Transport Committee on Feb. 26th, 2013

[The Chair, Conservative, Larry Miller]

We'll call our meeting to order.

I want to thank all of our witnesses for being here today and remind the committee and our witnesses that we have votes today. They shouldn't affect the length of our meeting, but I want to get started on time anyway.

With no further ado, I'm going to turn it over to our first speaker, Mr. Ballantyne, from the Coalition of Rail Shippers.

Take 10 minutes or less, please.

[Robert Ballantyne, Chairman, Coalition of Rail Shippers]

Thank you very much. I will share some of my time with Wade Sobkowich. We're certainly pleased to have the opportunity to bring the shipper perspective on Bill C-52 to this committee.

The 16 member associations of the CRS account for a substantial portion of the rail freight customer base, and the member companies in those associations are estimated to provide more than 80% of the Canadian revenues of CN and CP.

All 16 CRS member associations support the six proposed adjustments to Bill C-52 that we bring to the committee.

Bill C-52 is the government's response to the longstanding service problems that were identified and quantified by the independent rail freight service review panel and its consultants. The NRG Research Group, in its independent survey, found that only 17% of respondents rated their satisfaction with railway service at a 6 or a 7, based on a scale of 1 to 7 in which 7 meant “very satisfied”. They also reported that 62% of shippers reported that they had suffered financial consequences as a result of poor performance.

The fundamental underlying problem is one of market dominance. The rail freight market is not a normally functioning competitive market; it is dominated by the sellers. The rail freight service review recognized this, with the panel stating the following on page 41 of its final report:

This railway market power results in an imbalance in the commercial relationships between the railways and other stakeholders.

In his testimony before this committee on February 12, Minister Lebel referenced the above conclusion and stated:

It is essential for the committee to understand why this legislation is necessary. We are not dealing with the normal free market. The reality is that many shippers have limited choices when it comes to shipping their products. It is therefore necessary to use the law to give shippers more leverage to negotiate service agreements with the railways.

The behaviour of monopoly businesses has been well understood since the 19th century, and many of the lessons learned were from the behaviour of 19th-century railways. Canadian law has acknowledged this dominance for over a hundred years.

In this connection, the abuse of dominance provisions of the Competition Act—that is, sections 78 and 79 of that act—are certainly of interest.

The Competition Bureau's guidelines—and I stress that they don't govern the railway industry, but they're certainly instructive—or the bureau's general approach in evaluating allegations of abuse of dominance is as follows:

A market share of less than 35 percent will generally not give rise to concerns of market power or dominance.

A market share of 35 percent or more will generally prompt further examination.

In the case of a group of firms alleged to be jointly dominant, a combined market share equal to or exceeding 60 percent will generally prompt further examination.

In the case of the rail freight market, CN and CP together control 97% of the market by revenue. The issue of competition from other modes is a factor often raised. While in some instances there may be truck and marine competitive options, the reality is that moving to other modes in most cases is not practical, in any reasonable scenario.

There has been discussion that "commercial solutions are the preferred solutions", by government and other stakeholders. Throughout the service review and the follow-on initiatives, the shippers have stated a preference for solutions that would be "commercial", but a necessary prerequisite is that there be a normally functioning competitive market in which there is a reasonable balance between the buyers and sellers. Wherever there is no such balance, the only recourse for the disadvantaged parties is to look for a legislative framework that acts as a surrogate for normal competition.

The minister and his staff have outlined to you the structure and provisions of Bill C-52, which are designed to influence the behaviour of railways in a manner that would be comparable to there being effective competition. The CRS has noted that Bill C-52 in its operation will break new ground, with little relevant jurisprudence or experience available to the agency or arbitrators. The CRS believes the bill can be strengthened in a way that will minimize uncertainty, give more explicit guidance to arbitrators, and limit the opportunity for railways to mount legal challenges designed to either frustrate the intent of Parliament, delay decisions, and lead shippers both large and small into expensive legal battles.

The CRS has six recommendations, which I will very briefly introduce. These have been given to the committee and will be discussed by my colleagues in more detail. They are as follows:

The first one is to spell out that the service obligation is intended to meet the needs of the shipper, and then name the specific obligations.

The second one is to allow the arbitrator to rule on the whole contract between parties and not just the operational parts; that is, service is somewhat differentiated from just the operational parts.

The third is to make clear that dispute resolution terms, including damages, may be included in a contract by an arbitrator in order to reduce subsequent costs and delay in dealing with problems.

Number four is to remove a loophole whereby the railway can impose an unspecified charge against a single shipper without recourse.

Number five is to make clear that the shipper can decide which issues will be arbitrated.

Sixth is to remove undue precedence given to the railways' network obligations over and above the service obligations to the shipper.

With that, I would like to turn over the rest of my time to my colleague, Mr. Sobkowich.

[The Chair, Conservative, Larry Miller]

You have just a little less than four minutes.

[Wade Sobkowich, Representative, Coalition of Rail Shippers, and Executive Director, Western Grain Elevator Association]

We're thankful to the government for making rail service a top priority on its legislative agenda. The entire shipping community has been through a multitude of processes leading up to Bill C-52, which started in 2006 and which, we hope, will finally result in the necessary backstop for balanced accountability.

In order to ensure that it does not render the legislation ineffectual for or detrimental to shippers, Bill C-52 requires six sets of amendments. We cannot overstate the importance of all six. I should add that they complete the modernization required to ensure that the service pie grows in size rather than it only being divided differently. Without all of them it's possible that rather than facilitating the predicted growth in our economy, the bill might have the unintended effect of potentially constraining that growth.

Others will speak to items 1, 2, 4, 5, and 6, although l'd be pleased to respond to any questions. l'm choosing to focus my comments on item number 3 from the CRS package that I believe everybody has. It's about the need for an expedient mechanism for a shipper to be awarded liquidated damages for service failures.

This particular amendment speaks to a void in the draft version of Bill C-52 that affects smaller shippers. My perspective is that of a grain shipper. I'm a member of the CRS, but I'm with the Western Grain Elevator Association. In this regard, we speak about all grain elevators as smaller shippers since each elevator location essentially acts as a small location shipper. The best way to illustrate the problem we're trying to rectify with amendment number 3 is with an example. So here it goes in two minutes.

Typically, the time allotted for loading a unit train of grain is 24 hours. If we fail to perform, the consequences are set out in a railway tariff. We don't object to this discipline. For example, if a grain shipper is anticipating the arrival of a unit train at an elevator location on a Tuesday, normally the elevator will shut off receiving from farmers when they are loading so they can dedicate staff to loading the train. Twenty-four hours means that with about a hundred cars, it takes about 14 minutes per car to load, so the company has to be very efficient.

When the train doesn't arrive on the day the railway says it's supposed to, we're faced with added costs of labour and overtime costs on a weekend. And if the train doesn't show up on a weekend, now we've paid time and a half. Inbound loads from farmers have to be rescheduled, which causes significant problems at the farm level, and there's a danger of congesting deliveries. If the train doesn't show up for three days, now we've shut that elevator down for three days. In some cases the elevator is full and can't accept any more deliveries. When cars don't show up, those farmers have to be turned away, and that disrupts the system.

When the train moves to a terminal elevator later than expected, it is very likely that it will arrive on top of other shipments. Rail car bunching occurs, which leads to longer unloading times, exposing companies to railcar demurrage. If terminals are waiting for those cars, they are exposed to vessel demurrage, which is extremely expensive. Or perhaps the vessel has sailed, and now the terminal has to sit on this inventory. It would not be unreasonable to assume that the added costs to the shipper in this example could be $50,000. Under Bill C-52 the railways are not required to compensate shippers for any portion of these losses, and this gap is what we're trying to address to the best of our abilities to make sure that this legislation fulfills its intentions.

We propose a modification to 169.31(1)(b) to allow the shipper, at its option, to submit to the agency for arbitration terms governing whether or not a service failure has occurred and the manner in which damages are to be assessed and paid to the shipper for losses resulting from such a failure.The practical use of a service level agreement is severely limited if obtaining a remedy resulting from a breach requires the shipper to commence proceedings before the agency and/or court, or to rely on the proposed AMPs system. It's not practical for shippers to always undertake costly and lengthy agency and/or court proceedings.

Allowing dispute resolution mechanisms to be included in an arbitrated SLA will enhance railway responsiveness to service problems that arise once an SLA is established. The concept of balanced accountability between shippers and rail carriers can be achieved if mechanisms for compensation to shippers for railway failures can be determined in a simple and expedient fashion.

[The Chair, Conservative, Larry Miller]

Thank you, Mr. Sobkowich.

We'll now move to the Forest Products Association of Canada.

Ms. Cobden.

[Catherine Cobden, Executive Vice-President, Forest Products Association of Canada]

Thank you very much. I'm happy to be here.

I very much appreciate the committee's efforts to review this bill. As Bob Ballantyne has already stated, we, as shippers, remain united in the need for this legislation. I'm here today representing forest product shippers from coast to coast. My remarks will not be association-speak, but will actually be direct feedback from the shippers we represent.

I would like to point out that with me today is a shipper, Mr. Brian Mcgurk. He is with Resolute Forest Products. He leads their shipping from coast to coast and also happens to be the chair of the Forest Products Association's transportation committee.

We also have with us, Allan Foran, from Aikins, MacAulay & Thorvaldson. He is our legal counsel, and I offer his assistance to you if there are any legal points of clarification that you might benefit from.

On behalf of the members of the Forest Products Association of Canada, our 230,000 employees, and the 200 rural communities we represent, I would like to thank the government for the work it has done to date to prepare Bill C-52. This bill does move us forward and will give us more leverage on the day it is passed than what we currently have. We do have a few simple suggestions that are of critical importance for improving the practicality of the bill and to assure that the regulatory burden is minimized.

Before I get into those specifics, I will share with you some insights on how forest product shippers experience the world to help you appreciate why this is such a critical area to get right. FPAC member companies represent a significant slice of the rural economy. We also represent a significant slice of the railways business. We estimate that to be about 20%. While we are rurally based in our manufacturing, we serve a very wide global marketplace. Over 85% of our products from these small northern towns are shipped all over the world and into a demanding global marketplace. Whether we're shipping to China, Europe, or the U.S., we require timely, predictable, and cost-effective transportation systems to meet the needs of these discerning global customers.

I would also say that we believe in a free market economy. However, it is unfortunate that we routinely experience the challenge of living with a key component of our business, the railway transportation system, that is not free market-based. Indeed, addressing the imbalance of market power that the railways currently enjoy remains the final frontier—if you're a Trekkie—of opening up Canada to the world economy.

It is with this backdrop that FPAC applauds the intent of Bill C-52. You have taken action to enhance the effectiveness, efficiency, and reliability of rail freight supply to address the current imbalance we face in the rail system.

Minister Lebel's testimony on February 12th went further in outlining the critical intent, when he urged this committee to understand why this legislation is vital. My colleague Bob Ballantyne has already read the quote, and I'll just borrow from the very beginning of it, where Minister Lebel said, “We are not dealing with the normal free market”.

FPAC member companies fully agree with the intent of creating the conditions to allow for successful commercial relations. Obviously, that's what we agree with, and this would normally be possible in a free market condition. Ideally, we'll never have to use this legislation.

I want to point out that our bona fides on this point is very strong. In fact, we had tried to broker our own commercial deal with one of the railways on this very topic prior to this regulatory endeavour, and we failed miserably. Having led the exercise on behalf of FPAC member companies, I can say from personal experience that the shipper community does not have any other option than a strong piece of legislation being available to us to bring the discussions with the railways into better commercial balance.

Again, we fully support the intent of the bill, and in the spirit of ensuring the objectives of this bill are indeed fulfilled, forest product shippers make three important recommendations for your consideration.

Recommendation number one is that you delete all references to the word “operational”. Simply remove this one word. This will ensure that we do not undermine the objective of rebalancing commercial relations. By referencing operational data, you create the unintended consequences of adding costs, creating an information imbalance, and diminishing the intent and power of the legislation.

Recommendation number two that you delete all references to statutory obligations to other shippers and third parties. Removing this reference will ensure that we don't dilute the arbitration away from the true objective, which is addressing the inadequate service experienced by the shipper.

Recommendation number three is that you insert a new stand-alone section that would define adequate, suitable accommodation and service obligations. This one should be easy. All parties in previous processes, such as the rail freight service review and the Dinning process, were in full agreement as to the elements that defined service obligations. We argue that if this is not clearly spelled out in the legislation, we run the risk of cumbersome legal proceedings defining and eroding the intent and nature of this bill. I happen to put my faith in this committee over the lawyers in this regard.

A detailed description of these three changes has been circulated for all of you. I'm just glossing over them, but hopefully I've given you enough of a description so you can appreciate what they intend.

In conclusion, as Canadian companies aim to secure their place as the preferred supplier to the world, we must have an efficient, reliable, and effective rail system. The committee's undertaking on this legislation is therefore critical.

FPAC members appreciate your attention to these matters. We request your support for these adjustments to ensure that the bill is a workable success. Thank you for your attention.

[The Chair, Conservative, Larry Miller]

Thank you very much, Ms. Cobden.

We'll now move to the Grain Growers of Canada and Richard Phillips.

[Richard Phillips, Executive Director, Grain Growers of Canada]

I actually have a handout. There's not a lot of text in it, but I'm going to be referring to it as we go through.

First off, I would like to thank Minister Ritz and Minister Lebel for their work in putting this legislation forward. I'd also like to recognize Minister Strahl and Rob Merrifield for the work they did previous to that. I'd also like to thank the opposition members who have taken a keen interest in this bill and reached out to many stakeholders: Ms. Chow, Mr. Allen, Mr. Aubin, and Mr. Goodale.

Farmers are not the direct shippers. We don't actually do this freight stuff ourselves, but everything that goes on, or anything that goes wrong in our grain handling and transportation system, flows back down and affects our bottom lines very directly. So I would like to walk you through very simply what challenges we face and what we're talking about as farmers.

If you could go to the first two pictures, you'll see that they are of grain bins and barns and lots of snow around them. What happens is that we get a call to deliver grain. There's a train coming next week. We need put 5,000 tonnes of number one hard red spring wheat into this elevator to hit the train. That's what happens to the farmer who gets those phone calls. So we say, well, what day is the train going to be there? It's Tuesday. So we go there and start up our tractors and we clean all the snow away. We thaw out our auger engines and we get everything ready to ship grain. So the first two pictures are just of snowbanks and then in the next two pictures you see what it's like to try to move the snow in our yards in many parts of western Canada in the wintertime. Again, this takes a day's work just to get ready to ship the grain.

We do all of that work, and then you will see in picture number five us loading the grain with a grain vac into the truck that we will use to take it to the grain elevator. That's in the wintertime. Sometimes we get calls in the spring or the fall to deliver grain. Here's a photo if you're harvesting and you have you and your spouse or a hired man and you're out combining and delivering grain. Some farmers only have one good grain truck, and if you're using that at harvest time, then you either have to hire a custom trucker to come in to move that grain to the elevator and book that freight to do that, or you have to take the truck off the combine to haul grain to the elevator. Some farmers will have more than enough trucks, and some of the larger scale farmers might be able to do both at the same time, but for many farmers that's not a realistic option.

When you're rushing around on your farm, shown in picture number seven, it never fails that this is what happens when you're rushing and trying to get home to load grain and run the combines at the same time. That's actually what happened to this particular individual. He sent me a photo of it.

The other things that can happen, as you will see on the next page, are when you're busy seeding. Again, a lot of farmers only have one really good truck, and that's the truck you use to bring fertilizer or seed to your air seeder or your drill when planting. Again, if you have to haul grain during seeding time, you either have to stop and use the truck for that or you again have to hire a custom trucker to come in and do all that.

So you've gone through all this work whether you've cleaned snow or arranged for somebody to come in your busy times to haul that grain.

If you go to the next picture, there's a picture of Weyburn Inland Terminal, a big, successful farmer-owned terminal. That's the newer concrete ones. On the next page—page 10—you'll see an elevator at Coronach, Saskatchewan. What happens is that if the train doesn't come, the elevator fills up, and what you see is a big line of trucks forming. So now you're sitting there in the line with your truck and it's a busy time of year and you're saying, well, should I just turn around and go home and unload this truck, or should I wait in line? Is the train coming, or isn't it coming? This is the sort of stuff that can happen. Or you get up really early in the morning and you get in line first only to find out there's no room to unload the trucks.

These are the sorts of things that back right up to the farm gate and cause farmers a lot of consternation when the rail service and the trains aren't there on time.

The next two pictures are photos of elevators with fully loaded cars of grain. That's what we do want to see. The railways do haul a lot of grain for us every year. The challenge is that it's not always on a timely basis. For example, there are spot prices. If Japan is out in the market buying a lot of wheat, for example, and they want to pay a premium price, or Turkey wants to buy lentils at a premium price, there are spot prices to take into account. And if a grain company bids on that, they want to be sure that they can get the rail transportation to get it to the port on time, to get to the boat on time, to get to the customer's mill on time. If there's a risk of penalties from the customer because you didn't get it there in time, or you're going to pay a lot of demurrage at port for a boat to sit there, then all of that comes back into a lower price for the farmer because the grain company doesn't have that much margin. So they will say, well, we'll pay the farmer less money to allow for these probable costs that we'll absorb along the way.

So at the end of the day it all does come back down to the farmer, and we're the ones who suffer when things don't work properly.

Again, thank you very much for the chance to be here and I look forward to the questions and answers.

[The Chair, Conservative, Larry Miller]

Thank you very much, Mr. Phillips.

We'll now move to the Western Canadian Shippers' Coalition, and Mr. Ian May.

[Ian May, Chair, Western Canadian Shippers' Coalition]

Thank you, Chairman Miller.

I, too, am grateful for the opportunity to speak with this group. We're also grateful for the government's efforts in bringing this bill forward.

I want to give you perhaps a different perspective on the bill, because it will be one that comes from a group of shippers that probably makes greater use of the shipper protection mechanisms contained in the act, and I would think probably more than all other associations combined, although this is a guess because a lot of these are confidential. We have had some rather extensive and, in some cases, unfortunate experiences with them.

The WCSC members are bulk commodity shippers for whom rail freight service is one of the most important components of their business. They're typically captive to one railway or the other and collectively spend in excess of $2 billion annually on rail freight, or about $5.5 million a day.

In evaluating the potential of Bill C-52 to correct what Minister Lebel identified to this committee as the imbalance in the relationship between shippers and railways, it's prudent to examine the current regulatory provisions to discover where they fell short in this regard and in order to help assure the success of this new remedy.

To do so, we must look at sections 113 to 116 of the current version of the Canada Transportation Act. I believe they've been distributed to the members. These sections are subtitled “Level of Services”. They have been part of the rail legislation for years and set out the service rail freight shippers are entitled to and the service obligations the railways must meet.

For example, paragraph 113(1)(a) says that a railway company shall “furnish...adequate and suitable accommodation for the receiving and loading of all traffic offered for carriage on the railway”. Paragraph 113(1)(d) says that it shall “furnish and use all proper appliances, accommodation and means necessary for receiving, loading, carrying, unloading and delivering the traffic”.

While section 113 sets out the service requirements, it is section 116 that demonstrates how seriously Parliament took the delivery of adequate and suitable service. It gives the Canada Transportation Agency real authority, as follows:

If the agency determines that company is not fulfilling any of its service obligations, the Agency may

(a) order that

(i) specific works be constructed or carried out,

(ii) property be acquired,

(iii) cars, motive power or other equipment be allotted, distributed, used or moved as specified by the Agency, or

(iv) any specified steps, systems or methods be taken or followed by the company;

This is on behalf of the railway. The railway has to do all of this stuff. Those are steps, systems, and methods specified by the agency: considerable authority.

However, the conclusions of the rail freight service review panel have taught us that even legislation as clearly drafted and long-standing as this may not protect against railway market dominance. The question is why, and will the provisions of Bill C-52 as drafted provide a better opportunity for balanced relations and the consequential commercial solutions we all prefer?

In order to make that determination, one must first understand the world in which rail freight shippers operate. Taken as a group, they comprise a significant economic force and are perhaps the critical economic driver of the Canadian economy.

A 2009 study provided by the University of Toronto's Rotman School of Management revealed that just four commodity groups—oilseed and grain farming, coal mining, lumber manufacture, and pulp and paper products manufacturing—outperform our national railways by ratios of 6:1 up to 8:1 in contributions to gross domestic product, wages, jobs, and federal taxes paid.

In short, these shippers are the backbone of the Canadian economy, but without reliable and adequate rail freight service, they cannot hope to achieve their full economic potential.

The operative phrase here is “taken as a group”. Commercial interactions between shippers and railways take place on a one-to-one basis where the collective might of the shipper community is irrelevant. In fact, according to a report produced by Quorum for the rail freight service review, there are just over 5,000 shippers using CN and CP for rail freight service transportation, and 4,239 of them are listed as “small” or “very small” in the report. That is a substantial number of jobs and businesses to put through a process wherein they are significantly overmatched.

Bluntly put, a shipper needs proper rail freight service far more than a railway needs to provide it. Railways use an operating model that subordinates the needs of the customer to those of the carrier and its shareholders. Railways defend their right to do so expertly, vigorously, and relentlessly. Rather than honour the spirit of the law, railways have chosen to honour the letter of the law.

They have dedicated legal experts who, in the event of a service complaint, question everything from jurisdiction to administrative fairness, and failing an acceptable result from the agency, make full use of the Federal Court of Appeal and the Supreme Court of Canada in pursuing a favourable outcome. They are experienced and tenacious even with seemingly unimportant issues because they recognize the value of precedent. They are fully aware that victory in a small proceeding may well establish a principle that could lead to victory when much more is on the line.

For their part, shippers use the complaint process as a last resort. Service level complaints are not part of their core business and their knowledge and expertise usually ends with their own operations. They lack the information to comment on railway operational claims, and the process of acquiring experts to assist in that area is time-consuming and costly. Discussions with the agency reveal a certain level of frustrations over the manner in which shippers typically present their cases compared to the railways. Railways are well-prepared and much better acquainted with the process whereas, for the reasons previously mentioned, shippers, particularly smaller ones, are not. Since agency decisions must be based on the evidence presented, typically such decisions favour railways.

All this is to point out that the railway market dominance does not end with commercial negotiations. It pervades the long-standing service complaint mechanism as well. It's for that reason that we have recommended changes to section 115 of the act.

Here's one of our concerns. The current version ofC-52 provides a new opportunity for railways to avoid providing shippers with the service they require, one not previously seen in rail freight legislation. Proposed paragraph 169.37(d) instructs the arbitrator to “have regard to the railway company's service obligations under section 113 to other shippers”. In effect this gives the railway a get-out-of-jail free card when it comes to providing service, which could have unintended consequences for the growth of the Canadian economy, jobs, and our international trade aspiration.

Let me give you an example. Imagine a branch line with four distinct forest product shippers on it. Let's say we have a wood pellet plant, an OSB plant, a plywood plant, and a sawmill. Service has traditionally been provided by a 120-car train set on a three-times-per-week basis. While 120 cars aren't enough to handle all of the demand within the timeframe that each of the facilities requires, over the course of a year the railway manages by shorting one of its customers one week and another the next and so on. It's not great, but at least it's reliable. Service level complaints have been unsuccessful because all the shippers are being treated equally.

Now something good happens. The sawmill has expanded its international market and doubles its orders. Instead of needing 40 cars it needs 80. This doesn't work for the railway because in order to handle the extra shipments they would have to run two smaller trainsets of 80 cars each. It's still profitable but not as good as the 120 car-set, which maximizes asset utilization.

The railway's response to the request for additional cars is “We can give you 20”, which means that the other three shippers on the line will have to take a reduction. Or, the railways may offer to provide the additional cars but at a cost that significantly exceeds the current rate being paid for the original 40 cars.

This particular section of the proposed bill actually turns the current level of service provisions against improved service for the shipper, which is not exactly the recipe for economic growth that Canadians are expecting.

When the government asked for input on the establishment of rail freight service and rail freight service level agreement legislation, shippers responded that they needed a process that was simple, quick, effect and affordable. In terms of the speed of the process you have heard that it will take 45 days. While the proposed language calls for the arbitrator to render a decision within that time, the process actually begins with the shipper requesting that the railway make an offer to enter into an SLA. From that day the railway has 30 days to respond. When you add 45 days and another 20 days that the arbitrator may ask for, you can be into a three-month process before you know it.

In conclusion, we offer these brief comments on Bill C-52 to help ensure that it will accomplish its intended purpose, that of mitigating railway market dominance. We believe that the six amendments put forward by the coalition of rail shippers will assist in that pursuit. This bill brings to light an important issue for Canadian rail freight shippers and opens the door for further improvements during the 2015 statutory review of the Canada Transportation Act.

Thank you for your attention.

[The Chair, Conservative, Larry Miller]

Thank you, Mr. May.

We'll now move to Pulse Canada and Greg Cherewyk.

[Greg Cherewyk, Executive Director, Pulse Canada]

Thank you very much, Mr. Chair.

I appreciate the opportunity to be here today to discuss Bill C-52 and the enhancements that we believe will help this piece of legislation become a tool that contributes to the competitiveness of pulse and special crop shippers, Canadian businesses, and the users of the rail freight system in Canada.

I'm going to refer throughout the course of my discussion here to the six amendments that you have from the CRS, so you might want to keep them handy.

In order to encourage agreements that raise the bar, that allow Canadian businesses that drive our export-dependent economy to maximize their production and their marketing capacity, without having to work through costly legal proceedings, this bill must first provide sufficient clarity, definition, and guidance so that railways and shippers understand the framework within which they're being asked to negotiate agreements. If, and only if, they cannot reach an agreement in the commercial environment, the bill must provide appropriate clarity and guidance to the parties and the arbitrators so that the legislative backstop is quick, fair, and cost-effective.

We've been consistent with our recommendations leading up to the Dinning facilitation process, throughout that process, and indeed throughout the consultation process on Bill C-52, that clarity, definition, and guidance upfront in the legislation would increase the probability of commercial agreements being reached between rail carriers and their customers. While not all of our concerns have been addressed in the current version of this bill, we've also been consistent in saying that we'll remain firm on ends and flexible on means. There's more than one way to get where we're going.

That being said, I want to turn to what we believe must be done to improve the bill, once again with the goal of enhancing competitiveness of Canadian businesses by encouraging improved levels of service, better reliability, and better consistency.

We all recall the emphasis that shippers placed on having the elements of service defined so that shippers and carriers could focus their attention on negotiating the level of service associated with each element. This was a key part of the recommendations of the rail freight service review, and they actually put elements in the final report to the government. On the first day of meetings, the committee asked if this was addressed in Bill C-52. I'll point out where you can find some of these elements and I'll also highlight what needs to be done to complete the picture.

First, let's quickly review the five core elements of an agreement, as stressed by the rail freight service review panel and by shippers throughout the Dinning process, as well as through the consultation process on Bill C-52.

First are the service obligations. To be clear under service obligations, I also include communication protocols as part of a service obligation. Service obligations are the definitions of the services that will be provided.

Second are the performance standards. The standards or commitments associated with each one of those obligations.

Third is performance measurement. The tool that allows you to determine if standards and commitments have actually been met.

Fourth are the consequences. If a party is failing to meet the standards or commitments, some form of consequence shall hold them accountable.

Fifth is dispute resolution. The mechanism that helps determine if there has been a breach and how consequences shall apply.

Under service obligations, currently section 113 of the Canada Transportation Act refers to the railways' obligation to furnish adequate and suitable accommodation for all traffic offered for carriage. During the first committee meeting, it was made clear that the framing of railway obligations in Bill C-52 links back to section 113 and the reference to adequate and suitable accommodation.

Ladies and gentlemen, we have spent the past five years demonstrating that adequate and suitable is not an adequate definition of service obligations. It's time to modernize this act; it's time to bring it into the 21st century and appropriately define the obligations of the railway to make them consistent with modern supply chain operations.

I'm sure you'll agree that the definitions of service obligations provided in our proposed section 115.1 are reasonable. They're reasonable for an agreement between a service provider and its customer in a logistics industry today. Modern supply chains in this age of the Internet are driven by information. The expectations that shippers have for the provision of information about their plans and ongoing operations could not have been conceived of when the current language of the act was first written.

It is imperative that these items are defined so that when a service agreement is considered, it is clear that these are the obligations against which standards and communication protocols will be applied. The addition of 115.1 will provide clarity and guidance, and it's a simple and effective way to encourage more commercial solutions. Finally, it will also address the antiquated language of the act that has everyone wondering how they would ever know if they'd been furnished adequate and suitable accommodation.

With regard to performance standards, the reference to performance standards is found in proposed paragraph 169.31(1)(a). Again, to make this work, to make it effective, it must link back to more than section 113; it must link back to something like section 115.1, which we have proposed. If not, the result will most likely be inadequate and unsuitable.

Turning to performance measurement, it's the tool that's needed to determine if performance has met the performance standard. While it's not referenced directly in the bill, the second key amendment that we've proposed—that is, the removal of the term “operational” from proposed subsection 169.31(1)—will allow parties to include this essential element of an agreement in their SLA.

The term “operational” unnecessarily limits the elements that can be included. The simple amendment we've proposed would broaden the scope of an agreement to include a range of critical service-related elements.

With regard to consequences, once measurement has highlighted a failure, we look for a mechanism to confirm that a breach has occurred and to ensure that an appropriate consequence is in place to hold the offending party accountable—if that is what shippers wish to include in their framing of their SLA request.

The third amendment we've proposed simply gives the shipper the right to choose to include a mechanism that would help determine if a breach has occurred and how damages shall be assessed.

With amendments that would allow for such elements as performance measurement, the sharing of information on performance metrics, and dispute resolution mechanisms, we wouldn't expect a lot of opposition. After all, these are the terms that were routinely offered to shippers by carriers in collaboration agreements; they were key recommendations of the panel; and in the case of dispute resolution mechanisms within an agreement, it was the only type of dispute resolution that the railways considered discussing in the context of the Dinning facilitation process.

The remainder of the amendments we have put forward are critical, and will contribute to a fair and cost-effective arbitration process that is set up to achieve the desired outcomes.

Amendment four is well defined in our submission, and is an obvious gap that needs to be filled. If a railway, immediately following the establishment of an agreement, can apply a tariff or a charge that cannot be challenged, it has the ability to completely subvert the intent of this bill. The arbitrator will have made a decision within a specific context. If we do not amend section 120.1 as outlined in our proposal, a railway, through a limited distribution tariff or other such means, could apply a charge that completely changes the context of that agreement after the fact.

Amendment five in our proposal also addresses a key gap. In the minister's opening remarks to the first committee meeting, he was clear that the intent is to allow the shipper to frame the issues of an agreement under this act. The bill in its current form has a gap that will allow carriers to impose conditions or inject issues that were not raised by the shipper, which is contrary to the stated intent of this bill.

Finally, amendment six stresses that proposed paragraphs 169.37(1)(d), (e), and (f) must be eliminated. With these provisions, the arbitrator must consider a wide range of issues that are often characterized as network effects. The railways will always raise the issue of impacts on the network, and an arbitrator, quite frankly, has the ability to consider their case. But compelling him or her to consider these impacts unfairly disadvantages a shipper who has virtually no way to dispute these claims, adds expense and complexity to a process that should be quick and cost-effective, and places undue and disproportionate emphasis on the railway's needs.

Railways should not have the sole right to determine what is optimal in the context of service. The objective is not to assist railways in achieving record low operating ratios, it is to maximize the production and marketing capacity of Canadian businesses and thus the Canadian economy.

Achieving that goal may mean that the railways won't always have the most profitable configuration of their network. But then, Canadian economic performance is not synonymous with railway profitability.

Our national transportation policy reminds us of this—in section 5 of the act—when it states that:

a competitive, economic and efficient national transportation system that meets the highest practicable safety and security standards and contributes to a sustainable environment and makes the best use of all modes of transportation at the lowest total cost is essential to serve the needs of its users, advance the well-being of Canadians and enable competitiveness and economic growth in both urban and rural areas throughout Canada.

Thank you for your time.

[The Chair, Conservative, Larry Miller]

Thank you very much.

We'll go right to questioning.

Ms. Chow, seven minutes.

[Olivia Chow, NDP, Trinity—Spadina, ON]

Thank you for taking the time to come.

Mr. May, I have a very specific question for you. If the six recommendations in front of us do not pass, is Bill C-52 still worthy of support? I don't want to prejudge if it would or wouldn't, but given that we've been down this road for five years now, whether it's the stakeholders' review or the negotiations and mediation, I think every side understands the issues. I don't think there is anything that is not clear, and the recommendations we have in front of us are very specific.

It's all about the balance of power and who has it. Is it the 5,000 shippers, or is it CN and CP?

If these recommendations don't pass and you were a member of Parliament, what would you do?

[Ian May]

One, I'd fight very hard to get the recommendations passed.

[Olivia Chow, NDP, Trinity—Spadina, ON]

Of course, that's a given.

[Ian May]

Two, the bill is worthy of support because it actually sets down in writing and in testimony the fact that there is an imbalance. Having that on the table is worth a lot to shippers because it means we can come back at this again if we fail this time. As Greg said, we'll come back next time. There's 2015 ahead.

Does that mean we'd be happy about it? No. But we would still support the bill. It's an important premise to have established.

[Olivia Chow, NDP, Trinity—Spadina, ON]

That has been what New Democrats have been doing. We supported it at second reading, but we noted that the bill was deeply flawed.

Are these six recommendations in any rank order? Is there one that would be more of a bottom line than others?

[Wade Sobkowich]

Yes. It ties a bit into the question you asked Ian. We placed them there in the order they appear in the bill. Many of them are inextricably linked to one another.

When we started this process, under a very short timeline, at the Coalition of Rail Shippers we had over 30. We said this wasn't going to work; we needed to pare it down to the minimum we needed to get at the stated objectives of the bill.

I think that if you're looking at removing some of the amendments or not making the amendments now, it really does shift us into a grey area. A number of them get at making sure that the service pie increases in size. If we don't put those measures in place to plug those holes, we don't know if the pie is going to increase in size.

It's going to be divided differently, though. When you ask a group of shippers whether we would be better off to have it or not, it really depends on where you feel you sit in the marketplace and whether you're going to end up with a larger-sized pie or a smaller-sized pie. I think you'll end up with a group of shippers that would say we need these amendments with this bill. You'll end up with another group of shippers that would say, let's take this now and fight hard for the rest of them later. It really puts us into a grey area if we're without these amendments.

[Olivia Chow, NDP, Trinity—Spadina, ON]

Mr. Phillips, I really appreciate your photos. They really explain the problem. I've heard it many times, but seeing it all lined up like that and all the work it takes does illustrate the problem.

How much money is routinely lost? It's hard to put a dollar amount on it, but I would imagine that if the grains aren't delivered on time, or people are waiting, or they're waiting at port....

Does the entire shippers' community have a dollar amount? What about the Grain Growers of Canada? How much impact will it have if we continue on the way of complete market imbalance?

[Richard Phillips]

I think two of us will answer that.

Wade, do you want to go first?

[Wade Sobkowich]

Sure.

I don't mean to monopolize all the answers.

[Richard Phillips]

Just go ahead.

[Some hon. members]

Oh, oh!

[Wade Sobkowich]

Thanks, guys.

For the grain industry, a problem first manifests itself or becomes visible to us when a car isn't spotted. I describe some of the problems in my presentation. When you're facing railcar demurrage at an unload terminal, then you have to add that up. Then it depends on how long you're paying vessel demurrage as you're waiting for that grain to arrive. Today, vessel demurrage is $7,000 a day. That's very low. Typically, it's around $25,000, $30,000 a day. In 2008, before the economic problems, it was $120,000 a day.

So you add those things up, right, and then you add up whether or not you're going to get that customer back or whether he will go somewhere else. You add up contract extension penalties. If you are able to get the grain to the vessel even though you've been paying demurrage, there are penalties for being in default of a contract if that vessel has sailed.

Unfortunately, I can't give you one number because it's very difficult to quantify and it depends on when and the circumstances. But just to give you some idea of the elements of the costs that go into it, those are them, and they can add up to something significant.