Vol. 148, No. 17 — August 13, 2014

Registration

SOR/2014-192 August 1, 2014

CANADA TRANSPORTATION ACT

Regulations on Operational Terms for Rail Level of Services Arbitration

P.C. 2014-895 July 31, 2014

Whereas, pursuant to subsection 36(2) of the Canada Transportation Act (see footnote a), the Canadian Transportation Agency has given the Minister of Transport notice of the annexed Regulations;

Therefore, the Canadian Transportation Agency, pursuant to subsection 169.31(1.1) (see footnote b) of the Canada Transportation Act (see footnote c), makes the annexed Regulations on Operational Terms for Rail Level of Services Arbitration.

Gatineau, July 21, 2014

GEOFFREY C. HARE
Member
Canadian Transportation Agency

SAM BARONE
Member
Canadian Transportation Agency

His Excellency the Governor General in Council, on the recommendation of the Minister of Transport, pursuant to subsection 36(1) of the Canada Transportation Act (see footnote d), approves the annexed Regulations on Operational Terms for Rail Level of Services Arbitration, made by the Canadian Transportation Agency.

REGULATIONS ON OPERATIONAL TERMS FOR RAIL LEVEL OF SERVICES ARBITRATION

Definition of “Act”

1. In these Regulations, “Act” means the Canada Transportation Act.

Paragraph 169.31(1)(a) of the Act

2. (1) For the purposes of paragraph 169.31(1)(a) of the Act, a term constitutes an operational term when it sets out an obligation of the railway company towards the shipper respecting the performance of an action related to the receiving, loading, carrying, unloading and delivering of traffic.

Examples

(2) A term that deals with any of the following matters is an operational term referred to in subsection (1):

Paragraph 169.31(1)(b) of the Act

3. (1) For the purposes of paragraph 169.31(1)(b) of the Act, a term constitutes an operational term when it sets out an obligation of recovery that the railway company must comply with if it fails to comply with an operational term that deals with a matter referred to in any of paragraphs 2(2)(a) to (g) or any other operational term referred to in subsection 2(1).

Obligations of recovery

(2) An obligation of recovery must set out steps that the railway company must take to minimize the consequences for the shipper of its non-compliance and to ensure that compliance, including

Paragraph 169.31(1)(c) of the Act

4. (1) For the purposes of paragraph 169.31(1)(c) of the Act, a term constitutes an operational term when it sets out an obligation of the shipper towards the railway company respecting the performance of an action related to an operational term referred to in section 2, including a term that deals with any of the following matters:

Obligations of recovery

(2) For the purposes of paragraph 169.31(1)(c) of the Act, a term constitutes an operational term when it sets out an obligation that the shipper must comply with in relation to an obligation of recovery referred to in section 3.

Communication protocols

5. For the purposes of paragraphs 169.31(1)(a) to (c) of the Act, a term constitutes an operational term when it sets out a communication protocol for the railway company and shipper to use to communicate information in respect of their compliance with an operational term, including a protocol for communicating information about

REPEAL

6. These Regulations are repealed .

COMING INTO FORCE

Registration

7. (1) Subject to subsection (2), these Regulations come into force on the day on which they are registered.

S.C. 2014, c. 8

(2) Section 6 comes into force on the day on which subsection 8(2) of the Fair Rail for Grain Farmers Act comes into force.

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Issues

The Canada Transportation Act (CTA) provides for arbitration when shippers and railway companies are not able to reach a negotiated level of services agreement. The matters eligible for arbitration are described, in part, by the use of the expression “operational terms.” However, the CTA does not specify what an operational term is. As a consequence, shippers and railway companies debate the issue of what is an operational term in an adjudication proceeding that can be adjudicated before the Canadian Transportation Agency (the Agency). These adjudications must be ruled upon by the Agency within 35 calendar days from their filing and are processed in parallel with the arbitrations. Therefore, establishing in these Regulations a framework for what constitutes an “operational term” will give support to conducting arbitrations within the 45 to 65 calendar day statutory deadline, which is considered very short for this type of process.

Background

Issues concerning rail level of services, including the fulfilment of operational terms by railway companies, have been studied by the government through a number of review initiatives involving consultations with shippers and railway companies, as well as other participants in commodity supply chains.

The Rail Freight Service Review

In 2008, the Minister of Transport initiated the Rail Freight Service Review to address ongoing issues with respect to complaints from Canadian shippers regarding the level of rail freight services provided by the Canadian National Railway Company (CN) and the Canadian Pacific Railway Company (CP). One of the recommendations from the Rail Freight Service Review Panel was the creation of a dispute resolution mechanism for rail service agreements. The full report can be found at www.tc.gc.ca/publications/EN/TP15042/PDF/HR/TP15042E.pdf.

The Facilitator’s Report

In response to a recommendation in the Review Report, the Government began a facilitation process to assist the parties to establish the template service agreement and appointed Jim Dinning as the facilitator in 2011. After five months of working towards a solution that was hoped to result in stronger commercial and rail service relationships and a framework for level of services agreements, the facilitation process ended with no agreement on what constitutes operational terms and conditions for purposes of rail level of services agreements. The full Facilitator’s Report can be found at http://tc.gc.ca/eng/policy/acg-acgb-menu-3011.htm.

Recent legislation

The Fair Rail Freight Service Act (Bill C-52) was granted Royal Assent on June 26, 2013, introducing in the CTA 45 to 65 calendar day arbitrations for rail level of services matters where shippers are unable to commercially negotiate a level of services agreement with railway companies. The Agency may, on a case-by-case basis, determine eligibility of various persons in the logistics chain, including producers with producer cars, shortline railway companies and their agents, if acting as shippers, to participate as shippers in rail level of service arbitration, depending on their relationship with the railway company.

On May 29, 2014, the Fair Rail for Grain Farmers Act (Bill C-30) was granted Royal Assent providing the Agency with the power to specify by regulation what constitutes “operational terms” for the purposes of rail level of services arbitrations.

Objectives

The Regulations on Operational Terms for Arbitration on the Level of Services of Railways (the Regulations) specify what constitutes operational terms that may be brought to rail level of services arbitration. Arbitration decisions establish level of services terms that parties (shippers and railway companies) are unable to negotiate commercially. These decisions are deemed to be confidential contracts for specified purposes.

The Regulations, in specifying what constitutes operational terms for the purposes of rail level of services arbitration, will support the efficient processing of arbitration cases within the 45 to 65 calendar day statutory deadline and will reduce the need for parallel adjudication to have the Agency determine eligibility of matters submitted for arbitration.

Specifying what constitutes operational terms in the Regulations will also support the commercial negotiation of level of services agreements between the shippers and the railway companies, bringing clarity and predictability. In cases where the parties cannot reach an agreement on a commercial basis on a level of services agreement or specific terms and shippers request that the Agency arbitrate, the Regulations will help focus the issues in dispute and allow resolution within the short legislated timeframe. This will ultimately protect and advance the public interest in the economic well-being of Canadians in accordance with the objectives of the national transportation policy and promote a fair and competitive market economy, specifically by stipulating what constitutes operational terms with respect to rail level of services arbitration, for the period until the Regulations sunsets on August 1, 2016, as provided for by the Fair Rail for Grain Farmers Act.

Description

The Regulations specify what constitutes “operational terms” for the purposes of paragraphs 169.31(1)(a) to (c) of the CTA and describe specific matters that constitute operational terms for the purpose of each of these paragraphs.

With respect to railway companies, the Regulations stipulate that an operational term is a term that sets out obligations on the railway company towards the shipper respecting the performance of an action related to the receiving, loading, carrying, unloading and delivering of traffic. For this purpose, the Regulations also stipulate what constitutes operational terms related to performance standards and communication protocols.

The extensive but non-exhaustive list of operational terms set out in the Regulations provides examples of level of services terms that will be eligible for arbitration between shippers and railway companies. For example, this would include railway obligations, such as the furnishing of railway company cars, the pick-up times, and transit times, along with terms that stipulate the circumstances that would make it impossible for the railway company to perform an obligation set out in an operational term.

For the purposes of paragraph 169.31(1)(b), in relation to railway companies, the Regulations stipulate that an operational term includes an obligation of recovery that the railway company must comply with if it fails to comply with the other operational terms and includes a recovery plan for the purposes of minimizing the consequences for the shipper of the railway company’s non- compliance and of ensuring that compliance.

In relation to shippers, the Regulations stipulate that an operational term is an obligation on the shipper towards the railway company, respecting the performance by a shipper of an action related to a railway company operational term. Shipper’s obligations would include, for example, loading and unloading of railway company cars and the subsequent release procedures, number of switches required and provision of access to the shipper’s facilities.

“One-for-One” Rule

The “One-for-One” Rule does not apply to this proposal, as the implementation of the Regulations will result in no change in administrative costs to business.

Small business lens

The small business lens does not apply to this proposal, as the implementation of the Regulations will result in no costs to small businesses.

Consultation

Prior to the Fair Rail for Grain Farmers Act receiving Royal Assent, the issues surrounding the operational terms for rail level of services arbitration were debated in both the House of Commons and in the Senate, as well as in committees where interested parties were able to make presentations directly to parliamentarians.

There was overall support for providing clarity by way of regulation, as well as for the non-controversial operational terms. However, there was opposition to particular terms being included or excluded.

On June 9, 2014, the Agency launched its consultation on the proposed Regulations. Interested parties, from the railway, agricultural, mining, forestry and chemical sectors were asked to submit their comments by June 20, 2014. The Agency received 14 written submissions from shippers, shipper associations, provincial government departments and railway companies. In addition, a total of 12 meetings/conference calls were held with targeted stakeholders.

General highlights

During the consultation process, shippers indicated support in general for the Regulations, and they were particularly encouraged to see the level of detail contained in the consultation document. However, railway companies indicated that they do not believe the Regulations are required and the timeframe to submit comments was inadequate.

The railway companies stated that they did not provide detailed comments on each item set out in the consultation document because of the short consultation period. As well, railway companies expressed concern that arbitrators’ decisions may put too much emphasis on a specific shipper’s needs while not considering the impact on the network and other shippers.

Some shippers raised concerns with respect to the proposed definition of operational terms. They also indicated that the list of examples should expressly state that it is non-exhaustive. The following sections address the substantive comments received during consultations with respect to these aspects and explain how these comments were taken into account.

Definition of “operational terms”

Some shippers expressed the view that the proposed definition of “operational terms” was restrictive and narrow. In their view, operational terms should not be limited to acts necessary for the maintenance of a railway or the operation of a train. Certain shippers suggested using the expression “in support of” instead of “necessary” to broaden the definition. Others suggested adopting the concept of “performance of a work” in order to alleviate the restrictiveness of the proposed definition.

In order to ensure that the expression “operational terms” is broad enough, the Agency has not used the word “necessary” in formulating the definition. In addition, “operational terms” is defined in relation to the performance of an action related to the receiving, loading, carrying, unloading and delivering of traffic.

List of examples

Shippers indicated their support of the Agency’s approach to providing examples of a broad range of operational terms in the consultation document. However, they stated their view that care should be taken to ensure that other operational terms not specified in the Regulations could nonetheless be brought forward in the future by shippers. In other words, shippers expected the Regulations to recognize that other operational terms applicable to unique circumstances may be submitted for arbitration.

To address this concern, the Agency has used language to indicate that the list of examples is not exhaustive for the purpose of the Regulations.

Specific comments by category

The Agency developed three categories of terms for stakeholders’ consideration during the consultation process:

Category 1 — Operational terms referred to in the CTA included terms and examples related to the services and obligations of the railway company to a shipper, communications protocols, performance standards, obligations of the shipper and recovery plans.

With respect to this category, the main comment from shippers was that some of the wording used in describing performance standard examples allowed for service failure. However, they indicated their agreement that performance standards could be established in relation to a range, variability or window associated with a particular aspect of service. Shippers indicated that such service windows, within which the performance must be provided, would be an acceptable means of setting performance in most cases.

These concerns have been taken into account by setting out in the Regulations that performance standards can be expressed using any metric, which will be determined by the arbitrator on a case-by-case basis, without prescribing any specific performance standard that will apply between a shipper and a railway company.

Some shippers were concerned with the consultation document indicating that an operational term could include “obligations of the shipper.” They suggested that reference to “conditions on shipper” would be more appropriate. They pointed out that the CTA provides the shipper with the option to submit for arbitration operational terms it wants, which makes it clear that the shipper is not obligated to submit anything under subsection 169.31(1) of the CTA if it does not so desire.

The Agency acknowledges that shippers have discretion in identifying the operational terms they include in their submission for arbitration. However, paragraph 169.31(1)(c) of the CTA states that “any operational term that the shipper must comply with that is related to[…].” Such operational terms under paragraph 169.31(1)(c), if imposed on the shipper by an arbitration decision, become obligations which the shipper must comply with. This concern was therefore not addressed in the Regulations.

Category 2 — Terms that are not specifically mentioned in the CTA but could be considered as operational terms for purposes of subsection 169.31(1) including terms and examples related to force majeure, dispute resolution, incorporation of tariffs by reference and routings.

Shippers expressed the view that these terms, with the exception of incorporation of tariffs by reference, are essential terms in order to have an effective level of services agreement. Shippers voiced their concerns that allowing incorporation of tariffs by reference may permit a railway company to change the overall terms and effectiveness of an arbitration decision.

The incorporation by reference of a railway company’s tariff provision is a method by which an arbitrator may formulate an operational term the arbitrator decides to impose in its arbitration decision, not a distinct operational term. Accordingly, the comments did not need to be addressed in the Regulations.

The Agency is of the view that dispute resolution provisions may be terms that relate to an operational term, but do not constitute a discrete operational term. Therefore, dispute resolution provisions could not be included as explicit terms that constitute operational terms under paragraph 169.31(1)(a) of the CTA.

Category 3 — Matters that are not to be considered for the purposes of subsection 169.31(1) of the CTA, including terms and examples related to reciprocal performance incentives and consequences for non-performance and damages.

Shippers expressed strong views with respect to the reciprocal performance incentives and consequences for non-performance not being specified as operational terms in the Regulations. According to these shippers, these are necessary to restore balance in the commercial relationship between shippers and railway companies, pointing out that shippers are subject to penalties and other consequences under railway company tariffs. Shippers expressed that they only want railway companies to be held accountable in the same way that the railway companies hold shippers to be accountable right now.

Some expressed the view that shippers would have difficulty negotiating a reciprocal consequences clause in a confidential contract level of services agreement if these are not characterized as operational terms under the Regulations.

One shipper also expressed concern that its ability to access other remedies, such as seeking damages for non-performance through the courts, may be circumvented should consequences for non-performance not form part of an arbitration decision.

Reciprocal performance incentives, penalties and damages were considered. However, while they may be terms that relate to an operational term, they do not constitute a discrete operational term and as a result, cannot constitute operational terms under paragraph 169.31(1)(a) of the CTA.

However, other remedies have been made available to deal with service failures and non-performance, such as administrative monetary penalties of up to $100,000 per violation. In addition, in level of services adjudications under paragraph 116(4)(c.1), the Agency may now order a railway company to pay to a shipper compensation for expenses arising from the railway company’s failure to fulfill its service obligations, including those established in an arbitrator’s decision, where the Agency finds that a breach has occurred. These measures may be significant deterrents so as to ensure compliance with arbitration decisions.

Rationale

These Regulations provide a definition of “operational terms” and provide non-exhaustive lists of specific operational terms eligible for rail level of services arbitration.

When the Fair Rail Freight Service Act was granted Royal Assent on June 26, 2013, it gave the Agency the responsibility to provide arbitration services for rail level of services where shippers are unable to commercially negotiate level of services agreements with railway companies. The legislation limited the scope of what could be submitted to arbitration to, in part, operational terms. However, the legislation did not define “operational terms.”

On May 29, 2014, the Fair Rail for Grain Farmers Act was granted Royal Assent and the Government mandated the Agency to specify by regulation what constitutes “operational terms” for the purposes of the legislation. The Regulations clarify the matters eligible to be brought to arbitration and facilitate the efficient processing of cases within the short statutory deadlines.

Agency decisions determining matters eligible for arbitration must remain confidential if requested by parties. As a result, these Agency decisions do not provide for public education about what operational matters are eligible for arbitration. The Regulations provide clarity to shippers, railway companies and the public as to what matters are eligible for arbitration.

These Regulations do not add any administrative costs for parties to bear. Rather, they reduce the costs to participate in arbitration by focusing the process on matters eligible for the arbitrator to consider and by reducing the need for parties to debate the meaning of “operational terms” before the Agency in a parallel adjudication under section 169.43 of the CTA.

Implementation, enforcement and service standards

Arbitration decisions establish the level of services terms, which are deemed to be confidential contracts between railway companies and shippers.

Administrative monetary penalties will be used to enforce railway compliance with arbitration decisions. Alleged violations of an obligation imposed on a railway company in a level of services arbitration decision will be investigated. If a contravention has taken place, the Agency has the authority to issue a notice of violation of up to $100,000 per violation. In addition, in level of services adjudications under paragraph 116(4)(c.1), the Agency may now order a railway company to pay to a shipper compensation for expenses arising from the railway company’s failure to fulfill its service obligations, including those established in an arbitrator’s decision, where the Agency finds that a breach has occurred. The Agency will determine the types of expenses that will be compensable under this provision, that may include demurrage fees that the shipper pays and labour costs paid unnecessarily as a result of the railway company’s service failure. These measures may be significant deterrents so as to ensure compliance with arbitration decisions.

Shippers may also bring a claim to the courts for the neglect or refusal of a railway company to fulfill its level of services obligations.

As provided for by the Fair Rail for Grain Farmers Act, the authority to create the subject Regulations will sunset on August 1, 2016, unless, before that day, their coming into force is postponed by a resolution passed by both Houses of Parliament.

Contact

Gerry Nera
Director
Alternative Dispute Resolution
Canadian Transportation Agency
15 Eddy Street
Gatineau, Quebec
K1A 0N9
Telephone: 819-953-0365
Fax: 819-953-6613
Email: gerry.nera@otc-cta.gc.ca