Transport Committee on Oct. 24th, 2006

[Gary McNeil]

We're running them now, but we need to run more. But at the rate they are charging us we cannot afford to run any more. We are basically restricting our ability to put more services out, because we don't have an appeal mechanism to go back and say we need this rate adjusted.

That's really what the bill does. It gives us an ability to go to a third party that is independent, to be able to look at the rate that's being charged and say, is this fair and reasonable or isn't it fair and reasonable? Now we go to the railways, and the railways just say take it or leave it, and we have no choice.

[Peter Julian, NDP, Burnaby—New Westminster, BC]

Do you have any estimate of what the financial difference would be over the course of a normal year, for GO Transit, for example?

[Gary McNeil]

I think, for us, it sets a bellwether test. If all of a sudden they say that in order to run another train you're going to be charged 50% more, then the next time we come to negotiations every single train is going to be 50% more. So for us, on the operating side we'd probably be looking at an additional $5 million a year, in that order of magnitude, in our operating costs. And typically, we would end up having to pass that on to our customers.

[Doug Kelsey]

The first thing is, if it did not happen, I think we'd all be extremely disappointed, to say the least, having spent literally years trying to get this through. In the case of West Coast Express, there would be no expansion considered when our number one complaint from our customers is they want more service.

The timing is also very important because these are not short-term projects. You have to work on these literally for years in the planning stage. The business cycle to actually put a new service in can take a lot of time, particularly with the capital. We also have to compete internally for the value of what we do. If it does not happen, our cost structure will be far higher than what potentially could be considered...to perhaps not even consider expansion.

In our case, if you look at abandonment, you look at costs. In the case of the Arbutus corridor, I think the railway was looking for $100 million. I think it was well profiled across the country, and it's a very strategic corridor. Part of this is also the strategy of long-term planning and protecting these corridors, and making sure that urban transit authorities get to put their oar in the water, if you will, about commitments and the long-term plans. If it's still unknown and the rules of the game are not known, they can get lost. We saw that with the Arbutus corridor case, which ultimately ended in the Supreme Court of this country.

You could be looking at somewhere between a difference of what a railway might see on Arbutus corridor, of $100 million, which I think was the advertised price...whereas somebody else might see half of that. The debt servicing on that is about $5 million a year just for the capital portion, let alone the operating cost structure. As other people look at other corridors--ultimately, in this case, the Canada line was put down--those get lost in the comparative, because people elect to move on in their conversation.

Part of this legislation will cost us in operating. I would estimate even some of our track rates, as our contracts expire, could go down as much as 80% plus, which is extremely significant in what our operating cost and our viability will start to look like. What's really important here is that the railways still make a reasonable return. It's critical they do, because if not, capital dries up and moves elsewhere. They have to be protected so that there's a reasonable return.

I think the challenge is, what is reasonable? Without checks and balances through legislation such as this, then you have to negotiate with a monopoly. Can there be negotiation with a monopoly? Yes, but it's defining what is reasonable in negotiations. If you look at the average contribution of a railway in this country, they're making something less than 30%. We are in the three to four digits in some cases, historically. There's a significant impact by not putting this in place quickly so we can get on with our long-term planning to serve the customer.

[Peter Julian, NDP, Burnaby—New Westminster, BC]

Monsieur Bélanger.

[Raynald Bélanger]

Again, I have to be careful with the confidentiality of the contract, but right now for the usage of their plant we talk about a net book value. Now, depending on each contract, it's something between net book value and replacement value, except in Doug's case.

I think it's more than replacement value, from what you say.

I think it's written on the wall that they want to go from net book value to replacement value. If this happens, we're dead. It's as simple as that.

[Peter Julian, NDP, Burnaby—New Westminster, BC]

You also talked about taking the line to Marieville. That'll be another...

[Raynald Bélanger]

In our case, timing wise, I have to be honest, this is not critical to us now. If the bill is approved next spring, it won't change.... We don't have a plan to take this trackage right now. It's probably more important for GO than it is for us. I can wait one more summer for this article.

For the other ones, we cannot wait. We now have a major issue on our existing lines--a major issue coming up with the new Repentigny line, which the Prime Minister announced, and it is a project in the order of $300 million. We are in the midst of it right now. So any delays would certainly postpone coming to agreement with the railway. You can't imagine what we can argue about sometimes.

[The Chair, Conservative, Merv Tweed]

Mr. Fast.

[Ed Fast, Conservative, Abbotsford, BC]

Thank you, Mr. Chair.

Thank you to all of you for coming.

My questions are going to be directed to Mr. Kelsey.

West Coast Express is very familiar to me, as it's right across the river from my riding. It also had some controversy when it was first started, and I'd like to address that a little. I have a couple of brief questions to which I would elicit brief answers, if you may.

First of all, how long has West Coast Express operated?

[Doug Kelsey]

Ten years.

[Ed Fast, Conservative, Abbotsford, BC]

Whose track do you use?

[Doug Kelsey]

We use Canadian Pacific's track.

[Ed Fast, Conservative, Abbotsford, BC]

When does that contract expire, or are you at liberty to say?

[Doug Kelsey]

No, I'm able to discuss that. It expires in 2015, but it has an option to renew for another 21 years if we elect to exercise it, which we won't.

[Ed Fast, Conservative, Abbotsford, BC]

Is it an option to renew at current rates?

[Doug Kelsey]

Correct.

[Ed Fast, Conservative, Abbotsford, BC]

You're saying you wouldn't exercise that option if this legislation goes through, I assume.

[Doug Kelsey]

Correct.

[Ed Fast, Conservative, Abbotsford, BC]

I sense that there is a will at this table to move this proposed legislation through expeditiously. It is the previous government's legislation for the most part, and I sense that there is a will to get this done, hopefully before the next election.

In terms of cost, what's your current cost per rider? Mr. Bélanger had mentioned that West Coast Express would have been significantly higher than replacement cost. Is that correct?

[Doug Kelsey]

Yes, if you use that calculation. If we look at operating cost recovery, I took over about seven years ago, and in fairness to the railway, those were costs that we had to address internally, frankly.

I come from the private sector. If I look at it from a business perspective, it has about $150 million in assets, with an expense budget of over $14 million a year, and we're running it with only eleven people. I'd stack that up anywhere in the private sector. Our operating cost recovery has been taken from 33.5% seven years ago to what we have this year, when we'll probably hit about a 76% operating cost recovery.

[Ed Fast, Conservative, Abbotsford, BC]

But your cost per ride—

[Doug Kelsey]

For cost per ride, you'd be looking at probably just over $3 right now. It was upwards of $15, but it has come down significantly.

[Ed Fast, Conservative, Abbotsford, BC]

It was $15 at one time. I do remember that.

Could you comment on the process you went through originally when you negotiated with CP? This proposed legislation obviously wasn't in place. There was significant controversy over the fact that CP essentially held the taxpayers and the residents of the Lower Mainland and Fraser Valley up for ransom. Could you give us some insight about the struggles you went through and how this proposed legislation is going to address that issue?

[Doug Kelsey]

I'll try to be as brief as I can on a multi-year journey.

I used to work at Rocky Mountain Railtours as vice-president of operations. Having negotiated track rate contracts with VIA Rail, CN, and CP, I had seen some agreements before. Without getting into any details, when I first arrived it seemed just excessively high. I had limited experience in it, frankly.

Our contracting is very important, but what contracts are we talking about? The first one was a crewing agreement, so it expired in the first five years. We renewed it. I would applaud Canadian Pacific for being very responsible. We got some significant reductions out of it, and we signed up that contract. It made sense, and it was reasonable for both parties.

In the case of the operating of the track rate agreement, it was very evident to me that it was excessive in terms of rates. If you used a typical long-run variable costing type of calculation, which is a fairly standard type of calculation, you were looking at a four-digit type of long-run variable cost or margin of contribution. The rates were extremely high. But if you compare them to the same type of calculation, using the same methodology, for other types of what the railways' average contribution is--as I said, they're less than 30%--using the same methodology, I got 30%, with something that has quite a number of digits added on to it.

As for the process we went through, we really tried to negotiate first, on multiple occasions. In fairness to the railway, there was a 20-year agreement in place, so why would they want to make the change? What I ultimately had to do was work to create the willingness not to go back and be retroactive, because that's not appropriate, but to correct a pricing change, as most people who have been in business have had to make pricing changes.

Pricing changes are not uncommon in business on a regular basis if something's out of whack. I have done them. I used to work in a multinational organization, and they're very common. You don't have to change the contract, you just change what is called the price sheet at the back.

So over quite a long period of time, I attempted to do it through an appropriate commercial negotiation, if that could happen. Of course it couldn't happen, so I then elected to go to the Greater Vancouver Regional District board of directors in camera and the TransLink board of directors in camera. I reviewed this with them all. It was a very emotional meeting, frankly, and there was great anger once they saw what the real economics looked like. I wasn't able to share it with anybody, because that was actually one of the challenges.

I was even requested to do an editorial board review with The Vancouver Sun and The Province. I couldn't tell them anything, let alone the Minister of Transport at the time, Minister Collenette, because it had confidentiality attached to it.

So I basically met with every mayor in the whole Lower Mainland, and basically every mayor and every regional authority signed up support for trying to make a correction to this. It was exhaustive and it was challenging. Each step along the way, I communicated to the railway in question what I was going to do, in hopes that I wouldn't have to do it. I proactively communicated, saying I didn't want to do this but was going to do it if we couldn't get together.

Ultimately it came down to excessive public pressure, and it was tied into some other things strategically. At the time, I thought we had a very unique, never to happen again window, with the sale of BC Rail that was going to go on, along with some other interests that they had beyond, frankly, a relatively small commuter rail operation. I had to strategically tie in to all of those leverage points.

Ultimately it ended up with the chief executive officer and president of CP Rail having to come in, and I applaud him. Rob Ritchie, who is now retired, deserves a tremendous amount of credit for starting to put a dent into getting to the right thing. Are we there today, where we need to be? Absolutely not, but I do applaud the CEO for making an appropriate acknowledgement.