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6/97 BOZEMAN -- Canadian grain producers could face large shipping rate increases if Canada deregulates its railroad system, say two Canadian economists.
The U.S. experience in deregulation of railroads provides a "very stark view" of the likely outcome of a deregulated Canadian system, concluded Murray Fulton and Richard Gray of the University of Saskatchewan.
They presented their analysis to economists at a June 1997 conference on wheat market trends sponsored by the Trade Research Center at Montana State University.
Increased shipping rates would be expected if a railroad serving Western Canada had no competition, said Fulton and Gray. Their analysis of railroad rates for shipping grain showed that Montana and western North Dakota, served by a single railroad, have rates almost twice as high as those charged by either the regulated Canadian railroad or in U.S. areas served by competing railroads.
Their analysis showed that Canadian producers could face a $18-29* increase per thousand tons per mile if their rates were comparable to those in Montana.
In the past, the Canadian government subsidized grain shipment costs, said Fulton. Current Canadian regulations cap freight rates for transportation of western grain, but the government is considering deregulation. Rates are due for review in 1999.
Analysis of the price charged by Burlington Northern Railroad between Shelby, Montana and Portland, Oregon "closely reflects the cost of trucking," rather than the cost of shipping via railroad, said Fulton. "The . . . evidence suggests monopoly pricing," he added.
Both Montana and western North Dakota are served by one railroad: Burlington Northern. Producers in Shelby, Mont. pay about double the shipping rate (per mile per ton) to Portland as Western Canadian producers for a similar distance, and about double the rate producers pay from Denver or Kansas City to Galveston. Denver and Kansas City are served by competing railroads. It is 728 miles from Shelby to Portland, 961 miles from Denver to Galveston and 861 miles from Kansas City to Galveston.
Between January 1990 and September 1995, rates where there was competition between railroads hovered near or below $21.74 per thousand tons per mile. The rate from Shelby consistently has been higher. In September 1995, the rates from Shelby were about $41.31 per thousand tons per mile.
Usually, it is the entry of new companies into an industry or the threat of this that keeps industry prices competitive, said Fulton. Because land costs for a new railroad would be prohibitive, existing railroads essentially have a monopoly.
"In a perfect world, a contract would provide a solution," said Fulton. "In reality, such contracts are difficult to monitor and railways can be expected to act opportunistically."
There are little-thought-of impacts of both regulated and monopolistic systems, said Fulton. In Canada, the impending review of regulations scheduled for 1999 creates uncertainty that results in reduced investment in the system. In the United States, high freight rates probably have caused under-investment in agricultural production. In addition, he abandonment of branch railroad lines and poor maintenance of branch lines are predicted by the economics of a monopoly.
The analysis also suggests that "regulated freight rates may not solve the problem," said Fulton. Rate regulation doesn't work well, because "railways simply have too many means of reducing service."
One alternative regulation structure that might help the situation is to control the rails themselves, not the railroads, said Gray. That is similar to the structure of the telecommunications industry in the United States and in the rail industry in Britain.
Regulation that forces local companies to carry long distance services for other companies "has resulted in a dramatic reduction in the cost of long distance services," said Gray.
The British Railway Act of 1993 used a similar concept to make that country's rail system more competitive. In Britain, the rail infrastructure is owned by a corporation called Railtrack, which leases access to 30 independent rail operators, said Gray. These rail operators compete to provide passenger and freight service to the public.
Discussion of government policy options for railroads have been limited. Regulating the rails and encouraging competition by railway companies deserves more attention, concluded Fulton and Gray. *Editor's note: All figures are in U.S. dollars except the graph.
