Agriculture Committee on Dec. 9th, 2010

[André Bellavance, Bloc, Richmond—Arthabaska, QC]

Earlier, Marc talked about competition. There is no better remedy to discipline companies on costs than more competition.

However, it is clearly not easy for shippers, for example, to do business with U.S. railways, or to choose another mode of transportation that may well cost more. So that's a solution, but other railways cannot be pulled out of a hat. That is not easy.

As soon as the railways discovered that we would be discussing railway services, they wasted no time sending us a letter. I imagine that colleagues on the committee received the same letter I did. They told me that the sector is fully competitive. I'd like to share some of the points raised by the Railway Association of Canada to convince us that in the end, we don't need a cost review. I am somewhat suspicious when private companies tell me they do not want a cost review. Furthermore, we will not necessarily conclude that costs are too high as a result of the review. Companies don't know that yet. Or perhaps they already know the answer, and that is why they don't want the review to take place. I find it odd that people are opposing a cost review.

The Railway Association of Canada says that the Canadian market for rail rates is very competitive. It is referring, of course, to Canadian railways, but the association is also talking about U.S. railways. Have you had much opportunity to use U.S. railways?

They have also talked about trucking. Can shippers ship by road as easily as by rail?

They have talked about pipelines, but I assume that it must be rather difficult for grain producers to use these pipelines.

They talked about maritime transportation via the Great Lakes. I imagine that in western Canada, that doesn't really help you very much.

I would like to hear your views on how competitive the sector is. My question is for all of you.

Mr. Bacon.

[Gordon Bacon]

If you look at it from a shipper's perspective, whether it's someone loading lumber or pulses, you've built a facility along the rail line. That should be your lowest-cost option, because you're built to load out of that facility. I couldn't comment on the railways' comments about their competition, but if you take a look at a shipper that has built along one particular rail line, that's the kind of business-to-business performance and measurements of performance that I think we want to focus on. I think those are the kinds of measurement that we need to be talking about.

I would just come back again to one of the shippers' review findings that talks about how 75% of the orders were met 53% of the time. Is that something you would expect to see in a competitive environment? We have concerns with that. That's what we're really trying to address.

[André Bellavance, Bloc, Richmond—Arthabaska, QC]

Are there any other comments?

[Humphrey Banack]

When you talk about a competitive environment, I believe I heard at a meeting the other day that of the more than 200 terminals and grain elevators we have in western Canada, only five of them have access to both lines, where you can say there's competition. The vast majority have access to only one rail line.

On the numbers I quoted--hat we're 40% behind in shipping at the local terminals--I got them from my terminal on the basis of anonymity. He said that if I stood here and said where I got those numbers his rail shipping would go backwards. It's very hard to have competition in areas like that when you're dealing with one shipper.

[Greg Cherewyk]

I want to re-emphasize what Gordon said. This review was about looking at the facts. We were supposed to break away from anecdotal evidence and shipper griping. When you see facts like 100% of the demand being met 49% of the time and 90% of car plans being met 12% to 28% of the time, you have to ask yourself if that is truly somebody who is competing for business.

I'll leave you with a quote from the former CEO and president of CN, who has largely been regarded as the one responsible for the new precision railroading model. This was in his book called How We Work and Why. It's an employee manual. He talks about the good old days of railroading here and says:

Their biggest operational constraints were geographic and climatic and in many cases customers were captive because the railroad was the only game in town. You either played by their rules, or you didn't play at all. Pricing of freight service was more a matter of extorting a cut of the customer's revenue than a negotiation of equals. Given the situation of low competition and high profitability, the railroads enjoyed the best of all worlds. Service was something the railroad provided more or less on its own terms.

When those conditions exist today, where the railroad's the only game in town and you either play by their rules or you don't, wouldn't you assume that the same outcomes would apply? That service would be provided “more or less on their own terms” and pricing of freight would be “more a matter of extorting a cut of the customer's revenue than a negotiation of equals”?

[The Chair, Conservative, Larry Miller]

Thank you.

Now I'll move to Mr. Lemieux for five minutes.

[Pierre Lemieux, Conservative, Glengarry—Prescott—Russell, ON]

Thank you to the witnesses for being here.

This is an excellent discussion and certainly you're raising an excellent point, particularly with respect to service. I mean, even if there were no costs...if there were no service and no costs, it wouldn't make sense either. So definitely, the level of service and the costs are related.

I do agree with some of the comments that the service has to be guaranteed, has to be improved, and has to be more reliable, and then the costs figured out from that. There has to be a basic expectation that service will be delivered to our western farmers.

Now, there are two questions I want to ask. The first is on service.

I want to know, particularly from Greg, what specific recommendations you have about service and guaranteeing service. It's easy to say that we should have service legislation or a service model, but practically, I'd like to know what you think about that. Let's say the rail company says they're going to have 100 cars there, and they don't. Do you see that as, okay, we're just going to penalize them financially and therefore the farmer gets a better deal on his transportation rates? Or do you have something else to suggest to alleviate that problem with service? I'd like to know what your thoughts are on this solution-wise.

[Greg Cherewyk]

I've said that I've supported the fallback provisions of the panel, and their fallback provisions include our recommendation, so I'll speak to both of them at the same time.

The panel recommended in its fallback provisions that the railways provide advance notification of service changes. That was the first recommendation: that they would provide advance notification of changes to service that are affecting anybody, any of their stakeholders. The second was to enter service agreements with their customers. This was the recommendation we put forward.

Now, just to build on that and to give you some idea of what we're recommending, a service agreement is basically an agreement that defines the roles and responsibilities of both parties. It's a balanced agreement that says “these are the standards we both agree to adhere to”. It says how they agree to measure their performance--their service effectiveness--against those standards; what their agreed-upon terms are and what the terms are of the consequences for non-performance; what they agree to do in order to communicate with each other to manage problems; and what is their agreed-upon dispute resolution mechanism.

It's a service level agreement. Government has service level agreements. Microsoft has service level agreements. International and multinational logistics companies have them. They define the responsibilities of both parties. It's a contract, in effect, but it deals with service. This is what we're talking about.

In our case, for the pulse industry's service level agreement, we're not saying that you must meet 100% of my demand 100% of the time. What we're saying is this: you understand the constraints on your pipeline, you understand the seasonality of flows of coal and lumber, and you understand what's causing congestion at Vancouver at any given point in time.

We're saying, “I'm ordering 25 cars for next Thursday and you tell me what you can deliver”. Based on that commitment, we will measure your performance. So the Friday before, when you issue your final service plan and it says that you will get 20 cars on Thursday, we'll hold you accountable for 20 cars--and on Thursday. That's the first measure we'll look at. Of course, there are still 22 pages of things that hold the shipper accountable for doing all kinds of good things that make the railways efficient.

We're saying that they will provide a commitment and we'll measure their performance against it. Second, if they're going to change that plan, and we know that it'll change, we are telling them what the standard is for informing us of that change and, again, what the consequences are for not informing us. Then, once we load and release the cars, we're telling them to provide us with an estimated time of arrival. This notion that we're not going to measure the effectiveness of our ETAs and that the computer logic will be faulty is unacceptable: improve the estimated times of arrival so that our members can plan and operate efficiently and their supply-chain stakeholders can also plan and operate efficiently. These are the types of things--

[Pierre Lemieux, Conservative, Glengarry—Prescott—Russell, ON]

It's basically the same model. You're talking about, first of all, the responsibilities being balanced, and then there are performance measurements, and you want to measure from an agreed-to parameter.

[Greg Cherewyk]

At the facility level, we do, yes.

[Pierre Lemieux, Conservative, Glengarry—Prescott—Russell, ON]

Right--it would be at a facility level. There's a dispute resolution process and there's advance notice. Those would be the key elements. Is there anything else that you would...?

[Greg Cherewyk]

Yes, well, these are the core elements of the service level agreement.

Continuing with what the panel has recommended, the third one is a dispute resolution process. We're wholly supportive of the dispute resolution process that the Canadian Fertilizer Institute has worked hard on since 2006, in negotiation with the railways, and in discussions with the government. We support a regulated dispute resolution process as recommended by the panel.

[Pierre Lemieux, Conservative, Glengarry—Prescott—Russell, ON]

That would be dispute resolution between the farmer and the railway.

[Greg Cherewyk]

It would be between the shipper and the railway. It would be a regulated dispute resolution process.

Finally, there would be ongoing performance measurement, which, again, Gordon has stressed a number of times. This is where we deviate a bit from the panel. As a coalition, we've put forward an enhanced level of performance measurement, which would put it in the hands of an independent entity, not the railways, and ensure that performance measurement is done on an aggregate level across the nation.

[Pierre Lemieux, Conservative, Glengarry—Prescott—Russell, ON]

Thanks.

[The Chair, Conservative, Larry Miller]

Thank you.

We'll go to Mr. Valeriote.

[Frank Valeriote, Liberal, Guelph, ON]

Go ahead, Wayne.

[Wayne Easter, Liberal, Malpeque, PE]

I have one question first, Humphrey. You made the point earlier that if penalties were applied for non-compliance--let's say that the railways pay penalties for not having cars in place in time--the railways would in effect be protected by the railway cap, because it would only be trading dollars from within and that kind of thing. You also tied that to 50- or 100-car spots.

Can you expand on that? I think that is a critical question, because if penalties are applied, they should be penalties; they should not just get the money back in another way under the railway cap.

[Humphrey Banack]

Absolutely. I mean, what Greg said, his recommendations out of the service review...they're all recommendations followed I think across the grain industry in western Canada. The fact of the matter is that any charges to the railway for performance quality are not included under the railway cap, so there is no true financial loss to the railways; you can still hit that cap to move that grain. That would be very important to have. If it's going to be part of the legislation, we have to make sure that's coming out of the revenue cap. That's ultimately important.

[Frank Valeriote, Liberal, Guelph, ON]

Allen and Humphrey, thank you for coming this morning.

I'm curious. You wrote a letter to the Prime Minister on June 30, 2010, that I think you referred to. I apologize for not being here at the beginning. I'm just wondering: who is part of the coalition and how many farmers do they represent who are calling for this cost review now?

[Humphrey Banack]

I can't say. I know there are three western farm organizations that represent farmers across western Canada, and then--

[Frank Valeriote, Liberal, Guelph, ON]

Maybe Allen has an answer?

[Humphrey Banack]

--the National Farmers Union. They're all part of that coalition. We represent the same producers that the pulse group represents. We're both represented. I am a pulse producer and--

[Frank Valeriote, Liberal, Guelph, ON]

But we don't know exact numbers?

[Humphrey Banack]

For exact numbers? I can't put a number right on that, no.