Transport Committee on Nov. 27th, 2007

[The Chair (Mr. Mervin Tweed (Brandon—Souris, CPC)), Conservative, Merv Tweed]

Good morning, everyone, and welcome to meeting number three of the Standing Committee on Transport, Infrastructure and Communities. Pursuant to the order of reference of Monday, October 29, 2007, we are examining Bill C-8, an Act to amend the Canada Transportation Act (railway transportation).

Joining us today, we have our guests: from the Railway Association of Canada, Mr. Cliff Mackay; from Canadian Pacific Railway, Mr. Marc Shannon; from Canadian National Railway, Mr. Jean Patenaude; and from Ottawa Central Railway, Mr. James Allen.

It's my understanding that Mr. Mackay will be presenting. We have 10 minutes. I'm not opposed to your sharing the 10 minutes, but then we'll go to a question and answer session from the committee.

Mr. Mackay.

[Cliff Mackay, President and Chief Executive Officer, Railway Association of Canada]

Thank you, Mr. Chairman.

I intend to speak for most of the time, and then I'm going to ask my colleague Mr. Patenaude to say a few words as well.

The Railway Association of Canada, as many of you know, represents some 60 railways across the country, which number represents virtually the whole railway community in Canada: the large class 1 freights, the short lines, regional railways, intercity passenger and commuter railways, as well as a number of tourist operators. I'm very pleased on their behalf to be here today to speak on Bill C-8.

Just to give some background, the state of Canada's transportation system is far different today from what it was 10, 15, or 20 years ago. The current reality of Canada's transportation infrastructure is that there is no longer any excess capacity in the system. Our transportation system is coping with current demand; however, it's widely recognized that our current system will not be adequate to facilitate the projected growth in traffic for the future. This is particularly true with intermodal containers moving through our west coast ports as a result of the growth in the Asian market.

The federal government has recognized the overall transportation challenge associated with this increased trade and has implemented the Asia-Pacific gateway and corridor and the national policy framework for strategic gateways, and it has recently announced both an Ontario-Quebec continental gateway and corridor and the Atlantic gateway. All of these initiatives are being funded under the Build Canada fund.

For its part, Canada's class 1 freight railways have estimated that they need to invest at least $2 billion in infrastructure and rolling stock in the next decade or two just to accommodate the west coast growth. As such, it's imperative that railways be provided with regulatory certainty as well as the ability to attract the investments necessary to match the level of infrastructure necessary to allow for the growth in our economy.

The days of relying on excess capacity to meet growing traffic are clearly over. The bottom line is that putting in place regulations that would create greater regulatory uncertainty simply will not help us to meet the challenges of the future.

Let me speak just briefly, then, Mr. Chairman, about deregulation. Deregulation has proved to be a resounding success. It started with legislated reform in 1987, which allowed railways and customers to make separate commercial deals, and it developed further from that point with the amendments to the Transportation Act in 1996. If you measure what's happened as a result of all of this, as measured by revenue per tonne-kilometre, average freight rates in Canada declined 31% in real terms from 1988 to 2006. This has allowed shippers not only to move more goods but to move them at lower cost.

I should say that since deregulation, particularly since the mid-1990s, railways have spent more than $15 billion to improve their systems. This was double the amount of investment that took place during the same period of time under the regulatory regimes of the 1970s and early 1980s. Over the coming year alone, railways will be investing more than $2.5 billion in their infrastructure, which represents something in the order of 20% of our total revenues.

Railways, Mr. Chairman, face stiff competition, not only from other modes of transport, such as truck, but also from other railways. This fact was recognized recently by the OECD in a report. They say the clearest example of competition between integrated railways occurs in Canada, where two largely overlapping networks are capable of providing a wide range of substitute services.

Railways can lose business to competitors, and they do lose business to competitors. We need to continually strive to improve our services to our customers.

One example of some of the new things we're doing is that recently the class 1 railways have developed, in collaboration with shippers, a process called commercial dispute resolution—CDR, in short. CDR is a commercial option for shippers to address and resolve issues concerning rail freight rates and service and ancillary charges without having to go to the much more cumbersome and sometimes costly processes that are provided by government through the CTA.

Unfortunately, the members of the shippers council have not yet formalized the CDR process. Our understanding is that they are seeking to expand this process to the U.S. jurisdiction.

Our view at the moment is that clearly the CDR was developed to operate in Canada in the context of the Canadian regulatory environment, and the U.S. environment is very different. We hope that in the near term the shippers will reconsider and come back to the table. We think this is an initiative that is very good for them as well as for us.

Let me now turn and speak very briefly about Bill C-8 itself. The RAC understands and appreciates that the federal government undertook significant efforts through consultation with shippers and railways to propose a legislative framework that balances the interests of both parties. Bill C-8 is the outcome of this effort. However, notwithstanding all this effort, the RAC continues to believe that Bill C-8 is not necessary and we do not support the bill going forward.

Having said that, we understand there are a number of other parties who very much wish the bill to go forward, and in that context we would ask the committee to address our concerns in their deliberations about the current legislation.

Contained within our written submission, which is somewhat longer than my comments this morning, we'd like to propose changes in three sections--sections 27, 120, and 169--of the Canada Transportation Act. As such, we respectfully would submit the following for your consideration when you review the bill in detail.

Clause 1 of Bill C-8 proposes to repeal subsection 27(2) of the Canada Transportation Act, which requires the agency to satisfy itself that a shipper would suffer substantial commercial harm prior to granting a remedy or recourse. This provision is consistent with commercial principles enshrined in the various provisions of the act and essentially directs the administrative tribunal charged with the administration of the act to look at the commercial realities before imposing a regulated measure. Over the years, the provision has not prevented the shippers from obtaining redress when required, and it has acted as a reminder to all the parties and to the regulator itself that regulation is not to replace commercial relations. As such, the RAC recommends that subsection 27(2) be retained in the act.

The second point has to do with clause 3. Bill C-8 proposes to introduce an additional recourse to the agency for shippers. The intention is to provide a recourse with respect to charges established by railways for incidental or ancillary charges for services such as transportation services, things such as demurrage, car storage, and car switching services. These are services that are not associated with the core activity of actually moving the cargo. The proposed wording for this recourse in Bill C-8 is vague, in our view, and could be interpreted as applying to both incidental charges and transportation rates. The RAC believes that clarification should be added to ensure that it deals only with charges associated with the provision of incidental services.

I should say, Mr. Chairman, it's our understanding that there has been consultation with the government and with shippers, and I think there is general agreement that some clarification of this part of the act is necessary.

The third and last point, Mr. Chairman, has to do with clause 7. Here, Bill C-8 proposes to extend the final-offer arbitration recourse process to groups of shippers. First, the RAC believes that group FOA is simply not necessary. We think the existing system works. Second, the RAC believes that if the committee were to decide to proceed with group FOA, there is clearly a requirement for a certification process that should apply equally to all who choose to participate in this process. The legislation at the moment does not clarify that matter.

In conclusion, Mr. Chairman, as I said at the beginning, the days of existing capacity being available to meet the needs of Canada's rail system are clearly over. We no longer have overbuilt railways. As an industry, we are facing this new reality by investing heavily in new infrastructure and rolling stock to meet future demand. We need a stable and predictable regulatory environment that will ensure long-term financial sustainability. It's recommended that the proposed changes in Bill C-8 be implemented by the committee in order to better ensure a favourable climate for investment in the future.

Thank you, Mr. Chairman. I now ask for Mr. Patenaude to say a few words.

[The Chair, Conservative, Merv Tweed]

A few minutes.

[Jean Patenaude, Assistant General Counsel, Canadian National Railway Company]

Thank you very much, Mr. Chairman.

CN certainly appreciates the opportunity to appear before you today on Bill C-8. I'd just like to address something that Minister Cannon raised when he was here, and Mr. Mackay alluded to, and that's the commercial dispute resolution process. As the minister mentioned, in the summer of 2006 he basically challenged the railways to find a commercial solution to concerns that had been expressed by some of the shippers. We strongly agreed that this was the appropriate way to proceed, and as a result, both CN and CP worked very hard to develop the commercial dispute resolution process--the CDR, as I'll refer to it--as we believed that it addressed the needs of both the shippers and the railways.

The CDR represented a significant number of compromises by the railways, but we were quite willing to make those compromises in order to attain the regulatory stability that is essential in order for the railways to continue to reinvest large amounts of capital into the railway system. We were also anxious to find a less confrontational way to settle disputes with our customers. The CDR was intended to deal with disputes related to level of service, transportation rates, and the application of optional services fees.

What we proposed was a two-step process specifically to address the concerns that had been expressed by the shippers. First, the shippers had said that the railways did not listen, or that it was hard for the shippers to find someone in authority to speak with them when there were issues. We agreed, at the request of the shippers, that we would submit any dispute that they were raising to compulsory mediation. This would ensure that there would be someone with authority who would be listening to the shippers to try to find a solution.

In addition, if the mediation did not solve the problem, we proposed that in addition to existing statutory remedies the shippers would also have the option of going to binding commercial arbitration. The shippers had mentioned that they wanted to find commercial solutions to problems that are really of a commercial nature. So we proposed binding commercial arbitration, a system that basically works in most of the other areas of business in this country. We want to make it clear that we were not asking them to renounce or to give up any of their statutory remedies. We presented this proposal to a number of shippers and their representatives. Many of our customers were quite interested in the proposal.

Unfortunately, some of the shippers, through their associations, insisted, as Mr. Mackay said, that the CDR apply to U.S. as well as Canadian movements, and this was something we could not agree to; therefore, the discussions were not successful. However, we still have maintained the CDR in a contract form. We've put it up on our website and it is available for all customers who wish to take advantage of it. Many of our customers told us they like the proposal, but they saw no need to sign on at this time as they had no problems with our services. They indicated that if in the future problems arose, they would be interested in using the CDR.

I suppose it's not surprising that shipper associations did not rush to accept the CDR. They knew that if the process failed, the minister would introduce legislation, which of course is exactly what happened with Bill C-8. We have a number of specific concerns with the bill, as Mr. Mackay has referred to, but in the end our biggest concern is the continuing move toward re-regulation of the rail sector. Mr. Mackay referred to the deregulation of rail in Canada and how it's been a resounding success. It has triggered innovation and improved efficiency in the rail system and the rail industry to the benefit of all, including shippers. It has allowed the railways to improve service and asset utilization, and by any measurement, the railway service offering is dramatically better than it was ten years ago. Transit times are shorter and more reliable, car velocity is higher in real terms, and rates have decreased.

These improvements have led to a financial performance that has enabled the railways to make further capital investment in the rail system, and Mr. Mackay has referred to that. But in order to invest, there is a need for stability, and we need a regulatory regime that allows us to continue doing the things necessary to make our railway more efficient. We are concerned that this legislation is likely a step backwards.

The provisions of the FOA group create another adversarial process. To us it really is building a ring for us to fight with the shippers, whereas there should be a better process, such as the mediation and arbitration process. A very important thing is that unlike class action proceedings in law, there is no requirement for the group of shippers to show that they are in fact a true group, and in fact there's also no need in the current legislation that the decision apply equally to all of the group members.

We know that shippers do not like paying optional charges. They are in place to drive efficiency and discipline in the system. The railways cannot afford to have shippers use the yards and the equipment as warehouse space. Many shippers with private car fleets keep them parked in the railway's yards because they lack sufficient storage space of their own. All these things create congestion in the yards and affect the railway's efficiencies. Yards are there to sort cars, and congestion is expensive to CN, to the system, and ultimately to the customer.

We don't question the right of shippers to final-offer arbitration. This is a remedy they have now. We understand that there is a need for a remedy, but we do have many concerns with the FOA process as it currently exists.

[The Chair, Conservative, Merv Tweed]

I think I'll stop you there, and perhaps the rest can come out through questioning of the committee members, if that's agreeable.

[Jean Patenaude]

I had essentially finished.

Thank you very much.

[The Chair, Conservative, Merv Tweed]

Thank you.

We'll go to Mr. Volpe.

[Joe Volpe, Liberal, Eglinton—Lawrence, ON]

Thank you, Mr. Chair, and thank you, gentlemen, for appearing before us this morning.

I know this is a touchy situation for a lot of people, especially for you, because you've been painted by everybody as the group that needs to be looked at rather warily. So why don't I just defer to type and say that that's exactly where I come from.

Mr. Patenaude, just before we go into the substance of C-8, can you just very briefly tell me why it is that CN is the subject of a headline every second day with respect to safety in its system?

[Jean Patenaude]

Well, I guess any incident on the railway becomes first-page coverage, and--

[Joe Volpe, Liberal, Eglinton—Lawrence, ON]

It's not CP; it's CN.

[Jean Patenaude]

Yes, that's true. But the minister asked for the Railway Safety Act to be reviewed, and there was a committee established. We participated extensively in that committee. I think--

[Joe Volpe, Liberal, Eglinton—Lawrence, ON]

You forbade him from publishing the results.

[Jean Patenaude]

I don't think the committee has reported yet.

[Joe Volpe, Liberal, Eglinton—Lawrence, ON]

But you've already had a couple of reviews. They can't take two years to get an answer to a question that started two and a half years ago.

[Jean Patenaude]

I understand now which issue you're referring to. Basically, CN did not ask them not to publish the results. We said that if they published the results, we wanted them to also publish CN's answer to those results. That was the only request we made to the minister.

[Joe Volpe, Liberal, Eglinton—Lawrence, ON]

Right. You can see from that particular question and answer why some of us are troubled by some of the positions that are taken.

I want to be as balanced and fair as the next person. I've gone through the Government of Alberta position, and they essentially take the side of the shippers. In fact, on virtually every single issue they say you don't have the position to stand on and that as a result of—as you call it—deregulation, the pendulum has swung too far towards you, and it's time to go back in the other direction in order to achieve a balance.

As I read your submission, you're essentially focusing on two things. One is the removal of proof of commercial harm. The Government of Alberta's position is that it's not really removed at all. Why do they disagree with you? I mean, they consulted with you. You made submissions to them in both Calgary and Edmonton. Is there a philosophical difference here, or has somebody got hold of the wrong facts and is making recommendations on the basis of pure self-interest and nothing else? By the way, I don't know what the self-interest of Alberta is, other than the fact that they say the transportation industry, and especially the railways, are integral to the success of the Alberta economy. That sounds reasonable to me.

[Cliff Mackay]

My understanding, Mr. Volpe, is that the Alberta position is that there are other provisions that would look after commercial harm. Our view is that the provision has been around for many years. It's not unusual commercial practice, when you get into disputes, to have a two-step process. Step one, you determine the validity of the dispute, and then step two, you try to determine what is reasonable recourse. Part of that recourse, of course, depends on what commercial harm was inflicted as a result of somebody not doing what they were supposed to do. Our view is pretty simple. That's pretty standard practice. It's worked for many years in the CTA, and I guess we look at it logically from the other way around. We're not hearing good and valid arguments to say why we should deviate from standard commercial practice. The only argument we've heard to date is that they're going to do it, but they're going to do it using some other provision of the legislation. There still will be some determination of commercial harm. We're just sitting here asking, why fix it if it isn't broken? That's really where we're coming from.

[Joe Volpe, Liberal, Eglinton—Lawrence, ON]

But everybody else is coming from an entirely different position. There are no exceptions to the words “everybody else”. The only ones who take your position are, really, the railways. Governments, shippers, farmers, and others have all said to us privately and publicly, and in writing, that your position is an untenable one.

[Cliff Mackay]

Obviously, we disagree. I guess I would simply offer the observation that most of the representations that have been made with regard to this issue are either from shippers directly or from those who see a common interest with shippers, for whatever reason. If there is a dilution of the need to determine commercial harm, that would obviously skew the process, to some degree, to the interest of shippers. I mean, that seems fairly obviously to me, Mr. Volpe.

[Joe Volpe, Liberal, Eglinton—Lawrence, ON]

A lot of things seem to be fairly obvious until I start talking to people on an individual basis. Then they put forward a position that has a certain amount of coherence and would appear to be unassailable, from their perspective, and then along came Bill C-58.

I asked the minister last week, because he used some rather specific language.... When a minister says it's time for us to reintroduce balance into the system, and understanding a little bit of where the government would be coming from—and I don't mean to be partisan here, from my colleagues opposite, but this government is seen to be generally, philosophically speaking, much more favourable to a deregulated system than not—for a minister of a government from that persuasion to say that the balance has to be brought back toward more regulation, would suggest, even to the most cynical person, that maybe some of the issues are a little bit more egregious than people would normally give them credit for being.

[Cliff Mackay]

All I can say to that is that if you examine the record in terms of what's happened to actual rates in the last 10 to 15 years, what's happened to the level of service, the fluidity of the system, and the ability of the system to actually deliver on the demands, it's a pretty good news story, as I said in my opening remarks.

Having said that, I should say there are lots of people out there who feel that for one reason or another, either on the service side or on the rate side, they've got a particular story to tell. One of the things that has happened and is true is that particularly in the last 10 years there has been a massive change in the way in which rail services are managed and delivered, not only in Canada but in the whole of North America. We have moved from the days when railways did not run to precision schedules, where our capacity utilization was abysmal—if you look at our operating rates back 10 years ago, that clearly proves it—and we're now operating the system much more efficiently, much more fluidly, at much better productivity rates than ever in the past.

That has resulted in change, there's no doubt about that. Some of those changes have been positive and some of those changes have been negative, from the point of view of shippers. There are lots of shippers out there who, today, will complain to you that they don't want to bring crews in on the weekend because they have to pay them time and a half to load the railcars. But if they don't, they get charged with demurrage because they have the railcars for too many days. Well, that's part of the general change that has gone on in the whole North American industry, because every time a railcar sits stopped, that's utilization that's not happening. And if you want to have an efficient transportation system, you have to be able to address those sorts of questions.

So there's lots of pushing.... Sorry.

[The Chair, Conservative, Merv Tweed]

Monsieur Laframboise.

[Mario Laframboise, Bloc, Argenteuil—Papineau—Mirabel, QC]

Thank you, Mr. Chair.

My first question goes to you, Mr. Mackay. I am surprised. In your presentation, I sense some disappointment with the bill that has been tabled today.

But if the presentation that the Minister of Transport, Infrastructure and Communitiesmade to us last week is anything to go by, the situation that you are experiencing today has been known since 2000-2001. According to what he told us about Transport Canada, discussions on these questions have been going on since then. In 2006, he asked to hear your opinion and for you to come up with a commercial solution to these disputes. He told us that, unfortunately, the two camps had not been able to find common ground.

That concerns me greatly. Today, we have to discuss this bill. I too would have preferred you to have come to an agreement for a commercial solution. It is as clear as day that the shippers would feel that you are taking advantage of them. That is the reality. You are probably right in saying that the situation has changed and that you have practically no more capacity on the network. That puts you in a monopoly situation. From time to time, it looks like you are asking for a higher price for things than perhaps they are worth.

I have difficulty understanding why you would not have taken the hand that the minister was extending to you and come to a commercial solution.

Explain that, Mr. Mackay.

[Cliff Mackay]

You're right. We're disappointed with it as well, and we did try very hard.

My colleague, Monsieur Patenaude, referred to the CDR process. That was the major effort that was made to try to address the request of the minister to find a commercially based approach to dealing with some of these issues as opposed to looking at a legislative solution. We believe we came very close. Unfortunately, toward the latter parts of those discussions, some of the shippers took a very, very firm position that notwithstanding that they had generally a fairly comfortable feeling about how the whole process would work in Canada, they wanted us to make a commitment to extend exactly the same process to our operations in the U.S.

That caused a major problem for us. The U.S. regulatory environment is very different from the Canadian one. The nature of how business gets done there is quite different. It is much more confrontational; it's much more litigious than it is in Canada; and, frankly, the implications of introducing that sort of process into the U.S. business environment were very substantial, not just for CN and CP but for a whole range of other railways and other business arrangements that exist south of the border.

We didn't say that we would never do the U.S. option, but we said, look, why don't we proceed with the Canadian option now and see what we can do to sort something out further down the road on the U.S. side?

It was just too big a pill to swallow all at once without really understanding what was going on in the U.S. system, and if you follow that system at all, sir, you'll probably be aware that there are a number of disputes and issues going on in Congress and other places south of the border. There's a very difficult and complex environment in the U.S. at the moment. That was the straw that unfortunately broke the camel's back, and we were not able to get there.

But let me reiterate that, frankly, we'd go to a meeting this afternoon to restart that process. We think it's the right way to go.

[Marc Shannon, Senior Counsel, Legal Services, Canadian Pacific Railway]

May I just add one thing?

I think Mr. Mackay has explained this very well, and as Mr. Patenaude said, the commercial dispute resolution process that was essentially discussed and negotiated with shipper groups is still available to shippers. It is a process that both railways offer on their websites. It is in essence an offer to anybody who wishes to sign up that they can participate in the commercial dispute resolution process. As Mr. Mackay said, and let me just highlight, the reason there wasn't, at the end of the day, a consensus and final agreement on it was that the Canadian railways were not prepared to extend it to U.S. transportation.