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.