Natural Resources Committee on April 1st, 2008

[Marta Morgan]

FPAC has long been an advocate of running rights as a more fundamental structural solution to the lack of competition in the industry. Running rights would allow one railway to run over the line of another railway at rates for that portion of the trip that would be set by the Canadian Transportation Agency. There's already a precedent for running rights in certain situations within the act. We believe that ultimately that would be probably the most practical and best solution to create the incentives and the ability for real competition.

We've seen that there are some provisions within the act that have actually worked to create competition. One that works quite well is interswitching, where the agency sets interswitching rates for lines within 30 kilometres of one another. This has created effective competition in major urban areas. We know these kinds of provisions can work and we believe that running rights for rural areas is probably the most practical. So you could negotiate with one railway or the other and you would effectively allow access over the lines. I think that's really, for us, probably the best solution.

The other possibility is within the act already. There are provisions for what are called competitive line rates. This is a provision that has never really been effective. The railways have refused. It allows the railways to compete for each other's traffic, but they've never really been inclined to use it in practice. There are legislative modifications that could be made to make those provisions more attractive, perhaps, but our history with those is that the railways have avoided using them, and it's fairly discretionary to the railways. So we're less convinced that this would be effective in the long run.

[The Chair, Conservative, Leon Benoit]

Thank you, Ms. Morgan.

Now, gentlemen, who would like to start?

[Pino Pucci]

I'll start.

From our standpoint, simply put, the rail lines do not have the ability, with how they're running their assets, to deliver to the capacity of the mill. Simply, when you produce 120 cars a week and they cap you out at 70, and they have the only line in, they're not giving you the assets you require. You're forced to either find an alternate means or shut down a certain capacity at the mill, which then generally makes you non-competitive.

Basically, we would ask that either they have the ability to deliver to the mill's capacity, or if that's impossible, if they admit that they don't have the ability, then we need to have the ability to bring other cars into the mill and look after it ourselves.

But the point that really needs to get across in this whole thing is that this inability to deliver assets is their method of driving rates. They are artificially reducing what they're making available so that they can, in conjunction with that, announce rate increases yearly. I think that's the system we're operating in.

[Hal Brindley]

The major problem with the CN northern route is that I can't see how you'd have five people doing that route. The problem is they don't have the assets to move the volume that they're moving. Consequently, their trains are too long, and they can't pick up the stuff we have. So I don't think having ten carriers there is going to work. What we're trying to do is get the carriers we have do a better job with what they're doing--basically, supply cars to us so we can load product, and once we've loaded it, take the product away to our customers so they can receive it.

[John Adams, Transportation Manager, Buchanan Lumber Sales]

You asked what the perfect world would be. When we order cars at our sawmills, sometimes we're on one shift, sometimes two. We order six cars a day. If they don't bring us six cars, we have four loaders sitting there doing nothing. They'll bring them after they go home at night. They have to be more consistent. I've heard they're “out of hours” a million times this winter. If they're out of hours, hire more people so we can get five cars a day.

They put on a special switch train in Hornepayne just to serve our mills. A main line would drop off empties there, and that one train would look after Longlac and Nakina. They go to Longlac in the morning, draw some cars, then by the time they get to Nakina, they're out of hours--no cars for Nakina. Then it keeps building up, and we just can't run that way.

Then on Friday evening, when the four o'clock shift's over and everybody's going home for the weekend, the railway decides to drop off 30 cars. To satisfy our customers, we have to pay overtime, work all weekend. Then when we come in Monday morning to start work, there are no cars for regular work.

It has to be more consistent. I don't know how they'd do it, but I would think if they had more personnel...because I've always heard, as the only excuse for not getting service, “out of hours”.

Thank you.

[Hartley Multamaki]

I agree with Ms. Morgan that running rights are also a partial solution to the situation.

I also want to talk for a second about the lack of consequences as a result of having what's basically a government-supported monopoly. There are no consequences for having very poor service. The rail lines don't suffer the financial costs of delivering cars late, of not picking up cars, of capping mills at 70 cars when they should be producing at a capacity of 120 cars. There is no reason why the railway would not continue to do business the way they are because they have a government-authorized monopoly.

I would suggest that we really need to look at how they run their business at the expense of everybody around them.

[The Chair, Conservative, Leon Benoit]

Okay, thank you.

Starting the second round now, we go to the official opposition, Mr. Alghabra, for up to five minutes. Go ahead.

[Omar Alghabra, Liberal, Mississauga—Erindale, ON]

Thank you, Mr. Chair, and I want to thank all the witnesses for joining us today.

It's frustrating, given the economic conditions we've been hearing that the forestry industry is facing—the rising dollar, the slowdown in the housing market in the U.S., the shortage of skilled labour—that today we're hearing about an additional burden. I think we're talking about a whole different issue, and it's regrettable that CN and CP are not here today. I understand they were invited, but they're not here.

I find it kind of strange, and I would have liked them to respond to this question. We're saying that they have the ability to add cars to be able to meet the demand the customers are requesting. And if they have the infrastructure to do that, why aren't they doing that? If it's just a matter of increasing cars, why aren't they doing that? We know how the world works—supply and demand—and if there's demand that will be willing to pay for those additional cars, why aren't they putting on these cars?

I'm interested in hearing from the witnesses.

[The Chair, Conservative, Leon Benoit]

Ms. Morgan, just before you start, I just want to clarify that CN was invited and it said there was a conflict in the schedule of the person who would be best able to answer the questions. CP wasn't invited, just to clarify that.

Go ahead, Ms. Morgan.

[Marta Morgan]

I would like to hear their answer to that question as well.

From our perspective, I think there are two things going on here. One is that it's just classic monopoly behaviour, which is that if you can restrict supply, you can drive up prices, and it's monopoly 101. I think we've seen it in every industry that has monopoly power. You see a lower supply than you would otherwise see, so they can keep their margins higher.

I think the other factor that's going on—

[Omar Alghabra, Liberal, Mississauga—Erindale, ON]

Can I stop you there for a second? If they have a monopoly, they can still charge the same margin and still increase their top line. So I'm not sure, is there more to it than that?

[Marta Morgan]

Well, I think the other thing that's going on with CN, the railways, is that their business model is to try to optimize their core routes. So for them it's all about making the maximum dollar of revenue by keeping their core system as efficient as possible. So where you have problems is on the branch lines, not within the core system, with CN. It's getting your product from your mill. It's getting it going from your mill. Their revenue optimization system drives them to reduce car availability. That's the best explanation I can give you, but I'm sure they could give you a better one.

[The Chair, Conservative, Leon Benoit]

Do any of you wish to add to that?

[Hal Brindley]

Basically the two mills I'm talking about, Longlac and Nakina, and also McKenzie and Hudson, are on the main line, and the main-line trains are already maxed out when they leave Toronto or when they're coming to Toronto, so they don't have the facility to pick up extra cars. If they're running three maxed-out trains a day, they don't want to incorporate the fourth one if it's not going to be 100% utilized at the same time.

So we've talked to them, and we say they're not going to grow their business if they don't start the fourth train, because we have cars they can pick up. And that's where the debate is. They're trying to maximize their assets to the point where—their term is “velocity”—it makes it totally efficient from their point of view, but totally inefficient for the people who are on their services.

If they're getting paid more for petrochemicals or more for other products than they are for lumber, then we sort of fall by the wayside, because they're trying to service those other industries where they can charge more because they are a commodity-of-the-time, such as oil and gas and stuff like that.

[Pino Pucci]

I guess there are two ways of answering the question about why they as a monopoly can just keep increasing the rates even if they increase the supply. Everyone is aware that all the rail lines are printing record profits today. In a monopoly system, I guess you have one of two ways to get those record profits. The first way would be leaving the rate the same, or lowering it, and doing significantly increased volumes. The second way would be to increase the rates and lower the supply, running to the same profit dollar.

We've had direct meetings with these account reps from the rail lines, and behind closed doors they'll tell you that they're running to a profit number, period. If they see reduced demand coming from a lumber mill, it means those rates will have to go up to get the same profit dollar and the same line profit they're used to getting, period.

In light of curtailments, they take the option of announcing 7% rate increases, which only makes you have to curtail even more, making you less competitive. Inevitably, what you're doing is that you're facing a shutdown at all your operations.

[The Chair, Conservative, Leon Benoit]

Thank you, gentlemen.

Now to Madame DeBellefeuille, for up to five minutes. Go ahead, please.

[Claude DeBellefeuille, Bloc, Beauharnois—Salaberry, QC]

Thank you, Mr. Chairman.

Mr. Church, you said a little earlier that forestry companies use railway transportation about 70% of the time, and truck transportation about 30% of the time. You said that railway services cost you $280 million a year. I realize that there's a lot of talk about the problems associated with railway transportation today because it is the most used method of transportation but 30% is nevertheless transported by truck.

Given the increasing price of fuel, can you estimate how expensive it is for your industry to transport products by truck? Can you give us a figure, as you did with regard to railway transportation?

[David Church]

Unfortunately, no, we don't.

What I do know is that the companies out west that are using trucks are basically doing so because they cannot get effective rail service. So they're trucking to another railhead, putting lumber on a truck and shipping it to another railway, because the railway that serves their mill is not able to provide the equipment and the service they want—and likewise for pulp and newsprint mills out west.

So it's an increased or added cost to them. But what that cost is, I don't know. We don't get involved in those kinds of cost analyses for them.

[Claude DeBellefeuille, Bloc, Beauharnois—Salaberry, QC]

Ms. Morgan, since your association knows how much it costs to use railway transportation, why can't we have that figure for truck transportation? Does your association have that figure, which could be useful to us in our study?

[Marta Morgan]

We don't have that information right now. That's because there is a lot of competition in the trucking industry. It is not an industry which is subject to political or legislative influence, or one in which companies feel the need to band together to pursue common objectives.

We can try to find that figure. We haven't looked into it in the past, but we will certainly try to find it and provide it to you at some later date, if it would be useful to you.

[Claude DeBellefeuille, Bloc, Beauharnois—Salaberry, QC]

Based on your answer, Ms. Morgan, you're telling us today that you don't have any recommendations for the federal government to improve the trucking industry. Isn't there anything your would like to see improved in that sector?

[Marta Morgan]

No, that's true, once in a while we do look at regulatory issues to ensure that the trucking system is efficient and as cost-effective as possible, but for now, we don't have any recommendations to make which could be useful to us.

Really, the problems we are dealing with mostly have to do with railway transportation.

[Claude DeBellefeuille, Bloc, Beauharnois—Salaberry, QC]

You said that it costs the forest industry $280 million to ship natural resources and forest products, and that it represents about 25% of the railway companies' revenue. How much does it cost to transport the natural resources versus finished products?

[Marta Morgan]

I would simply like to make a clarification. The amount of $280 million, which represents about 13% of our total costs, is what we pay above and beyond what we should be paying because the railway companies have a monopoly. I cannot do the math right here, but I know that the total amount is higher than that.

Whatever the case may be, you are asking about the breakdown. Our companies produce pulp, paper, softwood lumber and panels. We have conducted an analysis broken down by product, and we realized that it was the same for each product, namely that each company spent a lot more than it would if there was competition in the system.

[Claude DeBellefeuille, Bloc, Beauharnois—Salaberry, QC]

So if I understood correctly, the amount of $280 million represents an estimate of what your industry is paying above and beyond what it would be if the system were competitive.