Agriculture Committee on Nov. 21st, 2006

[The Chair, Conservative, Gerry Ritz]

We'll call this meeting to order.

Good morning, gentlemen. It's great to have you here today with us.

We have, from the Canadian National Railway Company, Peter Marshall, who is the senior vice-president of the western region, and Paul Miller, who is the vice-president of transportation services; from the Thunder Bay Port Authority, Tim Heney, who is the chief executive officer; and from the Western Grain Elevator Association, Wade Sobkowich, the executive director, and Robert Meijer, the director of public affairs. Welcome, gentlemen.

We have two hours slated this morning to talk about rail transportation, what's good, what's not, what's working, what isn't, and how do we fix it. We have two hours to come up with the blueprint to the future. That said, we'll have presentations of 10 minutes or so from each of the panel members and then move on to questions and a comment and answer period.

Starting off will be Peter Marshall, the senior vice-president of CN's western region. Mr. Marshall, please.

[Peter Marshall, Senior Vice-President, Western Region, Canadian National Railway Company]

Good morning, and thank you very much, Mr. Chair.

I'm joined, as you said, by Mr. Miller. Paul and I are both from Edmonton, so we're glad to be here on a sunny day in Ottawa.

We are appreciative of the opportunity to appear to discuss the transportation of western Canadian grain. I have some very brief opening remarks, and I'm looking forward to the question and answer session, which I think is going to be very helpful to us all.

There is no question that grain is a very important component of CN's business. On average, we move from western Canada to the four western Canadian ports about 11 million tonnes of grain, mostly shipped in covered hopper cars, about 120,000 carloads a year. We handle about half of the total western Canadian export grain shipments to these ports. We also move grain from western Canada to non-port domestic destinations within North America, and we originate grain in eastern Canada as well. In 2005, grain traffic originating in Canada accounted for about 8% of CN's total freight revenues.

We're all aware that this year's crop in western Canada is of very good quality, and combined with high carry-in and strong pricing due to world market considerations, this has resulted in a very strong movement so far this year. On the crop year to date, to the three major export ports, we've moved just under 41,000 carloads, which is the second highest amount of grain moved to this point in a crop year in the last 10 years.

We are continually looking to improve the efficiency and the fluidity of the transportation system. I'll give just a few highlights from what we have done in the last year or so to look again at improving the physical plant and the assets we have to move products out there, including grain.

We have acquired 60 new high-horsepower locomotives, high-efficiency locomotives, with a further 65 committed for 2007.

We have extended 26 sidings this year in western Canada, which is going to allow us to operate the rail line more efficiently. Of these, 25 are actually in service. We have one more coming up in Barrière, B.C., with an investment of about $73 million.

We are signalling our line between Jasper and Prince George, which currently has not been signalled. So it will now have centralized traffic control, allowing us to move trains more effectively, more safely, and more efficiently. That's just being concluded by the end of this month, an investment of about $14 million.

Like most businesses in western Canada, we are faced with having to hire more people, about 334 new employees in western Canada. Over half of them are actual train crews, manning our locomotives, and crew consists. Certainly we've seen some attrition, like most businesses, but definitely the business is growing.

We have about 11,000 covered hoppers in our current service.

More important than the nuts and bolts of the railroad, we've worked very hard with our customers in the last little while on a number of initiatives to enhance system efficiency. A good example is our GX 100 train program, which offers incentives to customers for timely loading and unloading of railcars, and two-way financial penalties if delivery times and spotting times are not met. This has been well received by the marketplace and certainly has made a big difference in our movement to Vancouver, especially this year.

We've just opened an inland stuffing container operation in Edmonton, which helps alleviate the inefficiency of westbound empty container movements and eastbound empty hopper car movements, a very good little initiative that has just opened up.

And we have some incentives to encourage the movement of grain through Prince Rupert, which is one of the most efficient corridors we have.

I think it's important also to say we've attacked all of this with a very underlying objective of providing safety to our rail operations, employees, communities, and customers, and I'm pleased to report that, year to date, as of November 13, we've reduced our number of reportable Transportation Safety Board train incidents by 21%, year over year. The main driver of that has been an improvement on our main line, with a reduction of 35% fewer train accidents.

The main line is clearly the lifeline to the ports for grain, and it has the greatest impact on our ability to move traffic. As an example, in the last week we had quite a few weather issues, with some slides in the Lower Mainland of B.C. That disrupted the movement of all traffic, not just grain. I'm pleased to say that we were back in business in short order and that things are moving very efficiently today.

I think a simple testament of collaboration and the cooperation and the industry improvement, year over year, is the fact that we've moved over 5,400 grain cars into elevator positioning and therefore loading to ports. That is about 10% more over last year. We have been putting those cars into the country and spotting them at the elevators at about 90% of our capacity plan, which is around 4,400 cars a week.

At this time of year, it's important. We get a lot of counsel from the trade that it's a great crop, prices are good, and we have to move it all. It works well when the system collaborates and works collectively. At this time of year it's important that every part of the system work in the best way it can. It is an integrated chain. No piece of the individual chain is going to be able to move all the grain in a compressed period of time, whether it be in the country, the railways, the export terminals, or the vessel shipping program. It's just too compressed to expect it to move all at one time.

We have worked hard to smooth things out. We have had great cooperation, not only from the grain industry but certainly from our friendly competitors at CP. We've done a lot of things with them over the last year.

We can only make available the number of cars that are going to move through the system expeditiously, loaded or unloaded. To place more empties into a system just invites congestion and delays and a loss of productivity. It's important that cars move quickly.

Going forward, again, I think it's important to recognize that we operate as a railroad within an integrated system: the producers, the transportation companies, the field operations, and the port operations. There are many links in the chain. I strongly believe that we have made strong strides as a group over the last several years. It has allowed us to make significant gains for the movement of grain across Canada.

We will continue to work with our partners on other new products to promote system efficiency. We'll continue to focus on tactical planning and the safe daily execution of our plan. And we will continue to make the necessary investments in plant and equipment renewal and capacity to support the western Canadian grain business.

Thank you very much.

[The Chair, Conservative, Gerry Ritz]

Thank you, Mr. Marshall.

We'll now move to Mr. Heney, Thunder Bay Port Authority.

[Tim Heney, Chief Executive Officer, Thunder Bay Port Authority]

Thank you, Mr. Chair. On behalf of the Thunder Bay Port Authority, I'd like to thank you for the opportunity to appear before you here today.

The history of the Port of Thunder Bay is based on grain transportation. The first grain elevator in the port began operations in 1884. During its peak years, Thunder Bay was the primary load point for Canadian grain exports, holding the distinction of being the largest grain port in the world and the third largest port in Canada. Thunder Bay currently ranks ninth largest of the 19 Canadian public ports, shipping an annual average of 8.5 million metric tons. It is the second largest Canadian port on the Great Lakes.

The Port of Thunder Bay and the St. Lawrence Seaway transportation corridor continue to play an essential role in the eastern movement of Canadian grain, handling an annual average of 5.9 million metric tons over the past five years, between direct ocean shipments and the servicing of transfer elevators in Quebec. The port serves markets in Europe, Africa, South America, and Mexico. In addition, western Canadian grain crops are shipped by the Canadian lake fleet through to the domestic markets in eastern Canada. Grain represents over 70% of the port's total shipments.

Thunder Bay is the largest point of origin for export cargo transiting the St. Lawrence Seaway system, providing a critical back haul for the Canadian lake fleet, travelling upbound with iron ore. The port operates from the end of March to the beginning of January each year and hosts over 400 ships per year.

The port has nine operating elevators with a combined storage capacity of 1.4 million metric tons, the largest in any single location in Canada. This storage capacity allows for the efficient use of the Canadian lake fleet throughout the shipping season, as well as unparalleled capabilities in the traceability and blending of grain. The port also has two bulk terminals capable of handling grain. The grain terminals in Thunder Bay remain focused on productivity improvements, and they have made steady improvements in railcar unloading times and vessel waiting times. The time that ships spend in port was reduced by 13.6% in the first half of this year, to an average of 1.9 days, the lowest of all western Canadian ports. This compares to eight days in Vancouver. Our average car cycle time for the first six months of the 2005-06 crop year was 18.3 days in Thunder Bay, compared to 19.3 days in Vancouver.

The Great Lakes-St. Lawrence waterway is one of the world's greatest and most strategic commercial inland transportation systems, generating over $4 billion in economic impact and roughly 20,000 direct jobs in Canada. In 2005, 43.3 million tonnes were shipped through the seaway, which is considered to be about 50% of the capacity of the system.

Marine transportation is the best mode, from the point of view of reduced emissions in virtually any situation where the speed of delivery is not paramount. The St. Lawrence Seaway Management Corporation, in conjunction with the Great Lakes ports, launched the Highway H₂O program in 2004, with the goal of promoting the waterway and diversifying cargo movement. Toll incentives for new cargo were put in place, and to date 400,000 tonnes of new cargo and $1 million of incremental revenue have been generated.

Ocean shipping is projected to double in the next 10 years, resulting from the explosive growth in the economies of India and China. This growth will challenge coastal ports and all North American modes of transport. The seaway holds great promise to help meet future transportation needs and improve our nation's energy efficiency, while lowering greenhouse gas emissions.

During the past four seasons, an average of 850,000 metric tons of wheat and barley was shipped directly by rail from the Prairies to Quebec, bypassing Thunder Bay and the seaway corridor. This is the primary threat to the Port of Thunder Bay. The seaway's nine-month operating season is often used as the rationale for this movement. However, currently five trains per week, or about 60,000 metric tons, are bypassing the seaway, and our port will remain open until early January.

With the loss of inbound general cargo in the early 1980s, only about 5% of our port shipments are inbound. The Port of Thunder Bay's current initiatives focus on increasing inbound ocean vessel traffic with European cargo destined for the booming Alberta economy, utilizing grain as a back haul.

We feel that by capitalizing on our available transportation infrastructure, we will be able to enhance economic activities in our region and increase grain shipments through the port by providing increased availability of ocean vessels in the system.

In summary, the seaway system is a strategic transportation corridor in Canada that's currently underutilized. The seaway's future success will depend on its ability to retain existing traffic and be viewed as a viable transportation option.

The Port of Thunder Bay's future success in particular is based on retaining its status as an important gateway for the western provinces. We must force costs out of the system to remain competitive, respond to the demands for a more customized approach to service, and provide new, innovative solutions to meet transportation needs and become part of the strategic transportation planning efforts in western Canada.

I have provided the following recommendations for your consideration: one, eliminate the coast guard marine services fee; two, modernize navigation services; three, adjust Grain Commission work practices to keep pace with productivity advances in the grain terminals; and finally, utilize ocean vessels in addition to the lake fleet as an alternative to direct rail to Quebec for wheat and barley shipments.

Thank you.

[The Chair, Conservative, Gerry Ritz]

Thank you, Mr. Heney.

We'll now move to Mr. Sobkowich.

[Wade Sobkowich, Executive Director, Western Grain Elevator Association]

Thank you very much for inviting the WGEA's views on grain transportation.

The WGEA is an association of eight farmer-owned public and private grain-handling companies operating in Canada that collectively handle in excess of 90% of western Canada's bulk grain exports. Our members account for about 20% of rail revenues and over $1 billion in total rail freight bills.

Mr. Meijer.

[Robert Meijer, Director, Public Affairs, Western Grain Elevator Association]

I'd like to start by putting it into some kind of context. From WGA's perspective, in a perfect world no regulation--legislation or otherwise--would likely be needed. Businesses would act accordingly. All responsibilities, obligations, opportunities, and challenges could or likely would be managed to the benefit of all participants, and in particular in this case the grain handling industry.

However, it's quite obvious we're not in a perfect world. Moreover, we're in a competitive marketplace that's growing much more international, as we know and as we speak. In this context we're facing real and immediate challenging situations within our industry, and in particular with our carriers.

Again, I'd like to thank this committee for allowing us some opportunity here this morning. We're not here today to seek market intervention. We're certainly not here to ask you to hold our hands as business partners and competitors in moving our crops to valued customers domestically and internationally. Rather, we're looking to government and this committee to help reset the table with more fair, balanced, accountable, and transparent legislative improvements and reform. In our mind this is to ensure that all parties--both shippers and carriers alike--live up to their obligations and commitments to the benefit of the grain sector and its valued producers. We've come here today with a few reasons for the reform and how we've realistically come to the decision to approach both the committee and this government with the need for legislative reform.

Both farmers and grain companies, rightfully and out of great interest, have invested heavily in the western grain handling system over the last 20 years and even beyond that. More than ever, we're finding ourselves struggling to meet our contractual commitments due to carrier shortfalls, inefficiencies, and uncertain failures. The current federal legislation does very little to assist in the correction of these deficiencies.

One measure of rail efficiency is cycle times. Despite significant investments in grain handling infrastructure, cycle times have not significantly changed over the last five years. In the same period we have seen a significant reduction in railway service and, unfortunately, reliability. In this past year we have tracked the country elevator spotting performance of one carrier in particular, Canadian National Railway. We're seeing CN spot elevators according to their plan an average of 60% of the time since the start of the crop year, and 70% of the time since we started taking this measurement. To be clear, this is not CN meeting 70% of our demand as an industry; this is 70% of the car-spotting plan CN itself put into place, which has already been rationed considerably relative to the demand of the industry.

This has caused problems in planning the movement of grain from the country to export terminal positions, and has no doubt resulted in extra costs due to additional country elevator staffing on our part to meet loading requirements when cars finally do arrive, and increased export terminal costs due to the lack of reliability of arrival times of those railcars. As shippers, we are unfortunately captive in many of our locations; a grain company situated on a railway has little or no choice but to ship product on that particular railway. Services offered under terms that in our view minimize railway costs do not necessarily meet the transportation needs of the industry each and every time.

In addition, we find that the railways are offering limited car supply--much less than the demand of the industry. This is a serious concern. In times of high demand, this creates an environment of fierce competition for these cars and their services. They assume that the grain will move eventually, and we feel they are not concerned about the negative effect that untimely movement may have on the operations of the grain companies and our valued farmers.

The railways are operating in an unpredictable manner. They are simply maximizing their returns under the current legislative environment. They cannot be expected to change their behaviour until federal transportation law is amended.

As I've spoken to, under the current CTA there is a lack of balance in accountability between shippers and carriers and little obligation on those carriers to provide adequate service. As an example, companies are required to load 100-car unit trains within 24 hours, or 10 hours for 50-car units, to achieve incentives. This also puts many of our employees in stressful situations as they wait around for those cars. When we do get them there's very little time, as I'm explaining, to load those cars. We also have safety concerns that we are always monitoring and keeping our minds on top of.

In addition, once cars arrive at port position, terminal operators must unload cars within 24 hours or they are subject to railcar demurrage. However, there is no reciprocal penalty for a railway or carrier if it fails to provide service.

The matter of reliable and efficient rail service is an issue affecting other industries as well, not just ours. The WGEA has been working with a broad coalition of shippers, including farmer representatives, the Canadian Wheat Board, fertilizer and forest products shippers, and others, to try to bring forward legislative solutions and changes to the legislation. Together, these groups account for 80% of the railways' revenues.

[Wade Sobkowich]

To pick up from there, Transport Canada told us the reason we weren't able to get these amendments in the past is that as a shipping community, we were never able to agree on what sorts of changes we needed. Earlier this year, they said if we could reach consensus as a group of shippers in Canada they would seriously consider and, in fact, make the amendments we requested, using Bill C-44 as a starting point--the old Bill C-44.

So we created a coalition of these groups Rob mentioned. I have the list for folks who may be interested. In April we reached an agreement and took our proposal to Transport Canada and staff from the Minister of Transport's office.

It's important that members of Parliament recognize that in just reaching this consensus we're talking about 80% of all the rail shipments across Canada, and the different organizations, the different industries and associations, left a lot on the table. In the interest of doing what we were challenged to do, we did reach this consensus and we took it to Transport Canada.

On May 5, 2006, Transport Canada rejected some of the requests put forward by the shipper consensus, but also agreed to some. For example, shippers had proposed amending the legislation to explicitly ensure railway accountability for service. The specific wording we wanted included in the act was: “A railway company shall not provide a level of service that impedes the ability of a shipper to conduct its business in a competitive, economic, efficient and effective manner.”

This particular component was rejected by Transport Canada, so the May 5 package excludes that particular component. The outcome was a further compromise that was less than what was requested by our coalition, but we reluctantly agreed to the May 5 package, recognizing that it would not solve all the grain industry's problems; however, these changes were seen as a significant step forward toward more balanced accountability.

The changes are intended to address railway problems before they occur, primarily by changing railway behaviour through greater accountability, and also improve upon the shipper remedies to be used once an incident does occur.

The May 5 agreement also includes a commitment by the Minister of Transport to undertake a more detailed review of level of service and railway accountability concerns within 30 days of the passage of the bill. We believe an independent review of this nature would be the best way to properly identify the magnitude of declining rail service and determine solutions to reversing this trend.

With respect to the content of what was specifically agreed--I don't want to read through all of them, they can be made available--former Bill C-44was used as a starting point, and some of the more notable changes to Bill C-44 were multi-party level of service provisions.

The CTA level of service provisions would be clarified to state that they apply to multiple party filings as well as to terminal operators. Another key one was that final offer arbitration provisions would be amended to enable groups of shippers to use the FOA process--right now it only applies to individual shippers--enable groups of shippers to arbitrate ancillary rules and charges, like demurrage for example, in addition to the line haul rates and services as at present; and remove the requirement that terms of an offer under final offer arbitration apply to all shippers in the group equally.

This was seen as pretty important, because if it were a requirement that each of the multiple parties had to be equal, they would never be equal. They all have different business sizes, different shipping locations. You would never have a situation where they could all be equal. So we agreed that item should be removed.

A review of the railway service. It was recognized that the changes we talked about above only go part of the way to address problems in rail transportation; more work needs to be done. So we proposed the CTA be amended to require an independent and comprehensive review of the level of service provisions and the effectiveness of these provisions, and that this review take place no later than six months after the passage of the bill. Transport Canada and the minister did not agree to this particular insertion in the legislation, but they did commit to undertake the review of effectiveness of the CTA level of service provision. So they agreed in principle, but they didn't agree to put it in the bill.

That's what happened in the last year to get where we are today. The grain industry was part of that overall coalition of rail shippers.

[The Chair, Conservative, Gerry Ritz]

Thank you, gentlemen.

[Wade Sobkowich]

We just have a few concluding paragraphs.

[Robert Meijer]

I will conclude, Mr. Chairman, if I could.

On a daily basis, as members of the WGEA, we do consult at various levels, of course, with our carriers. There is a great amount of dialogue that goes on in a working business day. In my view, and in our mind, what we're talking about today is a safety net, an assurance that where we can't come to an agreement and can't find solutions, there are those avenues and mechanisms that both parties, shippers and carriers, can look to for some guidance and a guarantee that obligations and commitments--to the benefit of our industry and our value producers across this country--are met and satisfied.

Really, our main objective is about balanced accountability. We accept the penalties that we pay. I could tell each of you that I don't necessarily like what we would be penalized, but when we do wrong, and where we create issues, I think it's only fair that we are held accountable. But we do need those mechanisms, where it introduces a more balanced and fair level playing field within the system. In our view, the best way and the only way for that is legislative reform.

If we don't get to that point and we find ourselves in a continued dialogue situation between shippers and carriers, this will get much worse than the concern we're expressing today. We will lose grain sales, both domestically and internationally. We will lose revenue within our industry, across all sectors, right down to the producer, unfortunately. There will be significant vessel demurrage costs. Worse, there will be a lost reputation of Canada being a reliable and consistent-quality shipper and provider of grains throughout the world.

Thank you.

[The Chair, Conservative, Gerry Ritz]

Thank you.

We'll now move to our question rounds, starting with Mr. Boshcoff, for seven minutes.

[Ken Boshcoff, Liberal, Thunder Bay—Rainy River, ON]

Okay, start the clock now.

[The Chair, Conservative, Gerry Ritz]

I started it two minutes ago, Ken, but that's okay.

[Ken Boshcoff, Liberal, Thunder Bay—Rainy River, ON]

Mr. Heney, if Thunder Bay can turn a car around in six days less than Vancouver and in five days less than Prince Rupert, and you can get the train back essentially without dismantling it, if it was spread between the coasts, wouldn't that make the entire grain movement system much more efficient?

[Tim Heney]

Well, certainly car turnaround is a big factor. I think the elevators in Thunder Bay have come a long way in that regard. A lot has to do with the incentives placed on larger car blocks. They've responded to that. There are a couple of facilities in Thunder Bay that are capable of unit trains. I'm not sure that the grain sourcing on the Prairies is capable of supplying 100 cars at one time on a regular basis. There are bulk facilities, beyond the elevators, that could also turn cars around fast. Those haven't been used in probably five years. But certainly turning railcars around in a rapid way is a goal of everyone in a port.

[Ken Boshcoff, Liberal, Thunder Bay—Rainy River, ON]

When we talk about that and get into the environmental aspect, maybe I'll ask CN that question.

If we use 850,000 metric tons, which would essentially be 35 vessels, it's not only taking the cars out for that much longer a period of time, but there has to be an economic impact on the seaway and the Port of Thunder Bay. I'll ask that first. What would the economic impact be to the Port of Thunder Bay, or our seaway system? If they went from Manitoba to Thunder Bay and back right away, how much greater assistance would that be to, say, the WGEA?

[Tim Heney]

In terms of the car turnaround time, I'd have to defer to CN about how long it would take to get the cars back from Quebec versus going to Thunder Bay.

The economic impact is generally considered to be $50 a tonne. So on 850,000 tonnes a year, you're looking at about $400,000 for economic impact of the seaway--if it had gone down the seaway.

[Ken Boshcoff, Liberal, Thunder Bay—Rainy River, ON]

Four hundred—?

[Tim Heney]

I'm sorry, it would be $4 million.

[Ken Boshcoff, Liberal, Thunder Bay—Rainy River, ON]

Okay, $4 million. Thank you.

In your conclusion, you talk about ocean vessels versus the lake fleet. Is there a reason the CWB has given you as to why they won't use salties?

[Tim Heney]

They say that they're unreliable in supply, that the ocean rates fluctuate, and they gave various other reasons. The quandary we're left in is that most of our non-board grains that go through the port, which comprise about 35% of the grain, are carried almost exclusively in salties.

The grain companies don't seem to have a problem getting the saltie supply for their own crops. Very little, if any, of the Wheat Board crop goes by saltwater vessels.

[Ken Boshcoff, Liberal, Thunder Bay—Rainy River, ON]

I'm also concerned that the WGA mentioned that earlier this year you were advised that if you could reach a consensus, you would not only be listened to but responded to. I presume that this was essentially a consensus amongst competitors.

I know you must be feeling somewhat disillusioned. Our concern here as parliamentarians is the loss of the competitive position that with this delay.... You've gone down this path, and now the minister won't agree to it. What can we do as a committee to expedite this or make the case for you?

[Wade Sobkowich]

I'm glad you asked that question. You're right, we had a lot of debates. There was a lot of heated discussion among the shippers in Canada to reach a consensus. A lot of the discussions have really been exhausted over the last nine months.

Yes, we are frustrated. We were challenged to reach a consensus. We stepped up to the plate, and we did reach a consensus. It was a lot of hard work to bring forward the needed changes as Canadian shippers.

We had more left in the next step in the process, and we reluctantly accepted that even though it was less than what we needed, it would help expedite and be a good first step. We'll get these; we'll see how it goes; and we'll get the level of service review, because that's where we think a lot of the solutions might come from.

We're still hopeful that this is going to happen, that we'll get the May 5 amendments. But as to what this committee can do, it would be fantastic if this committee approached Transport and the minister in support of the May 5 amendments.

[Ken Boshcoff, Liberal, Thunder Bay—Rainy River, ON]

For CN, when we talk about car turnaround and availability and your own commitment to environmental concerns about vessels, versus direct to the eastern coast, is there any kind of environmental commitment where you'd say, we can help the farmers, the suppliers, and the producers if we can utilize a port, such as Thunder Bay, much more quickly and save all that time and answer the questions about car availability? Is there a philosophy within the organization?