Major Market Initiatives

Reciprocal Penalties Brief

Executive Summary

Introduction

Improving railway efficiencies and service is an ongoing concern for Canada, a major grain exporting country. Inadequate railway service prevents market growth, adds to supply chain costs and limits domestic profitability. Rail inefficiency is a result of the lack of competition between rail firms since it is difficult to incentivize railways in areas where they have limited accountability for their actions.

Railways have a variety of measures that govern shipper efficiencies, some of which are known as asset use tariffs. These tariffs are used to penalize shipper failures through a monetary fine in order to gain shipper efficiencies but there are currently no reciprocal penalties or shipper tariffs in place to penalize railway failures. In order to create a fully efficient supply chain and balanced commercial accountability, railways need to be accountable for service failures.

Alberta Producers Propose:

  • The development of language within the Canada Transportation Act Sections 117 and/or Section 126 surrounding standardized shipper reciprocal penalties in which grain shippers can impose accountability on railways to increase system efficiencies through one of two options:
  1. Standardized Shipper Asset Use Tariffs through the Canadian Transportation Agency
  2. Standardized Shipper/Carrier Service Level Agreements (SLA) between parties

A shipper asset tariff or an SLA would create an incentive for railways to focus on performance and invest in assets that can improve efficiencies. This recommendation positions railways to act as competitive firms in order to drive efficiencies, lower shipper risks and ultimately develop foreign markets for Canadian exports through reliability and cost effectiveness.

Recommended Shipper Asset Use Tariff/SLA Charges

The focus of shipper tariffs or SLA charges is on empty railcar spotting delays and loaded railcar movement. The charges would be equal to the amount charged by the railway. Reciprocal penalty estimates are provided as recommendations based on current railway tariffs.

  • Charges between $100 and $250 per car per day are recommended for delayed empty car spots depending on seasonality and the severity of the delay.
  • Recommended loaded rail car movement charges are between $100 and $150 per car per day and are dependent on seasonal empty hopper car demand. 

These proposed penalties are equivalent to tariffs currently imposed by the railways on shippers for system delays. If railway tariffs are altered, the penalties would change by equal or the same amount to reciprocate the railways penalties.

Summary

Alberta producers support shipper tariffs or SLAs to create an equal playing field between shippers and railways. Without a standardized tariff or SLA system in place there is little incentive for railways to invest in creating efficiencies. With a sufficient and equal penalty system in place, railways and shippers will have incentive to move traffic efficiently and each entity will strive towards the common goal of having a second-to-none Canadian transportation system.

Mandatory Railway Reciprocal Penalties

Introduction

Since the deregulation of the Canadian Wheat Board (CWB) the focus has been on creating competition in the Canadian grain supply chain. Where investment is possible, new firms have entered the grain market through asset purchases or new builds. Canadian grain companies are expanding assets to become more efficient and competitive within the Canadian marketplace and multinational firms are reviewing new investment opportunities within Canada. 

Competition between grain companies bodes well for farmers but there is still an issue of competition between Canadian railways. Canada is situated with two class one railways, and market entry by another rail firm is highly unlikely because of the large startup costs involved with placing the necessary assets needed for a railway. The lack of competition between railroads leads to less or no accountability for delayed shipments and the capacity to set asset use tariffs to cover all shipper delay costs. The ability for grain companies to set tariffs is one way to cover costs of railway delays and create an equalized penalty system.

The purpose of this brief is to recommend reciprocal penalties in which grain shippers can impose accountability on railways to increase competition.

Weekly Car Allocation

Grain shippers must order empty hopper cars by Tuesday at 10:00 AM MT on Canadian Pacific (CP) and 12:00 noon MT on Canadian National (CN) each week. The grain shippers are then asked for a list of priority orders by the railroads in which they can make their allocation decisions. Friday morning, car allocation is set by the railways for the following week for a specific spot date and time[1]. Shippers then can confirm the product they are shipping depending on quality or product demand at destination. Car orders that are not allocated are shortfalled and added to the next week’s pool of orders unless cancelled by the shipper or the maximum order threshold is met on CN or CP.  If the maximum thresholds are met, excess orders will be cancelled by the railway.

Weekly Order Spot Changes

Shippers are informed of delays or advancements of their allocation by the railways as each week progresses. Spot time changes can cause shippers to alter products they are shipping to meet vessel or destination needs. Shippers do not always have the flexibility to change shipments and when cars are delayed, the entire supply chain is delayed. Delays cause end product users to wait for orders and in-turn, end users impose penalties on shippers which are ultimately passed on to the producer. Penalties are imposed in many different forms including contract penalties, vessel demurrage and additional risk assessed in future purchasing bids.

Current Weekly Order Delay Penalties from CN and CP

CP has two tariffs in place that can be reciprocated by grain companies. The first is a last minute changes tariff (Item 30) where last minute changes to local service is charged out at $100 per car and the inability to place cars at a shipper facility is $100 per car plus switching fees (Item 31). 

CN Tariff (Item 5600) covers reducing, cancelling or changing car orders. CN charges $100 per car for cars already planned for service up to the point of placement.

Shipper Delayed Spot Charge Recommendation

The recommendation is for CN and CP to identify and supply shippers with spot dates and times by noon MT Friday of each week[2]. The railways then can make changes to the spot time within 48 hours of the original time and any time greater than 48 hours a fee of $100 per car per day can be charged by the shipper for up to 7 days.  If car allocation is delayed greater than 7 days, a charge of $250 per car per day can be charged until the allocated cars are received.

  • Empty car spot time changes greater than 48 hours can result in a fee of $100 per car per day up to 7 days thereafter a charge of $250 per car per day is chargeable until the empty car order is spotted.

Spotted Car Allocation Demurrage Charges

CP states in their Asset Use (demurrage) Item 10 tariff that “Rail car dwell, either in railway yards or at loading facilities is inefficient, consumes capacity and is an area where improvements can be realized.” In order to create these efficiencies, CP implements their demurrage tariff which is dependent on a number of factors including fleet status demand, hazardous materials and private or railway owned fleet. Currently CP uses non-hazardous railroad fleet cars in grain service.  At the shipping origin, railway owned cars are given one credit day to load and thereafter a demurrage rate is charged depending on fleet demand.

CP recently changed their tariff to a demand-based system where origin asset use charges are based on industry demand for fleet cars. In periods when demand is low there is a $90 per car per day charge, medium or balanced demand is set at $100, and high demand is $200 per car per day.  CP recognizes that during peak periods when demand is high, it is in their best interest to have customers order cars that can be used. If demand is low, they discount the asset use time to promote slower turns by customers.

The CN loading asset use tariff (9000) differs from CP’s since it is set on location-based demand instead of overall fleet demand. CN set their tariff rate at $140 per car per day for the greater Vancouver and Chicago areas and $100 per car per day for all other areas. 

It is known that often shippers load and release cars within the allotted period only to witness loaded cars dwelling on their track for days and even weeks. This begs the question as to why there are not reciprocal penalties for railroad lift delays. A railway-borne loaded dwell penalty would help to offset incremental charges that may be carried by the shipper for additional costs (ie. Staff) allocated to meet railway load time targets. 

Shipper Demurrage Charge Recommendation at Origin  

Once cars are loaded at a shipper’s facility and released back to the railway, the railway company must advance unit trains (traffic greater than 40 cars) within 24 hours and block less than 39 cars within 48 hours. It is recommended that reciprocal rates equal to what the railways charge are imposed on the railway. For example, the shipper can charge a demurrage rate of $100 per car per day from January to August and $150 per car per day from September to December (peak season).

  • Unit train traffic must be lifted within 24 hours and small blocks within 48 hours or a reciprocal rate is charge to the railway. Approximately $100 per car per day from January to August and $150 per car per day from September to December is chargeable to the carrier.

Traffic Held In-Transit

Once cars are lifted from a shipper’s facility the railways have a tariff in place for cars held en route or at the customer’s request. For CN the charge is $100 per railcar per day excluding the greater Vancouver and Chicago area. Within the greater Vancouver and Chicago area the charge is $140 per car per day.  CP charges are demand based at $90 per car per day during low demand, medium or balanced demand is set at $100, and high demand is $200 per car per day. Once the cars have been pulled from the shipper’s facility, there is a chance they can be held en route due to inadequate supply of power and crews by the railway company or various other reasons that stop shipments.

Similar charges must be accounted for by shippers or there is a lack of incentive for railways to invest in adequate resources. A held en route shipper tariff may be one way to incentivize the railway to invest in the appropriate resources. 

Shipper In-Transit Charge Recommendation

  • The shipper can impose a charge of $100 per car per day or rate equal to the rail company’s held in-transit tariffs for cars held en route in one location for greater than 24 hours until the time the cars are advanced.

Loaded Cars for Spotting at Destination

Demurrage charges at destination use a debit and credit system. CN allocates two free days and CP allocates one free day to unload cars at destination. After the free period expires the aforementioned asset use tariff comes in effect.

Shipper Traffic at Destination Charge Recommendation

  • If cars are not spotted within 24 hours of being ordered into the unload facility, the shipper can impose a demurrage rate of $100 per car per day from January to August and $150 per car per day from September to December (peak season) on the servicing carrier.

Conclusion

Competition is needed in the Canadian supply chain in order to improve efficiencies and level the playing field between shippers and the railways. Alberta’s farmers are putting forward the recommendation to:

  • Create shipper tariffs or a standardized service level agreement to create a level playing field and generate supply chain efficiencies through competition.

Creating efficiencies and competition in the Canadian grain industry is a must for farmers to stay profitable and competitive. If shippers and railways realize an effective supply chain, farmers can reap the benefits of competition and international buyers will restore trust in the Canadian supply chain. 

[1] CP’s dedicated train allocation methodology follows a shipper/carrier confidential contract and may differ from the above description.
[2] This tariff item covers open allocation only. CP Dedicated trains are under contract between shippers and railways and will not be covered under this tariff item. Shippers and railways can set agreed upon penalties within their confidential contract.