Canadian National Calls for Greater Rail Deregulation.

Business Editors

MONTREAL--(BUSINESS WIRE)--Oct. 11, 2000

Canadian National (NYSE:CNI)(TSE:CNR.) said today the clear shipper benefits of rail deregulation merit further easing of rail regulation in Canada.

CN made its comments in an initial submission to a federal government panel conducting a statutory review of the effectiveness of the Canada Transportation Act of 1996 (CTA).

CN said Canadian rail freight deregulation has been a success for the Canadian economy, shippers and taxpayers. It has significantly contributed to the substantial economic recovery of Canada's railroads, but this recovery is incomplete and fragile.

Because rail recovery is unfinished, CN said, the revenue adequacy of Canada's major railroads must figure prominently in the CTA review panel's analysis of competitive rail access issues. An interim panel report on access concepts is due by year-end.

Open access - allowing multiple carriers access to a network owned by another railroad - would constitute a major structural change to Canada's rail transportation system. Open access regimes in other countries are all significantly subsidized by taxpayers and fall well short of the performance and policy objectives met by Canada's current regulatory system.

CN said the shipper benefits of the CTA and National Transportation Act of 1987 are clear. Today, rail freight rates paid by Canadian shippers are the lowest in the world - 60 per cent below the international average. Since 1987, shippers have benefited from a 35 per cent decline in real freight rates. Moreover, deregulation has given rail customers in Canada the highest level of shipper protection of any jurisdiction in the world and significantly more protection than shippers enjoy in the United States.

Equally significant, Canada's rail freight industry no longer requires operating subsidies - subsidies that were costing Canadian taxpayers hundreds of millions of dollars every year.

The CTA also paved the way for CN's privatization and the dramatic improvement of rail freight efficiency. Currently, CN is the most efficient railroad in North America.

CN said Canada's rail industry faces major hurdles in spite of the benefits of deregulation. Despite impressive service performance and productivity gains, rail's share of the growing freight transportation market is still shrinking and more than eight years of sustained economic growth has increased rail traffic volume, but revenues only modestly.

Railroads' single greatest challenge, therefore, is to increase business, recapture market share from trucks, and compete head-to-head with U.S. railroads for business in the fast growing, but competitive North American market. In Canada, 99 per cent of all rail business is subject to intense competitive pressures, whether from trucking, rival railroads or alternate sources of goods.

In such a market, CN said, the rail industry's capacity to compete depends on cost recovery and its ability to renew its infrastructure to provide shippers with better service. Railroading is a highly capital intensive business - today CN spends about $1 billion annually, or 20 per cent of annual revenue, on capital improvements.

To achieve full cost recovery and the lowest rates for shippers, railroads employ differential pricing - pricing based on the elasticity of demand for rail transportation, not cost formulas. Differential pricing optimizes contributions to high fixed costs for the benefit of all stakeholders, especially the most rail-dependent shipper.

Even with differential pricing, the rail industry's rate of the return on capital - 8.4 per cent - is lower than most other major industry groups. In this period of sustained economic growth, CN is now beginning to earn its cost of capital, but it is far from earning its cost of capital over a full economic cycle.

Railroads face a fundamental reality - differential pricing is essential to rail viability. Conversely, the inability to price according to demand would lead to lower levels of service and higher rates or subsidies.

CN said any recommendations for regulatory change based on access - including access provisions for regional railroads - must maintain the integrity of differential pricing and be measured against a set of core principles that first addresses:

--Full cost recovery;

--Access reciprocity, permitting all railroads to have reciprocal
  rights to access each others lines;

Then includes:

--Full deregulation, because under open access, market forces, not
  regulation, should drive industry efficiency, service and price;

--Commercial arbitration of rate disputes;

--Regulatory rules that are competitive with the United States and
  respect North American Free Trade Agreement (NAFTA) and World Trade
  Organization (WTO) rules.

CN said any access proposal that fails to address each of these principles would constitute regulated or forced access and could represent a subsidy and/or expropriation under NAFTA or WTO rules.

Current proposals, such as a regional railroad focussed on grain transportation or the competitive access rates proposals, fail to meet the core principles outlined above and both would undermine differential pricing.

To respond to such proposals would quite simply constitute an unwarranted - and possibly unlawful - transfer of wealth from one participant in the transportation system to another, CN said.

CN firmly believes that the principles that underlie Canada's current legislative and regulatory system should be the basis for the future.

CN said the onus is on the Canadian proponents of open access to demonstrate that such a system would improve efficiency, deliver economic benefits to all stakeholders and maintain the competitiveness of Canadian railroads.

CN will address in full its call for further rail de-regulation, an integrated national transportation policy compatible with North American regulatory trends, and tax equity for Canadian railroads, in a filing with the CTA review panel on November 17, 2000.

CN's initial CTA submission is available on its Web site, www.cn.ca.

Canadian National Railway Company spans Canada and mid-America, from the Atlantic and Pacific oceans to the Gulf of Mexico, serving the ports of Vancouver, Montreal, Halifax, New Orleans, and Mobile, Ala., and the key cities of Toronto, Buffalo, Chicago, Detroit, Memphis, St. Louis, and Jackson, Miss., with connections to all points in North America.