Agriculture Committee on June 22nd, 2006

[Claude Mongeau]

It's about a 35% difference, which on a $30-per-tonne basis would be close to $10 a tonne more in the U.S. than it is in Canada on average.

[Alex Atamanenko, NDP, British Columbia Southern Interior, BC]

So it's roughly $30 a tonne. Is that what...?

[Jim Buggs]

That depends on where you're coming from. If you're talking about Saskatchewan to Vancouver, maybe it will range from $25 to $30, depending on whether you are moving trainloads in big multi-car blocks or in smaller lots.

[Alex Atamanenko, NDP, British Columbia Southern Interior, BC]

We're saying that under the new legislation this may come down by a couple of dollars a tonne--is that right?

[Kristine Burr]

It's $2 a tonne.

[Alex Atamanenko, NDP, British Columbia Southern Interior, BC]

Okay.

There are 12,100 cars that are now going to come over to the government. Obviously there are a lot of other cars. Who decides how many are allotted to CN and CP? Do you divide up the territory, or is there competition in the same territory? How does that work? From where I'm living, as point X to point Y, do I have a choice? I don't understand how that happens.

[Kristine Burr]

At the moment, it's based on an historical allocation, and each railway has a portion of the Canadian government fleet. In CN's fleet, as we mentioned earlier, there are some aging aluminum cars, which everybody recognizes are outmoded. The balance of the fleet is with both CN and CP.

We don't actually have the fleet right now. It's literally in with the railcar fleet of both railways, plus any other cars that belong to shippers. There are quite a few that belong to shippers or are leased from leasing companies.

[Paul Steckle, Liberal, Huron—Bruce, ON]

Your time has expired, Mr. Atamanenko.

We will now move to Mr. Easter on our second round, for five minutes.

[Wayne Easter, Liberal, Malpeque, PE]

Thank you, Mr. Chair.

When you look at the railway profit picture, folks, you're not exactly hurting, compared to the farm profit picture. If you look back over the last 12 years, freight rates for farmers have increased massively.

First, Mr. Mongeau, you must have said at least seven or eight times that rail rates in Canada are 35% lower than those south of the border. I would suggest to you that this is somewhat misleading. They may be lower in the rail rates, but as compared to the United States, you are operating main lines now, and branch lines are virtually gone. The farmers have to get the grain to the main line; they have those additional costs. Their costs have gone through the roof, while you people have managed, by going to mainly main lines with the branch lines closing down. The farmers' costs have gone up in terms of the additional trucking costs and additional elevation costs, and then they run the grain on your line.

This is my first question to the railways. Under the formula, what return on capital are you assured? It used to be 21%. What is the return on capital that the railways are assured now?

[Claude Mongeau]

That is for the government to answer. When they set out the revenue cap, they set it out at the level they believed was fair to all parties. I do not believe there is a specific return in the legislation.

As I said earlier, moving grain is slightly less profitable for us than moving other commodities. But at the current level, it is a business that allows for the reinvestment in assets and activities.

[Wayne Easter, Liberal, Malpeque, PE]

How we would love to have that kind of return on capital in the farm community; we don't.

You've said that we should promote efficiency, the lowest possible cost, and the best services. I don't disagree with that point. The problem is that those savings have never been transferred back to the farm community. I mean, you do have a return on capital that is assured to you on your investments. And I can understand why you want to buy hopper cars; if I had that return on capital in my operation, everything I bought with that return in capital would make me money.

Let me put it this way: history has shown that the railways, with increased efficiencies in the system, have never really returned the greatest share of those efficiencies back to the farm community. You haven't; you've returned some, but I am not confident that...and it concerns me.

That brings me to the point about the FRCC, Mr. Chair, which we're here to talk about. I understand that Transport Canada has brought one report to the committee. When can we expect the other two? I understand discussions are taking place with the railways.

We know, as Alex had said, that over the past number of years the railways were charging $4,329 per year for maintenance when the cost was $1,686.

Now, to the railways, can we expect those...I won't use the word “gouged”, but certainly those “excess” maintenance costs, which were applied to the farmers under the cap, to be passed by the railways back to the producers? You've made millions. You've made millions overcharging on maintenance under the cap, and got away with it. Now we're entering a new phase. We want to forget about that old phase where you gouged--I will use that word--the farmers on transport and maintenance costs. Transport Canada let you get away with it.

Can we expect some of those excess maintenance costs to be returned from the railways?

[Judy Harrower]

From our perspective, Mr. Chair, it is premature for us to even comment on the outcome of the analysis that will be done by Transport Canada and us. We don't agree with the methodology in the past, as I think both of us mentioned, and some of the comparisons that were made.

The analysis that has been done so far is outdated and incomplete. It needs to be updated before any commentary can be made.

[Claude Mongeau]

Mr. Easter, the $1,600 is a snapshot of one year, 2004, when the railroads moved 24 million tonnes. The $4,300 is a construction of what would have been the cost 15 years ago in a year that had 35 million tonnes. The difference between those two is what equates to $2 a tonne. If you believe those numbers, you would be agreeing to the construct that 65% of the costs were not there. The difference between $1,600 and $4,300 is a 65% reduction.

The reality is that you cannot look at maintenance costs in a one-year snapshot. That's not the right way to do it. Second, if you do it, you have to do it on a volume-adjusted basis. The government, in its own report at the CTA, has taken the $4,300 down to $3,600. And we don't actually agree with that number either, but the last official number is $3,600, not $4,300. The $1,600 was never adjusted for volume; these are taken, in a misleading fashion, from bits and pieces of reports. If you agree with the construct, you would find a difference that is very much smaller than what has been discussed.

But the whole thing is largely irrelevant; we're trying to reconstruct something that took place 15 years ago. The government has decided to move away from item-by-item costing to one where we have a revenue cap that governs the revenue generation for railroads. They did that twice. They did it once, when they instituted it; they took it down by 18% in the early 2000s to provide efficiency for the farmers. What we have today is far lower than what's being paid everywhere else in the world.

So to single out one item is highly misleading.

[Wayne Easter, Liberal, Malpeque, PE]

But is the revenue cap too high? That's the key.

[The Vice-Chair, Liberal, Paul Steckle]

Your time has expired, Mr. Easter. If there's another round, we'll get back to you then.

Mr. Bellavance, for five minutes.

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

The old agriculture committees also considered the hopper car issue. But every time we come back to this subject and talk about maintenance costs, we step into a mine field. It's very hard to get specific information on the subject. Moreover, the committee asked the director general to look into this matter.

First of all, I'd like to speak to the representatives of the National Railway Company. We don't agree on the figures and there are all kinds of explanations. Mr. Mongeau, you said that it might be a temporary problem. In 1992, we did an enormous amount of transportation. However, you seem to limit the $4,329 to 1992. I thought the figures that had been given were more of an average.

Are you making a commitment to assist the Auditor General shed some light on this issue and to provide her with all the relevant documents so that, at some point, we can move on to something else?

[Claude Mongeau]

We don't have any problem providing the information. The more people look into this matter with expertise and objectivity, the better it will be. We think the actual situation is very different from what has been stated using the figures I mentioned to you and giving the appearance of $2 a tonne. So we agree that this issue should be examined carefully, with a great deal of rigour and expertise.

However, we're also saying that there should be a debate to determine whether the five percent of costs that there was under another regulatory system more than 15 years ago was a little too high or too low. That's a bit of an artificial issue. It had been debated in order to offset the increased payment for the cars so that the transfer would be made to the Farmer Rail Car Coalition without any additional costs to farmers.

We propose to achieve the same result, not only to have wagons without it costing farmers any more, but also to have better cars with greater capacity, more efficient cars, and to carry on this operation relying on productivity gains through cooperation between the players involved in the system, rather than resorting to confrontation and technical debate on figures they try to redo based on 15-year-old data.

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

When the former government decided to sell the hopper cars, I imagine the railway companies were interested in acquiring them. Is that of interest to you?

[Claude Mongeau]

We made the government an offer to buy them, if it was prepared to sell them. The vast majority of the cars used to transport products by rail belong to the railways. There's logic in that. It's the most effective method. To the extent they own the assets, they take care of them, operate them as quickly as possible, and make every effort to ensure that the system is as efficient as possible. That would be the best way to do it, at a lower cost to Canadian taxpayers and in a context where, on the whole, farmers would still have a global transportation cost advantage.

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

A number of factors were cited at the time in support of the former government's view, and yours as well from what you've just told me, that it was advantageous to sell the hopper cars to the private sector. Guaranteeing that the cars were available to transport western grain was one of those reasons. Providing better value for taxpayers and minimizing the consequences for western producers were two others.

Now that the current government has decided to keep the hopper cars, do you think that jeopardizes...

Mr. Anderson said earlier that it had been difficult, if not impossible, for producers in the northern part of his province to transport their grain.

Does the government's decision change anything for you? Do you think the service can nevertheless be provided?

[Claude Mongeau]

I think the government's decision is the right one. As regards the cars that are currently owned by the government and can be kept in service over the long term, it's not a bad thing for the government to keep them. That will reduce costs to farmers.

However, there is a problem. All the cars will have to be replaced in the next five to seven years. What's going to be done for the future? We believe the best solution is to keep the cars that currently belong to the government where they are, to agree on the terms of a new lease and for the government to give all participants directives so that efforts are focused on productivity and improving system efficiency so that we have not only the best system in the world, but also a system that would be productive enough to enable us, the railways, with the revenues we currently have, to buy the cars without increasing costs to farmers.

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

The Department of Transport is currently negotiating with the railways. Is Mr. Mongeau's suggestion being considered and can it be considered?

[Kristine Burr]

That's one of the questions we'll consider in the negotiations. We've just started talking about the future of the hopper cars. We have to think of the future. We're confident that most of the hopper cars will be available for a number of years.

As my colleague mentioned, some of them are nearing the end of their useful lives, but a lot of others will continue to be operational for perhaps 15 years. We have a little time to determine the most practical approach, in view of all the transportation issues currently being raised.

[The Vice-Chair, Liberal, Paul Steckle]

Mr. Bellavance, your time has expired.

Mr. Gourde is next, please, for five minutes.

[Jacques Gourde, Conservative, Lotbinière—Chutes-de-la-Chaudière, QC]

Canadian agriculture will no doubt evolve and change. Producers will seek crops that are more profitable for them in future. They don't have a choice: they have to evolve. In five, 10 or 15 years, there will be specific grains for pharmaceutical or other purposes. We'll have to transport specific grains in lesser quantities. We currently transport a significant volume of grains, no doubt wheat. There will be products that will have to retain certain properties. It must be ensured that they are not mixed with other grains, in order to preserve their characteristics.

Will the railway system be able to adjust quickly enough to permit high-quality transportation at an affordable cost? These grains must currently be transported by truck in order to protect those preserved characteristics. I'm convinced that grain volumes will increase, but that producers will still be concerned about transportation. To remain globally competitive, we'll have to transport those value-added products in a secure manner.