Bill C-30 (Historical)

Fair Rail for Grain Farmers Act

An Act to amend the Canada Grain Act and the Canada Transportation Act and to provide for other measures

This enactment amends the Canada Grain Act to permit the regulation of contracts relating to grain and the arbitration of disputes respecting the provisions of those contracts. It also amends the Canada Transportation Act with respect to railway transportation in order to, among other things,
(a) require the Canadian National Railway Company and the Canadian Pacific Railway Company to move the minimum amount of grain specified in the Canada Transportation Act or by order of the Governor in Council; and
(b) facilitate the movement of grain by rail.

[Dianne Lynn Watts, Conservative, South Surrey—White Rock, BC]

If Bill C-30 was reversed, that would take BNSF out of the picture or significantly decrease its competitiveness.

[James Clements]

Thank you, Madam Chair.

Good morning. We thank the committee for the opportunity to discuss the consequences of Bill C-30 for the Canadian grain supply chain. The majority of our comments this morning will focus on the provisions of the act that grant authority to the Canadian Transportation Agency to extend the interswitching limits in the prairie provinces from 30 kilometres to 160 kilometres.

As background, grain is CP's largest line of business. Grain accounted for approximately one-quarter of CP's total revenue ton-miles in each of the last three years. CP's grain movements are roughly two-thirds originated in Canada and one-third from U.S. locations. Both regions supply agricultural products to domestic and international markets. CP serves directly or indirectly multiple export terminals for shipments overseas with major outlets on the west and east coasts, the U.S., and Mexico. The majority of CP's grain traffic is regulated, with two-thirds of our 2015 grain revenue relating to that traffic.

The grain supply chain starts at the farm gate. Every tonne of grain is loaded on a truck, and as a result, producers have the freedom of choice as they determine both the destination and the timing of their deliveries.

There's a high degree of coordination required within the grain supply chain, particularly with respect to grain moving to marine ports for export. The capacity of that system is determined by the capabilities and operating practices of the entire supply chain, and not just rail.

I'll note that it's important to understand the context that led to the introduction of Bill C-30 by the previous government. In the 2013-14 crop year, CP moved a record amount of grain. The challenge that the system faced was driven by the fact that the capacity of the system did not match the demands created by an extraordinary grain harvest. The crop that year was 23.5-million metric tonnes larger than a typical year's grain crop. That's the equivalent of an extra 13 Rogers stadiums full of grain that hit the supply chain at once, or put another way, more than double Canada's typical export movement of potash.

The system's ability to respond to the challenge in moving the large grain crop was compounded by the winter of 2013-14, which was extremely harsh. The weather pattern set in for a lengthy period of time across the entire North American supply chain. As Mr. Emerson's report noted:

In spite of the challenges confronted by the grain-handling-and-transportation system, it still managed to move record volumes of grain under some very difficult conditions.

Temporary, extraordinary demands like the ones in 2013 pose a significant challenge. No efficient supply chain in the world is designed to handle extraordinary, atypical volumes under abnormally challenging operating conditions. A system built to handle these outliers would be under-utilized and/or under-compensated at all other times.

Although we are used to and prepared for dealing with challenging winter conditions in Canada, extremely cold temperatures require the railway to run shorter trains at slower speeds in order to operate safely. This reduces overall system capacity. The unusual, cold temperatures also caused the seaway, an important grain outlet, to be closed for a month longer than normal. Once the weather improved, the supply chain moved record volumes of grain. This performance was already in place before the legislation was passed, and it would have happened in the absence of any legislative intervention by Parliament.

Fundamentally, Bill C-30 was based on a flawed premise, namely, that Canadian railways had the ability to move an extraordinary volume of grain but were choosing not to. This premise simply defies logic because moving grain, our largest line of business, is how CP makes money.

The stated goal of the Fair Rail for Grain Farmers Act was, and I quote from a press release of March 26, “to help the entire grain transportation system reach the goal of getting product to market quickly and more efficiently following a record crop year for...farmers.” It was never clear how the legislation would actually achieve that goal.

At the time we cautioned that Bill C-30 would have a negative impact on Canada's competitiveness, threaten job growth and investment, and hinder the grain supply chain. The data over the past two years demonstrates that Bill C-30 has not resulted in the movement of any more grain. Regrettably, this legislation is harming capacity, efficiency, and competitiveness of the Canadian supply chain to the detriment of all shippers and the performance of the Canadian economy.

The extension of interswitching limits from 30 kilometres to 160 kilometres for all commodities in the prairie provinces is our major concern. The change has harmed the supply chain in three distinct ways: overall rail system capacity has been reduced as a result of the added complexity and variation; U.S. railroads have been given an unfair competitive advantage, which is drawing traffic away from Canadian railroads; and the regulated rate that Canadian railways can charge for interswitching is non-compensatory, so we lose money for every car that we interswitch, which undercuts investment in capacity-building infrastructure that could help move grain at a greater velocity in the future.

Overall system capacity declines because the extended interswitching limits reduce our operating efficiency. Interswitching creates additional work events to process cars to and from interchange locations.

The last thing a railway needs to do is to try to get air through railcars at -35° C. The extra work increases time and complexity in the supply chain. These inefficiencies reduce capacity and velocity for all players.

Bill C-30 also puts the Canadian railways at a competitive disadvantage to the U.S. railways because there is no reciprocal interswitching provision in American law. The expanded interswitching limit in Canada gives U.S. railroads significant reach into Canada, and has caused Canadian traffic to be interswitched to U.S. railroads. The lack of reciprocity in the U.S. prevents Canadian railways from doing the same in the U.S. For the 16 months from May 2015 to August 2016, BNSF obtained 3,945 carloads from CP through the application of extended interswitching regulations. Currently, the volume of this traffic is relatively low and involves six customers, but it is growing rapidly. Almost one-third of the BNSF interchange traffic related to non-grain commodities.

Perversely, an unintended but real consequence of extended interswitching is that 20% of the volumes are inbound to Canada, meaning that Canada is subsidizing U.S. exports into Canada, and these volumes included grain. All traffic interswitched with the BNSF runs the majority of its movement in the U.S., increasing density and therefore efficiency of the U.S. system, allowing U.S. carriers to earn profits and pay taxes to a foreign government, and providing jobs to U.S. workers.

The lack of regulatory harmony in the rail industry is inconsistent with the access reciprocity that exists in other transport sectors. Air transport access for the Canadian and American air carriers is governed by bilateral air agreements negotiated on the basis of reciprocity. Similarly, access regulations governing coastal and inland marine services in Canada and the U.S. are reciprocal. The lack of reciprocity for the rail industry harms Canada's economy, and the expanded interswitching reach is pulling traffic south of the border. We ask why the Government of Canada's preferred policy position is to see rail traffic moved to American railways for shipment?

The current government has made a promise to Canadians to make policy based on evidence, and we applaud them for that commitment, but Bill C-30 is a perfect example of a policy based on politics, emotion, and anecdote, without any reference to data and evidence. Now, with the benefit of two years of data generated after Bill C-30 became law, we submit that the evidence demonstrates that the extended interswitching limits cause far more harm than good, both for the grain shippers the act purports to help and the broader Canadian economy.

Every legislative review of extended interswitching limits has reached the same conclusion. The panel conducting the first review of the CTA in 2000-01 rejected calls for extending interswitching limits and recommended that the 30-kilometre limit be retained. The panel said at the time, “expanding the interswitching limits would worsen the market-distorting aspects of the interswitching rate regime and would be a step backward.”

The more recent review, headed by Mr. Emerson, recommended that the extended interswitching limit be allowed to sunset. The negative consequences for infrastructure investment, system capacity, and supply chain efficiency are strong grounds for the sunsetting of Bill C-30.

We urge the committee to listen to the evidence-based advice and analysis in the Emerson report and past reviews of extending interswitching, and allow the sunsetting of the Bill C-30 provisions. We have the most efficient rail system in the world. Layering on further regulation of the grain supply chain is not the answer.

What will help move Canadian grain to international markets? Market-based capacity-building infrastructure investments and innovation that drive operating efficiency improvements across the Canadian grain export supply chain. Here we have good news to share. Over the past two years, country grain elevator and port capacities have been increased. CP has invested record amounts in new and expanded infrastructure that will improve the rail system's ability to move higher volumes of grain more efficiently. CP has also developed new programs that improve asset management and availability for our grain customers and provide them better predictability to what they can sell to international markets. These are the features of a rail system that will actually improve the performance of the Canadian grain supply chain, and this should be our collective focus going forward.

Thank you.

[Janet Drysdale]

While quotas are an ineffective means to increase capacity, extended interswitching is far more problematic, undermining Canada's export agenda and exacerbating the looming issue with respect to railcar capacity for grain.

For those of you who travel by air to Ottawa, I imagine that given the option, you prefer a direct flight. Having to connect reduces your efficiency in trying to get from point A to point B. Like a connecting flight, extended interswitching introduces delays, sometimes significant, and uses up precious railcar capacity, reducing the overall throughput of the supply chain.

For every day that extended interswitching adds to the entire grain fleet, 785 additional railcars are required to move the same amount of grain. That translates into an additional supply chain expense of more than $100 million, directly impacting the competitiveness of Canada's grain exports.

Extended interswitching, over time, will also stifle investment. In April, fire destroyed a bridge on CN's rail network in Mayerthorpe, Alberta. Forty per cent of carloads originating or terminating west of that bridge fall within extended interswitching. If the only compensation CN received were the regulated interswitching rate for that traffic, we would not have been able to justify the $10 million required to rebuild the bridge. The same fundamental concern applies to all kinds of capital requirements across Canadian rail networks. When regulations discourage investment, we are putting the sustainability of Canada's supply chains at risk.

Another very serious concern with extended interswitching, which also discourages investment, is the opening up of Canadian traffic to U.S. railways. Extended interswitching enables U.S. rails to draw Canadian traffic onto their network while paying extremely low regulated rates to the Canadian railway performing the interswitching, thereby improving the density of the U.S. rail network and improving the U.S. railway's reinvestment capabilities.

As Canadian traffic is diverted to the U.S., the investment to maintain a safe and fluid domestic railway will by definition need to be spread over a smaller traffic base. Two things are likely to result from that: one, the need to charge higher rates on the remaining Canadian traffic; and two, the likelihood that some reinvestment simply does not take place, ultimately reducing Canada's competitiveness, particularly with respect to export supply chains.

In the U.S., switching rates are commercially negotiated, and there is no forced access provision equivalent to Canadian interswitching. The poaching of Canadian traffic by U.S. railroads without reciprocity will negatively impact reinvestment in our nation's transportation system. Rest assured, we are not suggesting that Canadian rails are not prepared to deliver or receive traffic from U.S. rail carriers. We are simply saying that the terms to do so should be based on commercial negotiations, thereby ensuring a level playing field in how Canadian and U.S. rails interact on both sides of the border.

The notion that extended interswitching is an important customer lever in price and service negotiations overlooks how much regulation and competition already exist. With respect to price for grain shipments, railways are already regulated under the maximum revenue entitlement. With respect to service, it is important to remember that all grain starts in a truck. Eighty per cent of western elevator capacity is either dual-served by rail, within the 30-kilometre interswitching regulation, or within 50 truck miles of CN or CP. Those existing competitive options operate far more efficiently than extended interswitching.

Shippers also already have the benefit of other regulatory measures that address price and service issues, including final offer arbitration, common carrier obligations, level of service complaints, and service level arbitration provisions. It is also very important to note that close to 75% of CN's grain is now moving under commercial terms that include reciprocal penalties for car supply and car usage.

We are already dealing with the unintended consequences of regulation in the country's Vancouver trade corridor, where significant investments cannot be justified by rail companies because the regulated returns are simply insufficient.

Canada needs a transportation policy that supports our export-oriented economy with innovation and investment. Market-driven forces have enabled Canada to create a world-class rail network, in which Canadian shippers benefit from rates that are among the lowest in the world. We would like to keep it that way. If we collectively hope to do so, Bill C-30 must be allowed to sunset.

Thank you.

[Sean Finn]

Thank you, Madam Chair.

Hello everyone. My name is Sean Finn and I'm the executive vice-president of CN. I'm joined by my colleague, Janet Drysdale. We appreciate the opportunity to meet with the committee to share CN's views on Bill C-30, the Fair Rail For Grain Farmers Act.

I would like to take this opportunity to confirm that CN is ready to transport grain this fall. Our locomotives, train crews and railcars are ready to serve our clients and Canadian farmers.

Regarding Mr. Pellerin's comment on the grain shortage on the south side of Vancouver last week, the explanation is very simple. The grain was not transported because it was not available last week for delivery to a market. So there is no danger with regard to transportation in Vancouver or issue with supplying grain to the network.

We are pleased that the committee has decided to review the provisions of Bill C-30. We recognize that, as a result of the serious backlog of grain in the 2013-14 crop year, the government of the time felt it had to take some action. However, the reality is that the grain would have moved at the same pace without this bill. The situation in 2013-14 was a result of the largest crop on record, combined with one of the longest and most severe winters in recent Canadian history.

To operate safely, railways must reduce train length in severe cold weather, which significantly impacts our capacity. We assured the government of the day that as soon as extreme winter conditions broke, which they did ultimately, we'd quickly ramp up to meet the capacity of the export terminals. The government felt compelled to bring in the quotas, but wisely, they were set at realistic levels based on what we and others recognized was the capacity of the supply chain. While there were a few individual weeks when we missed the quotas, overall we exceeded them.

CN believes the quotas are unnecessary and fail to recognize the importance and interconnectedness of the grain supply chain. If any part of the chain—ports, export terminals, vessels, or country elevators—is not operating at peak efficiency, the whole system suffers. We are only as strong as our weakest link.

Regulation that singles out only one component of the supply chain is, in our view, unnecessary and ineffective. I would also suggest that the quotas send the wrong signal to other Canadian shippers, by definition implying that their traffic does not have the same priority. This is not the message we want to convey to any of our customers, particularly other bulk exporters that are also competing in the global marketplace, as well as those shippers who choose to use Canadian ports and railways when they have other options.

[Perry Pellerin, Chairman, Saskatchewan Shortline Railway Association]

Good morning, Madam Chair and committee. First, thank you for inviting me to speak today and for giving the Saskatchewan Shortline Railway the opportunity to supply our thoughts on your study of the amendments to the Fair Rail for Grain Farmers Act.

As you are aware, short-lines transport approximately $500 million worth of commodities per year in Saskatchewan alone. The vast majority of this is grain, with producer cars making up over 65% of that number. The success of grain farmers is critically important to us, and we appreciate the opportunity to contribute in this topic.

The sections under discussion today are timely and critical to Canada's reputation as a reliable export partner. The volume of grain being produced in Canada is growing each year, and we believe that the future of transportation should include improved, competitive choice for farmers and shippers. We believe to achieve this the following points are critical.

Firstly, maintain Bill C-30 provisions which afford the agency more power. Second, create a rail transportation ombudsman, in the hopes of achieving real-time correction of issues that adversely affect the economy. Third, re-examine the minimum volumes model. Fourth, extend interswitching provisions to local carriers, short-line railways. Fifth, we believe we need to act quickly on small, isolated issues. These are issues that usually fester and soon become very costly and much larger issues in a short time. I think over the past few years, since 2013, we've been looking for a global fix for the grain transportation issue, but instead maybe we should be looking at more isolated problems and fixing those problems before they become larger ones.

Regarding agency powers and the ombudsman, subsections 5.1 (8), (10), (11), and (12) of the Fair Rail for Grain Farmers Act deal with agency powers in some form. The Saskatchewan Shortline Railway Association does not support any changes to the act that would limit the minister's or the agency's ability to delegate, arbitrate, set penalties, or require a railway company to compensate those adversely affected by failure to fulfill service obligations.

To support and encourage competition, there must either be competitive choice by several service providers or an increase in policing of service obligations to ensure that a limited choice of service providers fulfill their service obligations. While interswitching, which I will discuss shortly, allows for some increase in competition, Canada is largely at the mercy of two national freight carriers, CN and CP. Any disruption to service obligations affects Canada's international reputation as a reliable, safe transportation network. The service disruptions in 2014 have already negatively impacted our reputation. With increased technology and yields, Canada's farms will only continue to grow, increasing the strain on the rail network.

The Saskatchewan Shortline Association feels that a critical piece missing from the grain transportation system is a transportation ombudsman. It is extremely foolish to let issues build to a breaking point as they did in 2013-14. The current system of dealing with the railway company's failure to fulfill its service obligation is slow, difficult to manage, and inefficient. This harvest season has already seen signs of 2013-14. But in the current system, again, we'll only be able to discuss issues after the fact, and cannot deal with them in a simple or timely manner.

We're having issues today on the south shore that would have directly affected customers such as Columbia Containers, which in week nine had to cancel all new orders because of a backlog of traffic. If farmers and shippers and stakeholders had an easy and accessible place to log concerns as they arise, it might be possible to avert issues rather than reflecting on them post-disaster. A public advocate, appointed by the minister, would be an excellent way to represent the interests of the public and stakeholders by investigating and addressing complaints and violations in real time. The ombudsman could easily identify systematic issues leading to poor service and attempt to resolve them through recommendations or mediation without the red tape so systematic in the current transportation system. We don't need more regulation. We need more timely actions.

In essence, an ombudsman would allow the government to protect Canada's export capacity proactively rather than reactively. It would also protect the smallest shipper to the largest shipper, and in some cases probably even protect the railways.

This brings us to the topic of minimum volumes. We support measures to encourage the movement of grain. However, there has been some unintended negative consequences to minimum volume regulations.

First, locations that are further geographically from the port are being unfairly disadvantaged. It is logical, less costly, and more logistically efficient to move grain from Alberta and western Saskatchewan to port than it is for the rest of Saskatchewan or Manitoba. This is not fair for farmers who are further from western port positions.

Second, customers shipping to the U.S., for example, those shipping oats, are negatively impacted, as CN and CP have trouble logistically meeting the minimum grain targets if they have to focus resources on these customers. This is not fair for farmers growing certain types of grain, and has a false impact on what farmers choose to grow in the future.

Third, small shippers are disadvantaged, as short-lines and producer cars do not always have enough volume to regularly ship assembled 130-car unit trains. As a result, large grain companies with huge storage facilities or mainline points are preferred for the mainline carriers.

The current obligation to move grain, which is in essence a positive provision, encourages CN and CP to favour large unit trains from large grain companies as close to western ports as possible, disadvantaging the eastern sites in western Canada and those shipping to the U.S., small shippers' producer cars, and subsequently short-lines. Small shippers deserve the right to move cars when sales are made, not when everybody else is done.

Michael did a very nice job on interswitching. Interswitching is, or could be, a useful and effective competitive access provision. It allows shippers access to the entire Canadian rail network and is a critical decision point for some shippers when deciding to do business in Canada.

Interswitching regulations do not benefit short-lines in their current form. We are only connected by an intermediate railway that can set intermediate or interswitching rates. A recent example of this is one class I carrier who set a rate of $2,600 to move a car one mile.

As a result, this makes short-lines a less attractive option to shippers looking for a location to build facilities with low-cost access to both CN and CP for competitive purposes. It would be ideal for short-lines to have interswitching regulations apply to us or not have the regulation at all. Currently this is actually a disadvantage for us, for the fact that if a new customer is looking to build a facility, especially in Saskatchewan, he's not going to look at a short-line. Under the current way that interswitching works, he doesn't have access to both carriers. He's much better to build on CN or CP.

In conclusion, we believe it is important to maintain the provisions of the Fair Rail for Grain Farmers Act, which provide the agency and the minister with the power to effect needed change. We also suggest taking one step further, the establishment of a rail transportation ombudsman to act in a timely fashion and prevent disasters like 2014.

As well, we believe there are added provisions needed for a minimum grain shipment section to ensure the act is indeed fair for all grain farmers.

Finally, we'd like to see interswitching provisions extended to short-line railways or abolished. Under the current form, as mentioned, it's a disadvantage to us.

I really appreciate the opportunity to speak here today, and thank you for all the work you have done. I want to express that time is of the essence. We've been talking about this, it seems like forever. Again, we're getting into trouble and we need to do something about it.

Thank you.

[Michael Bourque, President and Chief Executive Officer, Railway Association of Canada]

Thank you, Madam Chair.

My name is Michael Bourque. I am the president and chief executive officer of the Railway Association of Canada. With me today is Gérald Gauthier, our vice-president.

I'm here to speak on behalf of our federally regulated railways and to discuss our concerns with the Fair Rail for Grain Farmers Act, and in particular, the effect that interswitching provisions have on the railway sector and the customers it serves.

The Railway Association of Canada represents more than 50 freight and passenger railway companies. Our membership includes the class I freight operations of CN and CP and more than 40 short-line railways across Canada. It also includes Canada's principal passenger, commuter, and tourist railways. Since you will be hearing from CN and CP shortly, I will focus on the impact on short-line railways, but the detrimental effects of these provisions apply to class I railways as well.

Short-line railways are a vital part of Canada's transportation system. They own approximately 20% of the national rail network. One in five carloads originates on a short-line railway. These railways transport everything from bulk commodities such as metals, lumber, and grain to manufactured goods, accessing the high-density continental network operated by CN and CP.

Short-line railways provide an essential feeder service for businesses situated in rural and remote areas across the country. This service provides shippers with a cost-effective and energy-efficient option for moving their products to North American and global marketplaces.

Short-lines compete with trucking, but they are significantly different. They run on private track, not on public roads. They have lower emissions, lower greenhouse gases, and they don't congest our roads or wear them out.

Under the existing interswitching rules, a shipper serviced by one federal railway can ask the railway to move its traffic to the point where its line connects with another federally regulated railway, or the interchange point, at a prescribed rate. These rates are cost based. Subsection 128(3) of the Canada Transportation Act states that:

In determining an interswitching rate, the Agency shall consider the average variable costs of all movements of traffic that are subject to the rate and the rate must not be less than the variable costs of moving the traffic, as determined by the Agency.

As the vast majority of traffic interchanged in this country is between CN and CP, it is their costs, not the costs of short-line railways, that are considered by the agency in its rate determination. This is a fundamental flaw in the methodology as it does not align with short-line railway's unique cost structure. The RAC, our organization, has voiced its concerns to the Canadian Transportation Agency many times, including during the very brief consultation process that supported Bill C-30. Rates under the interswitching provisions are not compensatory for short-line railways.

It is important to note that short-lines have access to a limited revenue stream and are unable to make systemic improvements or expand and build their infrastructure at a rate comparable to class Is. Short-line revenues are sufficient for the purposes of maintaining existing infrastructure in accordance with regulatory requirements, but they just do not have as much investment to put in as class Is.

Over the last three years, the costs of operating a railway in Canada have increased for short-line railways. The new rail regulatory requirements for rail crossings, minimum insurance requirements for dangerous goods, and increased fuel costs have put their long-term sustainability at risk. You will recall that as part of your review of Bill C-52, short-line railways testified that the proposed minimum insurance requirements would create a substantial cost for them, and they have.

By the way, we're not arguing against these safety regulations, on the contrary. I'm simply noting that they, especially crossing regulations, have been very costly for short-line railways.

If maintained, the existing interswitching zone of 160 kilometres can have a detrimental effect on the short-line sector by further eroding their access to the revenues they require to maintain, upgrade, and expand their infrastructure. Over time, the resulting effect will be a slow and steady decline of short-line railways in Canada. For shippers in rural and remote areas, their rail link to a low-cost, safe, and highly efficient class I rail network will be lost.

In closing, the reality is that interswitching provisions, in their current format, are harmful for the rail sector in Canada. In no way can this regulation stimulate or incent the investments that are required to improve the movement of goods by rail in the Prairies. In fact, there is a demonstrable need to create a dedicated funding program for the short-line railway sector, and I would be glad to come to talk to the committee about that at another time.

Short-line railways in the U.S. have a different support structure, which includes a variety of dedicated federal and state-level funding programs. To date, there are no similar programs available to short-line railways in Canada.

The interswitching provisions brought forward under the Fair Rail for Grain Farmers Act were introduced as a temporary measure, hoping to facilitate a more efficient movement of grain in the Prairies. With the 2013-14 grain crisis behind us, we believe that the provisions should be allowed to sunset and that the public policy discussion should focus on how Canada can stimulate the investments required to remain competitive and move goods to the marketplace more efficiently and safely.

Thank you.

[Kelly Block, Conservative, Carlton Trail—Eagle Creek, SK]

I know that in the last session we developed a habit of extending our meetings in order to accommodate a fairly aggressive agenda. I'm not opposed to extending meetings for that purpose.

If the government members are not willing to schedule a time during committee to have a conversation with members of the opposition to determine what the fall session is going to look like, regardless of whether or not we talked about extending a study on interswitching, for example, on the provisions that were being phased out in Bill C-30....

Yes, we agreed to do that. We put that extension in place until August 1, 2017. We said we would report back by that time. There was an agreement to do the study, but we didn't sit down and say that it's going to happen at the very beginning of the session, that we're going to take this many meetings to do it, and that we're going to launch into another study.

I think it's a sign of disrespect to members of the opposition not to plan to have that conversation at the beginning of a session. While you say you're reluctant to do that unless we extend the meetings, I think there's an expectation that it should be one of the first things that happens during a committee meeting at the beginning of a session.

[Kelly Block, Conservative, Carlton Trail—Eagle Creek, SK]

I'm extremely grateful for the fact that we are continuing on with our discussion with you, Mr. Emerson. As we've gone through an hour of testimony, I have numerous questions that have arisen, not only from your answers, but from questions and comments that my colleagues have been making.

I do want to follow up on the comment that you made in regard to the unfairness that perhaps is perceived or actually created in the system as a result of the interswitching provisions that were put in for our grain farmers in Bill C-30.

One of the questions I have Mr. Katib or you could answer. Is there an issue of timing when moving grain, other cereal commodities, or other cereal crops that needs to be taken into consideration as opposed to other commodities?

[Ken Hardie, Liberal, Fleetwood—Port Kells, BC]

Thank you, Mr. Emerson and Mr. Al-Katib.

I want to focus on Bill C-30, which was something that was brought along due to some extraordinary circumstances. Those circumstances haven't gone away. Our crops are continually improving, and who knows what the weather is going to deal us. I want to focus first on that, and then perhaps later in this session, I want to come back to some broader issues that you addressed in your report.

With interswitching, what I understand is that there's no big problem if we leave it at 160 for a while. We need something longer term or a longer-term strategy to migrate to something else.

[Kelly Block, Conservative, Carlton Trail—Eagle Creek, SK]

Thank you very much.

From reading the piece of legislation, Bill C-30, it's my understanding that interswitching can be applied to other commodities and take into account the various regions across the country. It's my understanding that there are various rates also contemplated. Interswitching goes back to 1904. It started with a four-mile distance. Now there are a number of distances contemplated.

If 92% of producers now have access at the 160-kilometre distance for interswitching, more than they did have before that was implemented, why wouldn't you just keep it in the legislation and then go ahead and contemplate longer distances if that made more sense?

[Ken Hardie, Liberal, Fleetwood—Port Kells, BC]

Actually, Mr. Ruest, I want to give you one more shot at this one. Very simply put, I asked a question of the CTA about this imbalance of commercial accountability. If the shipper's ship isn't there on time, they get dinged by the railway. If you haven't got your goods ready to move by the time the cars are there, you get nailed by the railway. But if the railway fails to perform, I get the sense that there is really no consequence to that, certainly not covered by Bill C-30. Is that correct?

[Jean-Marc Ruest]

I guess we'll go back to the status quo of the previous environment that existed prior to Bill C-30 being adopted. We'll go back to limited interswitching being used because there are very few connection points between the grain elevators that currently exist and a connecting railway 30 kilometres.... I don't know what the numbers are, but I would say probably 6% of the grain shippers would have access to an interswitching spot, so you lose the ability to actually interswitch and you lose the ability to use that as a point of leverage in negotiations on rates and service with rail carriers.

[Kelly Block, Conservative, Carlton Trail—Eagle Creek, SK]

Thank you.

I know you've mentioned some of the benefits of the measures existing in Bill C-30 up until now, but can you speak to whether the changes introduced in the bill change the way shippers time their requests for pickup in order to maximize the price they get?

[Fiona Cook, Executive Director, Grain Growers of Canada]

Thank you, Mr. Chair.

My thanks to the members of the committee for the opportunity to appear today and to comment on certain provisions of Bill C-30, the Fair Rail for Grain Farmers Act.

My name is Fiona Cook and I'm executive director for the Grain Growers of Canada. The Grain Growers of Canada acts as a national voice for over 50,000 farmers across Canada, who actively grow and care for a variety of crops, including wheat, durum, barley, canola, oats, corn, soybeans, peas, and lentils.

We welcome the government's decision earlier this year to extend certain provisions of Bill C-30 for an additional year, effective until the end of July 2017. Today I would like to focus on the extended interswitching distance of 160 kilometres for the prairie provinces. I am here to tell you why this measure is so important for individual farmers and why we believe it should be made permanent.

On an annual basis, roughly 50% of Canada's grain crop is exported, with 94% of it moving by rail. Of these exports, 77% are exported by rail to port; 17% are direct rail, for example into the U.S. and Mexico; and approximately 5% are by road. Close to 70% of our wheat is exported, and some commodities are even more dependent on export. Over 90% of Canadian canola, including seed, meal, and oil, is exported annually. Over 90% of Canadian oats is exported to the U.S. Canadian pulses are a big success story—they're exported to over 150 countries. In fact, we are the world's largest exporter of lentils and peas.

It's not just about the exports. We have value-added domestic processors that also need access to reliable and consistent rail service: wheat millers, canola crush plants, oat millers, and barley malters are critically reliant on domestic shipments of raw product via the rail system. In many cases, they also depend on rail to transport the finished product to Canadian as well as export markets. Many of these facilities operate very lean production lines, employing just-in-time delivery, with smaller amounts of raw and finished product moving in and out on a timely basis. Most of these operations, like the grain elevators, are captive to one railway. They are therefore essentially operating in a monopoly-like environment.

Interswitching is an effective regulatory tool that can address captive situations and encourage behaviours in the rail industry that market forces would normally drive in a competitive environment. The extension of interswitching rights to a 160-kilometre radius was put in place in August 2014. It commits a rail carrier to pick up cars from a shipper and move product to a junction with another railway. Increased access to the lines of competing railways is good for farmers. It provides new options for grain handlers and processing operations in routing, as well as a new tool in negotiating with the railways better service, rates, and terms and conditions.

Extending the radius to 160 kilometres better reflects the large expanse of the prairies and the nature of grain transportation in western Canada. The original 30-kilometre radius was intended for urban centres and moving product at port. It encompassed very few grain-loading facilities: 6% had access at 30 kilometres. Now at 160 km, 92% have access.

When grain handlers and processors experience rail service issues, this directly affects the farmer's ability to sell grain and generate cash flow for their operations. It also negatively affects the price grain handlers pay for Canada's grain, oilseed, and specialty crops.

Every order for grain hopper counts. In a complex supply chain spanning an average of 1,520 kilometres, the ability of the railways to get agricultural products to an export position is crucial to every player in the value chain, especially the farmer. When the grain handlers or processors can't move product, the result is reduced orders and lower prices to farmers, to act as a signal to reduce the amount of grain they put up for offer. This means lost revenue to farmers when they have to sell grain outside peak periods. It can also affect future sales through a loss of confidence in Canadian shippers and their ability to deliver on time.

Rail interswitching provides grain producers with alternative options for rail services. The rule has already made for more competitive freight rates and service, and has directly benefited farmers. Not only have farmers noted reduced costs, they have also gained more leverage in getting rail capacity where needed.

In fact, the greatest use of interswitching has been a passive one. Some elevators operationalize the right to interchange by applying for an interswitching rate, while others use it as a leverage in negotiations with the railways. The mere existence of the option can provide shippers with the necessary leverage to obtain better terms and conditions. Shippers report that after using interswitching and the alternate line to move shipments, the originating carrier has often come forward to offer better rates and terms of service.

According to the grain monitoring program, for the crop year up to May 20, 2016, interswitching resulted in savings of almost $4 million and almost 1,300 additional railcars put into service.

Canadian grain production has seen steady growth of about 3% per year for more than a decade, a trend we expect to continue. It's been confirmed by my colleagues here this morning. Future production is not only contingent on a farmer's ability to access and utilize new technology, but also our ability to capitalize on growing opportunities and established and new export markets, many supported by Canada's active trade agenda. The 2015-16 crop year is expected to be another big one, with estimates ranging from 70 million to 75 million tonnes. Canada's 2013-14 crop year was recording-breaking, with over 90 million tonnes harvested. We expect these trends to continue.

In conclusion, the new interswitching provision has proven itself to be an effective tool, and for this reason we believe that it should become permanent.

Thank you very much.

[Humphrey Banack, Vice-President, Canadian Federation of Agriculture]

Thank you very much for giving me the opportunity to come this morning to speak to the committee about Bill C-30. My name is Humphrey Banack. I'm vice-president of the Canadian Federation of Agriculture. I'm a grains and oilseeds farmer in central Alberta. Transportation is critical to our family operation there. We farm 7,000 acres of grains and oilseeds. Today it's very difficult for me to leave the farm. We're harvesting wheat. Yesterday afternoon I got the combines running and left them in my wife's and my brother's hands and away I went. So for me to leave the farm at this time of year is a challenge, but transportation is key to our moving forward.

As I said, our organization represents farmers right across Canada, and I think it's very important to have the farmer's view here today. Bill C-30 has several key objectives. This act amends the Canada Grain Act to permit the regulation of the contracts relating to the arbitration of grain disputes, respecting the provision of those contracts. It also requires CN and CP to move minimum amounts of grain specified under the Canada Transportation Act by the order of the Governor in Council.

I hope by the time I'm finished here today you will recognize the importance to farmers of achieving these objectives of transportation of our product and fully appreciate that when we talk of shippers we're talking of grain companies. But it's ultimately farmers who will pay these bills. All of these objectives are covered and closely related to the Emerson report, which is soon going to be coming before the House and to the minister's table.

Before I go into specific reasons why Bill C-30 needs to be maintained, let me briefly explain our position in the industry. Farmers in western Canada sell or export 70% of the wheat we produce, 50% of the canola, and 25% of the coarse grains because of a small Canadian marketplace for our product. Western Canadian grain on average has to be transported 1,500 kilometres while most of our major competing countries around the world have a much shorter haul in the range of 300 to 400 kilometres. At least 94% of those exports are moved by rail to Canadian port positions and to final destinations in the U.S. and Mexico, unlike our competing farmers in the U.S. who in contrast use trucks and barges to transport 50% of the grain they export. This provides viable transportation competition to railways. Canadian farmers have no other viable transportation opportunities.

Consequently, between 35 million and 40 million metric tonnes of western Canadian grain is captive to rail monopoly annually. In the 2014-15 year, Canadian farmers paid $1.4 billion in freight charges to export their grain. This was not paid by the shippers. The shippers are sent the bill but the freight is paid by farmers who have no way to recoup these charges outside of markets. In this equation, grain companies are little more than service providers with farmers paying the entire bill. Farmers pay for the lack of grain movement. They pay all the freight for moving the grain. They pay for disruptions. They pay for delays. They even pay the penalties charged by shipping companies when their vessels have to wait in port, for demurrage.

This is acknowledged in the Emerson report that says that if service is unreliable or unpredictable contract penalties, lost sales, and lost premiums ensue. Shippers bear these costs, which are significant, and pass them back to farmers. Our livelihood and even our monthly cash flow depends on the timely, dedicated, and concentrated efforts of the two railway companies that basically have a monopoly. Farmers' ability to manage their grain movement—and by extension their cash flow and their ability to pay their bills on time—is captive to a transportation system that is a monopoly focused solely on cutting costs and maximizing returns.

On managing the volume of grain moved by the railways, the minister must maintain the legislative authority to mandate the volumes of grain needed to be moved at any given time. The success of the Canadian grains and oilseeds industry is contingent on finding international markets, providing a competitive price for those markets and getting the product to the market in a timely fashion. All those conditions cannot be left to the vagaries of the railways that are focused on high return commodities and cutting costs and increasing returns. Because farmers have no alternatives for access to export markets and because farmers need competitive freight rates, volumes of grain need to be moved in a timely manner, especially during times of bumper crop conditions and high demand in the international markets.

In my opening remarks I said we are in the midst of harvesting our wheat crop today. It is the largest wheat crop I've ever grown on our farm, and across western Canada we're hearing huge numbers.

We're going to have another very big crop in western Canada, very similar to the one in 2013. The government needs to maintain the authority to regulate volumes through an order in council by a request to the transport minister to ensure the railway system does not neglect the grain industry. We cannot afford to let down our international markets. When well-established markets to customers are lost because product is delivered late or not at all, it is very difficult to get those markets back. Financial success and even the survival of our farms is contingent on our being able to sell our grain to pay hundreds of thousands of dollars in production costs.

It is important to note that if volumes are regulated, it needs to be done in a way to prevent unintended negative consequences. In 2014, when the volumes were regulated, the railways, in order to increase the volumes to meet the demand, left areas with longer haul distances and logistic challenges plugged with grain. Northeastern Saskatchewan is one point to take in.

The regulated volumes imposed only applied to export grain. That is where the largest issue was and is. The railways moved the necessary infrastructure and met most of those targets.

The domestic markets, both for human consumption and for animal feed, were put in peril, as both were well below accepted input storage levels for an extended period of time. From reports received, a flour mill in eastern Canada was hours away from being unable to supply flour to Tim Hortons, and feed mills in the Lower Mainland of B.C. had feeding operations on restricted deliveries. While a shortage of our daily Tim Hortons' order may be devastating personally, a barn full of birds without feed would be an industry nightmare.

As we have learned from past experience, every action has a reaction. Steps should be taken to ensure that when grain movement volume is regulated, it is done in a balanced fashion, in order to ensure that problems solved in one area do not create problems in another.

Interswitching has been a huge topic around the table this morning. It gives shippers the opportunity to shop for lower freight rates and is extremely important, and expanded distance should be maintained. It is critical that railways work within the rules and the spirit of interswitching objectives. Interswitching is a simple mechanism facing competition in what is otherwise a monopoly. People even say that interswitching isn't working. We've seen some smaller numbers; Jean-Marc showed me some numbers, such as 4,500 cars moving here. It may not be a lot, but it's important to make sure it's always there. Pulse Canada has said that where expanded interswitching is available, the freight rate has been cut by about 20%.

Thank you very much for your time this morning. I'm getting a signal from the front, so we'll leave the last couple of pages to put in at the end.

Thank you. I hope my time off the combine is well spent.