A bumper crop can be an embarras de richesses. Thanks to an outsized 2013 harvest, producers and shippers of grain in Western Canada are having to struggle for space on railways. The oil-by-rail trend – itself partly a result of a notorious pipeline shortage – may be exacerbating the problem, leading to fierce competition for the railroads’ capacity.
There is a natural propensity in such situations to demand that the government do something. In this instance, there’s a very strong case for calling on the government to stop doing something.
The long-lived duopoly of Canadian Pacific and CN has had a large place in Canadian history, and consequently a lot of government intervention. Once upon a time, Ottawa capped the rates that the railways could charge for moving grain. The result was a railway system that suffered from losses and underinvestment, which in the long run was no favour to farmers and grain shippers. In 1998, a report by former Supreme Court justice Willard Estey recommended removing the price caps. He was convinced that a freer market would lead to lower freight rates.
The government of the day took Mr. Estey’s recommendation – but it also created a new, market-distorting rule. Under the Canada Transportation Act, CN and CP are each subject to specific formulas for “maximum revenue entitlement” from the shipment of grain. In plain English, there’s a restriction on how much revenue CN and CP are allowed to earn from the business of shipping grain. It makes little sense. A bumper crop, under this formula, becomes a problem from the railways, rather than an opportunity. If there were no such restrictions, the two big railways would have an incentive to find ways to carry more grain, and thus earn more revenue and higher profits.
The revenue-cap scheme, enacted in 2000, was advertised as a replication of a market model. But why try to come up with a replica of the market? Why not simply rely on, you know, the market?
The revenue cap gives the railways an incentive not to ship grain. That’s not the only cause of the present bottleneck. But it sure doesn’t help.