shorter grain movements within the system, trucking does not com-pete with rail over medium to long hauls of grain.1 With just two Class I railwaysserving this vast market, a set of pro-competitive transportation policies exist to off-set market power and ensure equity in the relationship between shippers and carriersof grain. One of these policies is known as extended interswitching, and it has beena source of considerable policy debate in the grain handling industry over the pastfew years because of its perceived potential to allow grain shippers more access tocompetitive rail services (Monteiro 2006).

In this light, we use detailed grain industry data to evaluate the effects of both extantand modified extended interswitching policies on the rail market serving the CanadianGHTS. Our industry sample is from the year 2000 and even though changes to theGHTS have occurred since, we feel that the data are not only unique in scope, but alsocome from a time when the system was in the midst of major change. This rendersour data or “snapshot” of the GHTS still relevant with respect to illustrating importantaspects of the policy issue under analysis.

By simulating modifications to the extant policy using geographic information sys-tems (GIS) methods, we conclude that greater competition between the railways inthe GHTS could have potentially generated significant gains for grain shippers in thisregion. Furthermore, given the structure of railway costs2 and considering the menu ofcompensatory regulated rates applicable to the process of extended interswitching, wefind that the suggested modifications would not likely increase rail costs significantlyover the status quo.

2 Background and literature review

Historically, the large number of wooden grain elevators scattered throughout thePrairies and the ubiquitous branch rail lines that served them have helped to define the

1 While trucking provides competition for movement from the farm to the elevator in western Canada,certain characteristics of the grain handling industry (e.g., the need for blending and the bulkiness of ship-ments once grain is collected in an elevator) dictate that trucking services within the GHTS are structurallyand spatially very different from rail services (Larson 2002). Even as the grain elevator network becomesmore diffuse, trucking is not a foreseeable substitute for rail. We conclude that there is still a need forregulatory oversight as discussed in this paper.2 While accurate railway costing is a complex issue, its basic structure is well known. Rail costs fall up tominimum efficient scale (output), and rise thereafter (Bonsor 1984; Boyer 1997). The majority of any setof rail movements (i.e. extended interswitches) that could occur under the suggested changes would fall onthe downward portion of a railway’s cost curve.

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Spatial competition and regulatory change in the grain handling and transportation system 931

western Canadian landscape. In 1984, the grain elevator population on the Canadianprairies was nearly 2,000 units. However, starting in the late 1980s and early 1990s, aseries of policy events occurred that began to shrink the grain elevator system and therail network in western Canada. The most important of these was the gradual reductionand eventual elimination (in 1996) of the controversial Crow subsidy program. Thelong standing Crow policy was a subsidy for Prairie farmers to transport export boundgrain by rail, and had been in place in Canada since approximately the beginning ofthe twentieth century.

In the early history of the western GHTS, the railways absorbed much of the costof gathering and collecting export destined grain. This was done using the extensive,subsidized branch line networks on the Prairies (Currie 1967). Increased rail line aban-donment freedoms finally came in the National Transportation Act (NTA) of 1987.With the Act, railways gradually began to stop service, and in many cases also removedthe track, on branch lines that did not carry enough traffic to cover operating costs. Inturn, this process left many of the older wooden elevators on the Prairies without railaccess, effectively shutting them down. For example, just after the passage of updatedtransportation legislation in 1996–1997, grain-dependent branch line mileage on thePrairies fell by approximately 18%. The number of grain elevators declined even moredrastically over this period, falling by 42% between 1984 and 1997 (Transport Canada1999).3

Even before the Crow subsidy was phased out, the age and condition of the olderwooden elevators meant that new elevators were needed in many locations. The newlarger volume elevators are referred to in the industry as “high-throughput” and arebuilt out of concrete. In contrast to the older diffuse elevator network configuration,grain companies constructed fewer new elevators mostly in accessible locations, eitherdirectly along railway main lines, at secondary rail junctions, and near larger cities ortowns located close to a major rail line.

While the large Canadian railways still serve a number of elevators directly, grain ismoved greater distances now by truck from the farm to the elevator. In fact branch lineabandonment let the railways shift cost burdens associated with collecting grain fromthemselves, through their old branch line network, onto farmers and the public roadnetwork. Not surprisingly, this modal shift in short-haul grain movement has put anincreased structural burden on provincial road networks (especially in Saskatchewan),one it was never designed to handle (Christensen et al. 2001).

In addition to the line abandonment freedoms, the 1987 NTA also contained updatedregulatory provisions that were intended to encourage competition between the twomajor Canadian railways. This research focuses on a spatial competition provisionknown as extended interswitching, which we will describe in more detail in the nextsection. Versions of extended interswitching regulations in Canada have been in exis-tence since 1908. Historically, the goal of extended interswitching was to provideshippers with benefits from potential access to not just one, but (at least) two railways(Grimm and Harris 1998).4 Older versions of these regulations severely restricted the

3 A few key delivery points are served by multiple elevators. The same situation exists today.4 Carlson and Nolan (2005) provide a description of rail competition and access in a Canadian context.

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distance over which the policy could be applied, but changes in the 1987 Act roughlyquadrupled the distance at which a shipper could seek access to a second rail carrier(Bonsor 1995). See Fig. 2 in the Appendix.

While the most recent changes in this regulation are clearly useful for shippersin dense markets, extended interswitching has proven to be somewhat less useful inpractice for those located in more sparse markets, including Western Canadian grainshippers. This situation can be attributed to a variety of causes, including grain eleva-tor consolidation and the overall diffusion of delivery points in the modern CanadianGHTS. The latter observation about extended interswitching policy was actually raisedduring a government review of the rail industry in Canada in 1999 because at that time,amendments to the existing interswitching regulations were proposed by some partiesas a solution to growing concerns about railway market power in the GHTS (Trans-port Canada 2000a). However, extended interswitching regulations have remainedbasically unchanged from the 1987 Act, save for minor intermittent adjustments to theregulated rates/costs applicable to extended interswitches.

We believe that current extended interswitching regulations in Canada need mod-ification in order to fit a vastly more dispersed grain transportation market than theone in which they were initially designed. While the policy modifications to inters-witching simulated here may lead to more rail competition in the Canadian GHTS,any such policy changes will necessarily entail some transfer of wealth among the sys-tem participants.5 Thus, we also recognize that competition policies developed usingthis framework must be designed to minimize negative effects on the viability of therailways serving the Canadian grain elevator network.

3 Rail competition regulations in Canada

Canadian rail legislation contains specific regulations mandating limited running rights(i.e., competition) for railways.6 The complete set of Canadian pro-competitive railregulations include (1) mandatory and extended interswitching rules; (2) a regulatedrate setting mechanism for shippers called a competitive line rate (CLR) and (3) anofficial dispute resolution mechanism known as final offer arbitration (FOA).7 Thisresearch focuses on extended interswitching policy and how it affects transportationcompetition in Canada, particularly within the extensive Western grain handling sys-tem.

In those situations involving disputed rates or carriage, a shipper in Canada mayseek an extended interswitch from the regulator (the Canadian Transportation Agency)as relief. Under the applicable regulations, mandatory extended interswitching rates

5 The Canadian Transportation Agency has stated the following about the issue addressed in this paper:“The Agency considers that extending the interswitching distance limits from 30 to 150 kilometres wouldconstitute a policy amendment that would have substantial repercussions in the rail transportation indus-try and the magnitude of these repercussions would be so significant that such an amendment cannot becontemplated by way of a regulatory change.” (Canada Gazette 2004).6 Joint running rights as applied to railways in Canada have been in place since the passage of the Crow’sNest Pass Agreement in 1897 (Currie 1967).7 See Nolan and Drew (2002) for a discussion and critique of Canadian rail competition regulations.

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Table 1 Regulated compensation to Canadian railways for extended interswitching (Government of Canada2000)

Rate per car forinterswitching ablock of less than60 cars

Rate per car forinterswitching ablock of more than60 cars

Additional rate per kilo-meter for interswitching acar (less than 60 cars)

Additional rate per kilo-meter for interswitching acar (more than 60 cars)

$365 $105 $4.20 $1.60

for a given movement apply if the shipper origin and the competing railway trackslie within a 30 km (“as the crow flies”) radius of each other. The full spatial scope ofextended interswitching is illustrated in Fig. 2 in the Appendix.8

Canadian railways can be obliged by law to perform extended interswitches atobligatory rates if the regulator rules in favor of a shipper who makes such a request.As seen in Fig. 2, while the effective radius of extended interswitching limits is 30 km,there is an additional restriction that no movement of the local carrier to transportshipments to the interswitch point can exceed 45 km.9 Regarding compensation to thelocal carrier, official schedules of rates for extended interswitching are used (as set bythe Canadian Transportation Agency, Table 1 lists rates applicable to this study) andare designed to compensate a railway for the regulated movement from the shipmentorigin to the interswitch point with the connecting carrier.10

Using Fig. 2 again as a guide, note that once the local railway has transported theshipment from origin to the interswitch point, the shipper must still negotiate a ratefrom the switching point to final destination with the connecting carrier. Clearly, ifthe connecting carrier does not actually serve the destination in question from theinterswitch point, the policy will not be of much use to the shipper. When consideringthe Canadian grain handling system, this type of strategic consideration would not bea significant factor in policy design. More than 80% of export bound grain is moved toa single destination (the Port of Vancouver), served by both railways. Short of outrightcollusion by the railways, increased access to a competing carrier offered by extendedinterswitching should give rise to a more competitive transportation environment, withmore frequent service and reduced freight rates.

A crucial component of competitiveness in the Canadian grain handling industryis the location of grain elevators (delivery points) with respect to the nearest inters-witching point between the two major railways. In the past few years, some industry

8 To interpret this figure, the following terminology is useful;(1) Local carrier, defined as a railway serving the shipper and the shipment origin.(2) Connecting carrier, defined as a railway located in proximity to the shipper, but lacking a direct link toshipment origin point.9 In Canada, the mostly parallel layout of the two major rail networks means that the 30 km radius ofextended interswitching is a binding constraint much more often than the 45 km total travel distance (radialdistance + 50%). In our subsequent simulations where we modify extended interswitching rules, we imposethis same upper limit on the total travel distance for extended interswitches.10 While the basic policy has remained unchanged for some time, these rates are updated from time totime. Interestingly, the most recent (2004) change in the rates (a decrease) was initiated following a formalrecommendation by the Canadian Competition Bureau to encourage more use of extended interswitching(Canadian Transportation Agency 2005).

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Table 2 Primary elevator delivery points in Saskatchewan, 1997–2000 (author’s calculations)

Year Number ofdelivery points

Average numberof elevators perdelivery point

Cultivated acres inSaskatchewan (million)

Average number ofcultivated acres perdelivery point

1997 410 1.53 44.6 108,780

2000 299 1.45 46.5 155,518.4

participants have become convinced that improved transportation competition at theelevator, facilitated through rail policy changes, could also effectively counteract anymarket power in elevation.11 These participants believe that modified extended inters-witching regulations can potentially offer all shippers (including grain shippers) inwestern Canada more choices/competition moving products to destination.

4 The importance of elevator location in the Canadian GHTS

Due to its historical economic dependence on the grain industry, the Canadian prov-ince of Saskatchewan, more so than the other two Prairie provinces, has been deeplyaffected by changes to the grain handling system. This section focuses on the impactof these changes and how they evolved around the year 2000 to give the reader a senseof the major economic transition that recently occurred in prairie agriculture.12

For several years there have been just a handful of major grain companies oper-ating in Saskatchewan, with significant variation in elevator capacity among them.13

However, beneath this apparent consistency in the industry structure of grain handlingwas a series of significant changes that occurred within a short period of time. Forexample, with respect to elevator location, by 2000 the number of loading/deliverypoints for grain in Saskatchewan declined by over 25% compared to 1997 (Table 2)while the average catchment area (i.e. cultivated acres) per delivery point increased byover 40% during the same interval. However, Table 3 shows that the distances betweenprimary elevators increased by only about 3%. This appears to have been driven byan increase in situations where the distance between elevators exceeded 50 km. Thegrowth in density of larger elevators in Saskatchewan was also apparent; the distancesbetween elevators with a capacity greater than 10,000 tonnes decreased substantiallyat that time. Table 3 also shows that over half of the grain elevators in the provincewere situated at delivery points far removed from competing locations.

Finally, Table 4 indicates that delivery points with relatively few (one or two)grain companies operating were becoming an important portion of total Saskatche-wan elevator capacity. While the other size categories all changed considerably inthe 1997–2000 interval, this combined category remained relatively stable during

11 For example, the Canadian Wheat Board has consistently maintained this policy stance in recent years(Canada Gazette 2004).12 Similar data for all three Prairie provinces (Alberta, Saskatchewan and Manitoba) are available fromthe authors upon request. Recent data show that Saskatchewan possesses about half of all grain elevatorsin Western Canada (Quorum Corporation 2005).13 In 2005, there were nine major grain companies operating on the Prairies (Quorum Corporation 2006).

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Table 3 Elevator network consolidation: distances between neighboring Saskatchewan delivery points,1997–2000 (author’s calculations)

Year Elevator type Average number Percentage of cases Percentage of casesof kilometers where distance where distance

exceeds 30 km exceeds 50 km

1997 All delivery points 17.8 5.1 0.2

Larger than 5,000 tonnes 25.6 33.9 2.3


2000 All delivery points 18.4 6.5 0.5


Larger than 10,000 tonnes 38.7 64 24.2

Table 4 System capacity atdelivery points by number ofprimary elevators at the deliverypoint, 1997–2000 (authorscalculations; Vercammen 1997)

Number Percentage, 1997 Percentage, 2000

1 28 35.4

2 40 31.3

3 14 22.7

4 5 2.1

5 1 3.4

6 12 5.1

this period—a situation that is still the case today (Quorum Corporation 2005). Theindustry data highlight two key facts about the modern GHTS. First, grain eleva-tor locations have become more sparsely distributed over time, and second, fewerelevators (and companies) now compete directly at any given location.14

Considering the inherently spatial nature of extended interswitching, in the nextsection we estimate the consequences for transportation competition within the grainhandling and transportation system of lengthening the mandated extended interswitch-ing distances throughout the Canadian Prairies. To accomplish this, the basic researchtool we employ is geographic information system (GIS) software. GIS allows us totrack spatial market changes as the extended interswitching rules are adjusted in oursimulation environment. While our focus in this paper is on the grain handling system,we acknowledge that many other shippers in the region could benefit from changes tothese regulations but accounting for all potential rail shippers is beyond the scope ofthis paper.

5 Mapping the effect of possible changes to extended interswitching limits

We begin this analysis assuming that extant extended interswitching rules have notbeen used more frequently by grain shippers in western Canada because the aver-age distance between grain elevators and interswitching points is very often greater

14 In 2005, the total number of grain elevators on the Prairies was 385, found at 282 locations (QuorumCorporation 2006).

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than 30 km.15 Compounding this situation is that while there are a number of pointsthroughout the region where the tracks of both major railways intersect (meaning thatthese points could be employed for extended interswitching purposes), only a fewof these are actually designated as “official” interswitching points by the regulator.We expect that this distinction is important for establishing formal rail interswitchingregulations, so we also assess the importance of this factor in the study. We will com-pare our results across both a larger set of “hypothetical” interswitching points withthe actual set of fewer officially designated (as of 2000) interswitching locations.

Along with digitized rail maps, we employ detailed provincial grain industry datafrom the year 2000 provided to us by the Saskatchewan Department of Highways andTransportation. The data contain information such as elevator location (i.e., latitudeand longitude), elevator capacity, as well as electronic maps of each major carrier’srail network. These data were inputted into GIS (ArcView) mapping software. GISallow us to overlap the railway map, elevator and switching point locations in space inorder to trace actual rail travel distance from each elevator to every possible switchingpoint. Subsequently, the software uses Dijkstra’s well-known shortest path algorithm(see Sherlock et al. 2002) to compute the distance between the specified interswitchingpoints to the grain elevators in the data set.

A sample of the mapping output for the interswitching situation for all grain ele-vators in the Prairie provinces (Alberta, Saskatchewan and Manitoba) as of the year2000 is shown in the Appendix as Fig. 3. Those elevators falling within the extantinterswitching policy at that time are highlighted as black hash marks. We calculate thatwhen considering the larger set of all potential interswitching points, approximately29% of total regional elevator capacity fell within this limit. By comparison, when weuse the set of actual interswitching points designated for that year, we find that just 19%of elevator capacity fell within the 30 km limit. Therefore, we conclude that extendedinterswitching was simply not accessible to a large portion of the grain handling indus-try at that time.

5.1 Grain volume estimates using all potential interswitching points

Rail trip distance estimates from elevator to switching point generated by the GISsoftware permitted us to simulate extensions to the radial interswitching limits in aprogressive fashion. The complete output resulting from this exercise is plotted inFig. 1 (up to an extended interswitching radius of 300 km), while a set of criticalinterswitching limits are highlighted in Table 5.

15 Between 1988 and 2001, there were only ten extended interswitching cases brought to the regulator, andjust three of these advanced to a formal decision. Of the latter, at least one case went against the shipper(Canadian Transportation Agency 2000a, 2002). Latest available data show that only 4 extended inters-witches were demanded through 2002 and 2003 (Canadian Transportation Agency 2003, 2004). The lackof regulatory activity in this regard could also be indicative of other issues—including the possibility thatthe rail industry charges competitive rates to the vast majority of shippers in the GHTS, or alternatively,there could be a general lack of confidence among shippers that a given case will be judged fairly [i.e.,possible regulatory capture (Stigler 1971)].

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Net Distance

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%

0 20 40 60 80 100 120 140 160 180 200 220 240 260 280 300

Network Distance (kms)

Per

cen

tag

e o

f C

apac

ity

Official Interswitch Points

All Interswitch Points

Fig. 1 Proportion of total western Canadian grain elevator capacity falling within interswitching radiallimits: all possible interswitching points vs. Canadian “official” interswitch points (2000 data)

Table 5 The effect of changes in interswitching limits within the Prairie GHTS in 2000, using the full setof switching points

Radial interswitching Percentage of Prairie elevator (% change in capacitylimit distance (km) capacity covered by extended covered)/(change in limit

interswitching under these limits distance increment)

45 37 0.53

75 54 0.57

100 65 0.44

150 80 0.3

Figure 1 shows how grain system capacity would have been affected by the indexedchanges in regulated extended interswitching distance. By computing the incrementalgain in elevator capacity available through extending the limits, the last column ofTable 5 shows that the optimum extended interswitching distance in 2000 occurredat approximately a 75 km radius [i.e., the peak incremental gain in capacity occurs at75 km (0.57) in Table 5]. At that time, this interswitching distance would have coveredjust over 50% of total grain elevator capacity in the region.

As a final point of comparative reference for Fig. 3, we present another extendedinterswitching map of the region (Fig. 4 in the Appendix) generated by ArcView,showing grain elevators affected by a hypothetical 100 km radial limit. At this dis-tance, we see that the both major Canadian railways would have access to a slightmajority of western Canadian grain handling capacity, covering approximately 65%of total capacity.

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Table 6 The effect of changes in interswitching limits within the Prairie GHTS in 2000, using the actualset of switching points

Radial interswitching Percentage of Prairie elevator (% change in capacitylimit distance (km) capacity covered by extended covered)/(change in limit

interswitching under these limits distance increment)

45 23 0.26

75 35 0.40

100 43 0.32

150 66 0.46

5.2 Grain volume estimates using actual interswitching points

Next, we consider instead the set of interswitching points that were officiallydesignated for western Canada in 2000. Our research discovered that in Saskatchewan,the complete or full set of potential interswitching points numbered 19, whereas the ac-tual number of designated interswitching points was 10. In the other two provinces, thedifferences between the complete and restricted sets of interswitching points was notas dramatic, but there were still fewer actual interswitch points than were consideredin the previous simulation.

Considering these differences, note again that in Fig. 1 these latter simulation resultsare plotted alongside data from the complete set of all potential interswitching points.Clearly, with fewer points available, the total elevator capacity potentially affected bythe simulated changes in extended interswitching distance was reduced, usually on theorder of 20% less (see Table 6). In the next section, the impact of this fact on potentialproducer benefits will be examined.

There are obvious physical limitations to be considered with modifications to theextended interswitching regulations. For example, Fig. 1 indicates that in 2000, avery large extended interswitching distance would have been needed to ensure theavailability of a competing or connecting carrier for the entire Prairie elevator system(i.e. 100%) for either simulation scenario. While imposing large interswitching (radial)limits may be beneficial for grain producers, without corresponding adjustments to theregulated compensatory rates, this gain would necessarily be achieved at a non-trivialcost to the railways.

In consideration of this latter point, policy trade-offs are needed. As it stands,extended interswitching policy, while well intentioned, was and is of limited use inthe modern GHTS. On the other hand, extending interswitching limits too far couldend up strongly disadvantaging the railways. So exactly what level of potential compe-tition is enough to safeguard grain producers against market power in transportation?Would grain producers be satisfied with a guarantee that rail transportation optionsexist for 50% of western Canadian elevator capacity? Using our 2000 data on elevatorcapacity and proximity to interswitching points, coupled with some assumptions aboutthe benefits and costs associated with improved rail competition, in the next sectionwe evaluate the magnitude of potential gains available to the grain handling industry,gains attributable to additional rail competition within the Canadian GHTS.

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6 Quantifying the economic effects of interswitching policy modifications

In order to measure the economic effects of an expanded extended interswitching pol-icy some assumptions need to be made about the impact of the presence of even a singlerail competitor on freight rates. Publicly available data on Canadian rail operationsis scarce. To the authors’ knowledge, empirical estimates of inter-rail competition onrail rates in Canada do not exist.16 However, some empirical estimates from the USmeasuring the impact of rail competition on rates are available. Given the similaritiesbetween the two rail industries in most other respects, we make an assumption herethat US estimates can be used as proxies applicable to the Canadian rail industry.

Majure 1996 conducted a study assessing rail competition for the United StatesDepartment of Justice.17 With access to confidential data from the post rail de-regula-tion era in the US, he found that rail competition, of the type that would be generatedvia extended interswitching (i.e., one more competing railway for a given shipper), ledto approximately 20% lower freight rates on average (Majure 1996). If we extrapolateMajure’s findings to Canadian average rates for shipping grain from western Canada in2000 [at just over C$30 per tonne (CWB 2001)], we infer that the impact of a secondrail competitor on grain freight rates at that time would have been approximatelyC$6.00 per tonne.18

In order to show how the railways might have been affected by the suggestedchanges, we also incorporate regulated compensation to the railways for performingadditional extended interswitching. We can find an approximate value for this becauseas mentioned earlier, Canadian railways are paid publicly available compensation ratesfor extended interswitching on a per kilometer or a per car basis, depending on themovement. Again, Table 1 shows a schedule of rates applicable to the year 2000.

For this analysis, the extended interswitching rates from Table 1 labeled “additionalrates” are used. However, it was also necessary to translate this amount into a simpleper tonne rate. We calculated that the applicable extended interswitching compensa-tion rates were equivalent to a rate of approximately C$1.00 per tonne, as applied toa hypothetical 20-car movement (at 120 tonnes per car) moving on a 75 km extendedinterswitch.19 Using this value as a proxy for railway interswitching costs in Canada,

16 Grain transportation rates in Canada were regulated up until 2000 when they were partially deregulated(using a regulatory device known as a “revenue cap”, applicable to the railways) under legislative changescontained in Bill C-34 (Transport Canada 2000b). In fact, grain transportation rates today are very similar(within about 5–10%) of the rates used in this study (Quorum Corporation 2006). Furthermore, no railindustry data are available to formulate Canadian estimates of the impact of competition on grain rates.17 The authors obtained Majure’s paper directly from the Department of Justice in Washington, DC.18 We must clarify the magnitude of our estimates. What Majure (1996) actually examined was the empir-ical effect of decreasing the number of rail competitors from two to one in a given market. He found thatthis situation produced consistent rate increases of about 20%, which translates to a rate decrease of 17%if applied symmetrically. Without loss of generality, we have assumed in this research that the presence ofa new competitor would lead to a maximum rate decrease of 20% in the relevant rail market.19 Calculations are available from the authors. To generate this rate, we use the regulated interswitchingrate per car (1.60 per km) applicable to a block of 60 or more cars (Table 1). Obviously, this linear costscheme is applicable only up to reasonable interswitch distances, including those considered here. We mustalso note that other independent estimates of rail costs indicate that our computed level of compensationfor extended interswitching is still quite generous to the railways. See PRR Travacon (1999).

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Table 7 Gains for grain producers from modifications to extended interswitching (all switching points)

Radial interswitching Incremental grain capacitya Estimated yearly savings inlimit distance (km) affected by these limits (million freight rates over the current

tonnes) regulations (30 km) (million)

45 0.51 $2.5

75 1.05 $7.7

100 0.60 $10.8

150 0.94 $15.5a In 2000, total western Canadian elevator capacity was approximately 6 million tonnes

Table 8 Gains for grain producers from modifications to extended interswitching (“official” switchingpoints)

Radial interswitching limit Incremental grain capacitya Estimated yearly savings indistance (km) affected by these limits (million freight rates over the current

tonnes) regulations (30 km) (million)

45 0.27 $1.35

75 0.71 $4.9

100 0.49 $7.35

150 1.4 $14.35

it follows that the overall gain available to grain producers from increased rail compe-tition through improvements in extended interswitching would have been on the orderof C$5.00 per tonne.20 This estimate, combined with our simulated data on affectedelevators and volumes, permits the computation of approximate total benefits availablein the year 2000 to farmers and grain companies over and above the extant extendedinterswitching policy regime. These calculations are shown in Tables 7 and 8.

For completeness, the producer gains computed in Table 8 use elevator capacitychanges derived from the actual set of regional interswitching points.

As a point of comparison between the two sets of interswitching points, it is alsouseful to illustrate and compare gains to grain producers that may have been theoret-ically available at longer interswitching distances. These results are summarized inTable 9.

Finally, consider that one of the policy goals within the Canadian GHTS could beto ensure that some high percentage (e.g. 80%) of grain elevator capacity should bewithin the reach of the potential competitive benefits of extended interswitching. Thesimulated data can be used to show what this level would have been in 2000. Refer-ring to the position of the two lines in Fig. 1, we find that the extended interswitchinglimits necessary to meet an 80% level of accessibility would have been significantly

20 We feel that this per tonne rate decrease from the introduction of intra-modal competition is likely veryclose to the maximum possible in Canada. As such, if the actual rate change were less than $5, the measuredsystem-wide benefits would fall accordingly.

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Table 9 Comparing the set of full vs. actual interswitching points, 2000

Simulation Desired elevatorcapacity affectedby interswitchrules (%)

Interswitch distanceneeded to capturethis capacity (km)

Estimated savings infreight rates over thecurrent regulations (30 km)(million)

Full set of points 80 147 $15.3

Actual set of points 80 208 $18.2

shorter (by about 60 km) under the full set of potential switching points than using the“official” set of interswitching points. Furthermore, this divergence grows slightly asthe interswitching distances are extended even further.

In sum, estimated producer gains that could have been generated under the suggestedpolicy changes make clear that as a competition policy, expanded interswitching rulesoffered potentially large gains to shippers in the GHTS. Given the current topologyof the western Canadian elevator network, we believe that gains of similar magnitudeare still available today. However, our simulations also indicate that the maximumextended interswitch distance that should be enforced by regulators depends upon theapplicable set of interswitch points. From Tables 7 and 9, we see that when consideringthe full set of possible interswitching points, incremental gains from the interswitchingpolicy change for western Canada in 2000 peaked at around 75 km and dropped offbeyond a 100 km limit. However, if the actual set of switching points is consideredinstead, then a larger interswitching radius, on the order of 150 km (see Tables 5, 8 and9) would have been necessary at that time to obtain similar gains for grain producers.

7 Conclusions

The Canadian GHTS has undergone major transition, with regulatory changes in railtransportation and elevator consolidation in the grain handling sectors as key drivers.The total capacity of the western grain handling system, while relatively unchanged,is more sparse in location compared to the situation just 20 years ago. Today’s grainhandling and transportation system is characterized by long distances and scale, whilethere are still only two major railways serving the entire system. Significant numbersof grain producers are now located at greater distances from grain elevators. Thissituation has led to continued concerns about transportation market power within theGHTS.

Historically, market power concerns meant that railways serving the CanadianGHTS were highly regulated. However, policy changes in the late 1990s led to morepricing and service freedom in the rail industry. Some regulations over market powerremain, including a set of spatial regulations intended to promote rail competition oversmall distances. However, since they have gone largely unused over the past decade,it appears that these extended interswitching regulations are dated and not relevant tothe modern Canadian GHTS.

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This study employed data from the year 2000 along with geographic informa-tion system software (ArcInfo) to simulate within the Canadian GHTS the effectsof changes to a distance-based rail regulation known as extended interswitching.Under a reasonable set of assumptions, we found that a substantial grain producergain (between C$10 and 15 million that year) could have been achieved if extendedinterswitching regulations were expanded in the manner suggested. This benefit isattributable to the availability of more competitive transportation options for grainproducers in the region. However, we also recognize that the suggested policy changehas distributional implications between the shipper and the carrier. Ultimately, thepotential for such policy changes to be implemented in the near future will dependon the relative economic well-being of both the grain handling and rail industries inCanada.

In those industries where market power is a concern, our analysis also providessome lessons about regulation and the need for flexibility. We have shown that whatappears to be a well-considered spatial competition policy in the Canadian rail indus-try has become virtually irrelevant to at least one major customer (the grain handlingsystem) it was intended to help, mostly due to a series of enormous industry changesover time and space. Thus, regulators must remain open to the possibility that evengood policies can become dated as industries evolve. The almost complete lack ofimplementation of extended interswitching policy in Canada with an increasinglydiffuse grain handling sector should be a sign that the policy itself needs review orremoval.

Appendix

Fig. 2 Illustration of the extended interswitching regulation (Canadian Transportation Agency 2000b)

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Fig. 3 Prairie elevators falling within a 30 km interswitching limit (current policy applied to the full set ofinterswitching points 2000)

Fig. 4 Prairie elevators falling within a 100 km interswitching limit (full set of interswitching points 2000)

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Documents

Spatial competition and regulatory change in the grain handling and transportation system in western Canada