Agriculture Committee on June 22nd, 2006

[Claude Mongeau]

There can be no doubt that it's possible to evolve. We move a lot of products, some of which have higher value-added, and others are in larger quantities, as you said, in efficient unit train cycles.

Will the railways be able to follow the agricultural sector's evolution toward new types of production? Will that mean that more grain will have to be transported in containers? Will that mean that other innovative methods will have to be used to meet demand? We don't know all the answers to these questions, but there can be no doubt that we'll be able to rely on the agricultural sector in all Canadian provinces as a whole in the same way we move containers of very high value-added products from Asia or Europe.

[Jim Buggs]

The grain business is very important to us also; it's not just important to the farmers. It's roughly 20% of our business, so it's in our best interest to make sure our customers are competitive. If they're not competitive they're not going to ship any grain.

We work with this continuously, whether it's in covered hoppers, containers, or special linings on the covered hoppers for food-grade applications. As my colleague said, so far this year our grain movements are 20% higher than they were last year. We're working hard at moving all the product that's offered to us--at a competitive price. That's what we do day in and day out.

[The Vice-Chair, Liberal, Paul Steckle]

You have one and a half minutes.

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

Do you anticipate that the biofuel strategy might result in a drop in total grain transportation volume? Larger grain volumes could be processed in Canada. Perhaps an equally large volume of grain will have to be transported, but within the country.

[Judy Harrower]

That's a marketplace that we are continuing to get our hands around, quite frankly. I don't think we know the final outcome of how the flows will change as a result of biofuels, but there's no question that the development of biofuels will change the landscape to some degree.

[Claude Mongeau]

I think that what's happening, corn production to make ethanol, for example, or other types of production that are solutions to environmental problems, is a positive development for the agriculture industry. The railways are prepared to help them, whether it be moving grain or finished products such as ethanol, for example, which can't be transported by pipeline and will have to be transported in tank cars, very often by train.

[The Vice-Chair, Liberal, Paul Steckle]

Okay. You have exhausted your time.

Mr. Easter, for five minutes.

[Wayne Easter, Liberal, Malpeque, PE]

Thank you, Mr. Chair.

Mr. Buggs, in response to Jacques, you kind of made it sound like you're operating at a competitive price and doing everything that you can to move grain. You kind of made it sound like the railways are doing farmers a favour. The fact of the matter is that on every tonne of grain you move, you make a profit. That's fine, that's fair, nobody's arguing about that. But from the farmers' perspective, in Canada versus any other country in the world, we average 900 miles from tidewater position. Farmers have no other options; there is no competition to the railways. You can't truck grain 900 miles and be competitive.

What's crucial to the farm community is that because there isn't competition and you're both operating under the revenue cap, you have to have an efficient operation. And I will admit that you've come some distance in that area, with better turnarounds and so on, from where you used to be. But there isn't any real competition to the railways from the farm community's perspective. So what's extremely important to the farm community and certainly to us on the agriculture committee is that any cost savings that are made do in fact go back to the farm community.

You guys are doing quite fine; they're not. Their costs have gone up in a lot of areas and they continue to creep up on transportation. That's why the FRCC was so concerned about wanting to take over the 12,600 cars, because they felt they could save the farm community $30 million. The reduction in revenue cap, if the $2 per tonne is saved, will make a difference. But that's a big if. It's “if“ you folks are going to transfer any other efficiencies back to the farm community. That's why we're concerned.

I have to ask Transport Canada about the return on capital. Do you have the figures, John, on what the railways are assured under the cap on return on capital?

I'll come back to my original question. Will we see those other two reports that will give us some data? I recognize it's old data, but the fact of the matter is I personally feel you have exploited the farm community on maintenance costs over the last number of years. I can't forgive the railways for that, and I can't forgive Transport Canada for letting them get away with it.

[John Dobson, Senior Policy Coordinator, Grain Monitoring, Surface Transportation Policy, Department of Transport]

I would like to clarify the return on capital that you're talking about.

Under the Western Grain Transportation Act, there were cost-based maximum freight rates. One of the cost elements was a return on constant cost, not a return on capital but a return on constant cost, which was set at 20% in the act when the effective rate was probably closer to 25% or 30%, because the railways got productivity gains between costing reviews.

The cost of capital is one of the cost items in the normal formula that they look at as part of the annual inflation indexing. I believe the current rate for cost of capital is in the order of 9%; it's not 20%. There are two different concepts, cost of capital versus return on constant costs.

[Wayne Easter, Liberal, Malpeque, PE]

John, is there anything you can send us as background information on that?

[John Dobson]

Yes.

[Wayne Easter, Liberal, Malpeque, PE]

If you have some of that, we'd certainly--

[John Dobson]

I think it's important, though, to make the distinction between the two.

[Wayne Easter, Liberal, Malpeque, PE]

I agree. I certainly vividly recall the 20%. I think in any other business, if they could get a return of 20% in capital, my God, it'd be great--and assured so by the government.

So if it's different, then that's fine; I accept that. But I certainly would like to see the background so that we're dealing with what is on the table right now.

Relative to the other two reports, I think they would give the committee the background we need to make some decisions on the new proposal by the government. Are we going to get those two reports, or are we just going to get pieces of them? The railways are here; I know you're negotiating with the railways.

[Kristine Burr]

I'm going to ask Madam Borges to answer that, Mr. Easter.

[Helena Borges]

First of all, I think we need to clarify what was the purpose of that report. I know you were told by the Farmer Rail Car Coalition that the report was a validation of their business case. This was not the case of that report. That report was meant.... We asked the agency, at the request of both the FRCC and the railways, to determine a preliminary methodology in terms of if ever we got the law changed to make an adjustment to the revenue cap, what would be that methodology? When we asked the agency to do that, they consulted with the railways, they consulted with the FRCC, and they consulted with all the members of the grain community with whom they consult in the determination of the revenue caps as well as determination of the index. All parties were asked to sign a confidentiality agreement with the agency. All parties did so.

Given this, we have to make sure that all parties that signed the confidentiality agreement, and the agency, which is the one that got the confidentiality agreement signed, are prepared to release that information. We are in discussions with the agency. We are looking at whether there is commercial damage that will be caused, because that is the concern to the railways of releasing the report.

Ultimately, the agency will have to make the decision; it is their report. But those discussions are ongoing. I wanted you to have the context of why this information hasn't been provided yet, and what the purpose of it was.

[Wayne Easter, Liberal, Malpeque, PE]

Okay. This question is tongue in cheek, but I'm certain the railways wouldn't want to be under the Access to Information Act the way that the government has proposed that the Wheat Board be under the Access to Information Act, right? Just yesterday we passed legislation in the House that the Canadian Wheat Board, which is not a government agency and receives no funding from the Government of Canada, is going to have to abide under the Access to Information Act, which puts the Canadian Wheat Board at a disadvantage. I'll just lay that out on the table.

[The Vice-Chair, Liberal, Paul Steckle]

Mr. Easter, I need to do this, to be fair.

Mr. Anderson, are you next? It's certainly your side of the table.

[David Anderson, Conservative, Cypress Hills—Grasslands, SK]

Thank you.

Mr. Buggs, I'd like to come back to a comment you made earlier. You said that you're negotiating to broaden the permitted use of the cars. I'd like to talk a bit more about that. In the past those hopper cars have been dedicated to western Canadian grain. How do you see this unfolding? Is the intention to expand their use beyond western Canadian grain? Obviously it is. What are you going to provide in return, or what are the discussions about providing guarantees to producers in return--especially in light of my question earlier, about the fact that there was an extreme frustration about even being able to get car allocation last fall? I'm wondering if you'd address that issue.

[Jim Buggs]

Sure. This is a key point you raise.

From our point of view, we think the system would be better by using the best cars and the best application, the cars that are best suited to the application. So how does that happen? Those are the details we're going to have to try to negotiate and reach an agreement on with Transport Canada.

Part of that, though--and I fully understand we'd be prepared to give this commitment--is if we were going to use the government cars in other than regulated grain movement, we would have to give some guarantees on equivalent capacity, going back into the regulated movement. From our point of view, we think that makes perfect sense. And when we would put back a higher-capacity car with higher quality, better suited for this application, we think that it's a win-win situation.

[David Anderson, Conservative, Cypress Hills—Grasslands, SK]

Shifting their use, then, would probably make a stronger argument for upgrading them, would it?

[Jim Buggs]

That's the other thing. I was going to talk to you later because we didn't have time to get into it, but if I have a few minutes.... What the Saskatchewan Grain Car Corporation has done is to broaden the use of the car and to make the asset that they have a little more valuable. But clearly that's what they're looking at, and we're in negotiations with them as to broader applications for the use of that car. We've already struck agreements with the Wheat Board, which gives us broader application on their cars.

This is really just moving to a more productive, efficient understanding, documented in writing with rates and terms and conditions as to how this happens.

[David Anderson, Conservative, Cypress Hills—Grasslands, SK]

Farmers don't want to lose that capacity. I assume that you're willing, then, to guarantee that similar level--

[Jim Buggs]

That's right. An equivalent capacity guarantee would be a key provision, a key guarantee, and you would have Transport Canada there to monitor and record that and make sure that we adhere to the responsibilities and accountabilities that we undertook.

[David Anderson, Conservative, Cypress Hills—Grasslands, SK]

Does CN see this the same way?