Transport Committee on Nov. 29th, 2007

[Wade Sobkowich]

Bob is exactly right, that this was one of the major issues. When we sat down with CN, for us, at the time, it wasn't so much the transborder shipments, it was just the fact that the railways came out with this commercial dispute resolution process and they put it before us and said take it or leave it, and they wouldn't move on it and they wouldn't offer any terms that were any better for us than the current FOA provisions under the Canada Transportation Act. Why would they? What's the worst that could happen to them? We would have to use the Canada Transportation Act, so why would they relinquish anything? That was the main problem.

The railways will say we just wouldn't agree to their commercial dispute resolution process. The reason why we wouldn't agree is because they would never agree to any terms that went any further than any of the rights that shippers had under the Canada Transportation Act, and they had no motivation to do it.

So we're hopeful that with the strengthening of the shipper protection provisions there will actually be more of an impetus to arrive at a satisfactory commercial dispute resolution process as an alternative, because a commercial dispute resolution process is just that, it's commercial. It's something that's arrived at between the parties without government involvement. But we need the legislative backstop. We need to have a fair and reasonable final offer arbitration process and the ability to challenge ancillary tariffs if we're going to have any chance at arriving at a fair and reasonable commercial dispute resolution process.

[Jeff Watson, Conservative, Essex, ON]

The railways said the group FOA would be a much more adversarial process than compulsory mediations. I personally disagreed about that. I think if you take very extreme adversarial positions, you tend to lose more. A group FOA would force the final offers to come a lot closer to the middle. What are your thoughts on whether this would become more adversarial?

[Marta Morgan]

Our experience with the existing FOA provisions in the act is that because of the way the FOA provision is designed—which is essentially baseball-style arbitration, where each party puts its best offer forward, and then the arbitrator chooses one or the other—it is actually an effective way to bring people closer together rather than further apart, because no one wants to put the offer on the table that's so outrageously ridiculous that the arbitrator will never choose it.

Similarly, in group FOA we would expect that this process would actually bring the parties closer together. This doesn't mean that it's going to be a friendly process. By the time a shipper and a railway get to the point where they are in FOA, they clearly have some strong disagreements. But the FOA process will give them a mechanism that's fair and reasonable to resolve those disagreements, and it's an approach that doesn't have within it the incentive for them to be more polarized going in.

[The Chair, Conservative, Merv Tweed]

Thank you.

Next we have Mr. Zed, and it's my understand that he's prepared to share his time with Mr. Volpe.

[Paul Zed, Liberal, Saint John, NB]

Absolutely. He's my leader.

[The Chair, Conservative, Merv Tweed]

Mr. Volpe.

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

He's only a year and a half late in saying that.

[The Chair, Conservative, Merv Tweed]

We'll make sure the blues show that correction in Mr. Zed's opening statement.

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

I hope you don't take from that, lady and gentlemen, that we are not as serious about this as you are. We do take the issue very seriously, as I think you probably have come to understand through some of the questions that have been raised by all members of all parties.

I want to go back to what I said earlier. It would appear to me, and it's reinforced now through your responses, that you're really asking for government to be much more engaged than it has been. That's a strange thing for those of us here to hear. And as I said when the railways were here on Tuesday, we have a government that is perceived philosophically to be more hands-off on industry but is actually much more engaged in the marketplace. So that tells all of us that the situation is not always as it appears to be. So I'll repeat the compliments on having convinced somebody, everybody, that you're in the right.

But I want to come to another question that I asked the railways, and since you were here, you heard it. I asked them if they wanted to change something, propose an amendment, what would it be, and the amendment they proposed--and I'm not sure it's what you would have agreed to--refers to section 169.2 and it goes back to FOA. I asked you a few minutes ago about making that process a little bit more systematic, and you referred to it as a bureaucratic position. But I'm going to read something to you--I don't have a copy--for your reflection, and it would change section 169.2, which I think you have before you. It says that:

The Agency shall not have any matter submitted to it for a final offer arbitration under subsection (1) arbitrated unless the shippers who are submitting the matter demonstrate to the satisfaction of the Agency (not to anybody else) that the matter is common to all of them and that they are making in respect of that matter a joint offer the terms of which apply equally to all of them.

Why would you have a problem with that?

[Robert Ballantyne]

I think our feeling is that the way it's written covers it off quite adequately and that it doesn't need this. My recollection is that in an earlier version of the bill, either when it was Bill C-44 or Bill C-26, it had a provision like that in it, and when Bill C-58 came forward that additional wording was removed. I think it was considered somewhat redundant. We think that the way it's worded right now is quite adequate.

Proposed subsection 169.2(3) says:

The Agency shall not have any matter submitted to it for a final offer arbitration under subsection (1) arbitrated unless the shippers demonstrate, to the satisfaction of the Agency, that an attempt has been made to mediate the matter.

So they're putting some reasonable hurdles in there anyway, and also proposed subsection 169.2(2) says:

A matter submitted jointly to the Agency for a final offer arbitration shall be common to all the shippers and the shippers shall make a joint offer in respect of the matter, the terms of which apply to all of them.

That's in the bill as it stands and which we've said we support.

[Marta Morgan]

There is some history on this, as Bob has mentioned. In the previous bill on this issue, the term “equally to all” had been included. Shippers would be very opposed to the inclusion of the term “equally to all”—that the solution should apply equally to all—for the reason that Wade discussed earlier, which is that shippers by nature are different. Some are smaller, some are larger. Some are shipping one place, some are shipping another. The matter at hand may in fact be common to all of them, but it is inevitable that the solution will not necessarily be equal to all of them because of this diversity.

It is the strong view of the shipper community lawyers that this provision could become the equivalent of the commercial harm test on the issue of level-of-service complaints, and become a significant barrier to shippers who are wishing to bring these claims.

So I think this is a way for the railways trying to get that language back in there that was in previous bills, which shippers had expressed their concerns about at that time.

[Wade Sobkowich]

That's a very good explanation, Marta.

To add, going into an FOA or a group FOA is not something shippers are going to take frivolously or lightly. They're going to look at all other options before they'll go into a process like that, and the fact that they have to put forward an offer that's common to all is the key, because if they're unable to do that they won't be able to go into the process to begin with. The fact that the outcome has to be common to all is in fact the same as what it would take to certify a group, in our view. So it's covered.

[The Chair, Conservative, Merv Tweed]

Mr. Shipley.

[Bev Shipley, Conservative, Lambton—Kent—Middlesex, ON]

Thank you, Chairman.

Thank you to our witnesses for coming out.

We've had a lot of discussion this morning around the ancillary charges. It's in every document we receive, regardless of whether it's from the shippers, from the monopolies, as you would call CN, CP, and others. So what I'm finding is that there's a big spread here somewhere, and I want to make sure that we're talking about the same thing.

CP--CP, not CN--talked about less than 1% of revenues. They have it broken down into different things--0.3%, 0.7%--different percentages, but in the end, it's less than 1% of their revenues. What you're talking about is 14% to 15% in terms of increase in ancillary charges or other charges that you have.

I wonder if we could have you table those for this committee's use, as we go forward. I can't remember, Mr. Chair, whether we asked for the tabling of those documents from CP, but that is something we might get. There's a big spread here, and we need to be certain about what those are.

I don't know if you have any comments on that.

[Wade Sobkowich]

The only comment I'd make, to start off, is that regardless of the impact—and let's say it's somewhere in between, I don't know off the top of my head—of the ancillary charges, the principle in Bill C-8 is that you would have the right to complain or to file with the agency, if you feel the charges and the terms and conditions of the tariff are unfair. That's a fair process and that's what we're asking for.

[Bev Shipley, Conservative, Lambton—Kent—Middlesex, ON]

I understand that. I only want to make sure that one isn't using the numbers to the best advantage to keep them low, and another isn't using them to the best advantage to keep them high, so we face this big discrepancy. I think we need to have everything on the table, as much as we can. So I'd appreciate that.

I want to say to you that I've been very impressed with the amount of work you've done and presented. On other committees, you know, we've never had--not in my experience, which is relatively short compared with some here—the work that you've done, and I think you've said to water down the wine so that you have a consistent message. I want to commend you for that. I think many organizations could learn from that as they come to a federal government, in terms of dealing with bills and their issues around them.

The railways—and it's been talked about before—have absolutely no reserves, no capacity left. Those were the words they used in their comments to us. So there's a concern that the investment needed.... From 1996, there's been $15 billion go into the investment. They're afraid this will cut the investment initiatives by those private investors to make it happen. So there's no capacity left. Therefore, there's a sense that it may curtail investment needed to expand and improve the service.

Can you talk to me, then, about the expansion of the service that has happened under the great times before, and that has benefited you?

[Robert Ballantyne]

I have a couple of comments. First, in terms of capacity, there are places on the network that are at or very near capacity, but certainly there are places where the rail network is not at capacity. In regard to the new container terminal that has opened up at Prince Rupert, CN has indicated that they have a fair amount of capacity in that line at least as far as Edmonton. I think there's capacity from the port of Halifax to central Canada.

Certainly the CN-CP main lines through the mountains from Vancouver are pretty much at capacity and they have been spending money on that, which I think they did and will continue to do because there's a demand and it's in the interest of their shareholders that they service that.

So that's one thing. The other thing they have been doing is more co-production agreements, and these are good. They get together, for example, down the Fraser Canyon, both railways. CN and CP run on CN in one direction and on CP back on the other, and that's a pretty tough piece of railroading there, in the Fraser Canyon.

So things like that are good. Things like that, of course, don't cost a lot of capital money. But I think to some extent.... Well, I guess “blackmail” is a little bit too strong a word, but on the issue about whether they would have the same incentive to invest if these changes are made to the act, I guess that remains to be seen. I would be very surprised if it changed anything.

I notice that in the most recent issue of the Canadian Pacific employees' magazine they were big about a substantial investment they have made northeast of Edmonton, near Fort McMurray. They've invested quite a lot of money in building new track. They've done that when this bill has been in play, so I think as long as the market is there and as long as they are making a lot of money, which they are....

I think CN and CP, the railways, told you this the other day. The investment community tends to look at operating ratio. CN has driven their operating ratio down, I think, to the low 60% range. The operating ratio is the operating expenses on the numerator and operating revenues on the denominator. That's probably about the lowest among the big class one railroads in North America. CP's is pretty good as well.

So I think this bill will probably have some impact on their revenues in total, but I wouldn't think it's going to change their operating ratios very much.

[The Chair, Conservative, Merv Tweed]

Thank you.

We've completed our round. Everyone has had a chance to ask questions. We're going to open the floor up for a couple of minutes each, for each question.

I have Mr. Volpe, Mr. Laframboise, and then Mr. Masse.

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

Mr. Ballantyne, I just wonder whether we could pursue that same point for another moment or two, because in some of the submissions we've seen and heard, the railway companies say that actually the climate of investment will be severely diminished and that their return on investment is considerably lower than the return on investment by any of the shippers. I think some of the figures I saw showed a 10% disparity. So their position is—and I know you know this to be their position—that this legislation will put a chill on the investment climate.

You've just indicated that's not the case and you've used a particular standard. But I detected—or perhaps I misread—a little bit of hesitation in your response, that you are concerned that there might not be the same kind of investment and that your shippers, your coalition, would suffer from services....

We're going to have a review, but there won't be much to review if they withdraw services by not making investments in a growing climate, from your perspective.

[Robert Ballantyne]

If you detected any hesitation, it's only that it's in the future, and I can't say for certain that they wouldn't. I would anticipate that they will continue to make investments as appropriate to handle the markets that present themselves.

We seem to be in a time of growing demand for transportation services in all modes. The world economy is growing. The way manufacturing and sourcing is done is pretty much on a global basis. So there is likely to be substantial growth, and I think they will continue to meet that growth. That's the business they're in.

[Wade Sobkowich]

Can I just add to that?

What the railways are saying when they make that statement is that they are going to be unduly harmed by this legislation. What we're talking about here is improving shipper protection provisions or mechanisms to resolve problems after they've occurred. If the problems don't occur in the first place, these provisions don't get used. And we're just asking for a fair and reasonable way—and this bill gives us a fair and reasonable way—to resolve disputes.

So if the railways are saying that they're going to be unduly harmed by implementing a process that resolves disputes with shippers in a fair and reasonable way after the problem has already occurred, then it speaks volumes to the way the railways are treating shippers today.

[The Chair, Conservative, Merv Tweed]

Mr. Laframboise.

[Marta Morgan]

I have one other point to add on that.

I think that all industries who operate in competitive markets also have to raise capital for the capital investments that they need. To argue that a fairly minimal restraint on monopoly power will have significant impact on your capital investment is, to me, an argument that doesn't hold water. In our industry we operate in competitive markets. We invest in capital as we need to, and the other shippers who are dealing with the railways are in the same position.

This bill will not create competition between the railways. They will still not have a competitive market. They will have some fairly modest measures in place to allow shippers to respond to egregious difficulties, because—trust me—a shipper will only take a railway to a level-of-service complaint or an FOA when they cannot resolve the issue bilaterally and when the difficulties are quite serious. We would prefer to resolve these issues on a commercial basis, and these are really measures of last resort from the perspective of our member companies.

[The Chair, Conservative, Merv Tweed]

Monsieur Laframboise.

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

Thank you very much. My question is for Ms. Morgan.

The Railway Association of Canada sent us a copy of the letter that it had sent to the Senate following the appearance of your association before the Senate committee. It contained harsh words towards forestry producers, among others, saying that you had little evidence that would allow you to say that forestry producers and forestry products would be the captives of a single rail transportation service provider.

For my part, I think that you are right, but I am having some trouble. It will be necessary to counter what they are saying, because their comments were based on the OECD report produced in 2005, which deals with all the rail transportation systems throughout the world. The report states that Canada is an example because there are two networks. I will quote the report:

[...] the two dominant rail networks operate over parallel tracks and are capable of providing a wide range of similar services [...]

So that means there is competition. But the evidence you have provided shows that that is not true everywhere; Mr. Ballantyne told us that. It is untrue, namely, in the forestry sector. I would like you to explain the day-to-day situation for your forestry producers who are grappling with a single service provider.