Transport Committee on March 5th, 2013

[The Chair, Conservative, Larry Miller]

I'll call the meeting to order. I want to start by thanking all of our witnesses for being here today.

With no further ado, we'll start off with the presentation from the Railway Association of Canada, and Mr. Bourque. You have 10 minutes, please.

[Michael Bourque, President and Chief Executive Officer, Railway Association of Canada]

Thank you, Mr. Chairman, and members of the committee.

My name is Michael Bourque and I am the president and CEO of the Railway Association of Canada. My colleagues, Gord Peters, Michael Murphy, Robert Taylor from CP, Sean Finn, and Shauntelle Paul, are here as well. Some will speak, and we'll all be here to answer questions.

Today, I've divided my presentation into three sections. First, as chief myth buster for the railway industry, I must address some of the statements made by witnesses in front of your committee these last couple of weeks. In the second section, I'll speak about some of the key service and productivity changes we have made and why we believe they are sustainable for the industry, for our employees, and for our customers. Third, I'd like to inform the committee about our proposed recommendation for this committee and to speak to the list of amendments we are seeking.

Let's start with the myths. I'll address the first myth, which is that the freight rail industry is made up of only two railways that don't compete for business. Nothing could be further from the truth. In fact, Canada has a vibrant railway industry, and our association represents 55 railroads, including CN and CP, and the Canadian operations of BNSF, Norfolk Southern, and CSX. These are all class 1 railroads.

We also represent over 30 short-line railroads. You'll hear from Gord, who is the president of a short-line railroad. These are small to medium-sized entrepreneurial Canadian railroads that are very close to the customer. Railroads, especially CN and CP, compete with each other, with other modes of transport, and as part of a globally competitive supply chain with various carriers in other countries. Railways are competing all the time, which is why they constantly work with customers to improve their productivity.

The second myth I would like to address is that somehow railways are failing the country; that our cars don't show up half the time; that they're broken, they don't work. Again, the reality is something else. Canadian freight railways own, maintain, and operate over 60,000 kilometres of track in North America, which is more than 35% larger than our national highway system. Last year we moved some 4 million originated carloads of freight goods in Canada alone. That's over 11,000 carloads per day, every day. However, this figure undermines the number of rail cars that are in transit at any one time. Class 1 railroads estimate that the number of rail cars in transit every day is approximately 140,000 cars, which is equivalent to a train that is 3,000 kilometres long, or about the distance from Vancouver to Thunder Bay. Our railways are serving. In fact, they have an obligation to serve a variety of customers from coast to coast every day.

This brings me to the third myth, which is that our service is lacking. More than one person here has said here that 80% of freight rail customers are unhappy with their service. This is simply untrue. This inaccurate number was taken from a survey done five years ago. It was based on 262 responses from a total of 8,000 shippers. The survey itself included many leading questions and its results were flawed.

A more credible and more recent survey was conducted for shippers themselves last year by Supply Chain Surveys Inc. This survey reports that 72.5% of shippers reported 95% or better on-time departures and on-time arrivals performance from their carriers, an upward trend that began a few years prior to that. There is also a very credible, publicly available survey from RBC Capital Markets, the 2012 North American Railroad Shipper Survey, which found that 69% of rail customers rated rail service as being good or excellent, up from 58% in the previous year. Notwithstanding a rough winter, today our service satisfaction is on par with other modes of transport such as shipping and trucking, reflecting our collaboration with other supply chain partners.

I think l've got time for a fourth myth, so I'll leave you with the one that bothers me the most. There seems to be an acceptance, and it's partially driven by all the rhetoric that we've heard, that railway transactions occur in what people are calling not a normally functioning market, and the inference is that railways exercise and abuse market power. So I'd like to know, what is a normally functioning market these days? Is it the stock market, defence procurement, automotive manufacturing, or how about grain elevators?

Railways are an asset-based business and it's not surprising therefore that that there are not a lot of railways in such a business. It is extremely expensive to build and maintain railroads, but once they're built, they must compete in the marketplace against seaways, trucking, pipelines, and other railroads. Railways aren't any different from pipelines or shipping, or even grain terminals for that matter. Just because there are few players doesn't mean there isn't competition, nor does it mean there is abuse of market power.

Our service is improving. We've put into place new initiatives and investments to make them sustainable. High prices could be a signal of market abuse, yet Canada enjoys the lowest freight rates in the world. In fact, commodity prices have risen significantly over the past 10 years while freight rates have remained largely flat.

Enough about myths, because they could really keep me here all day.

Let me turn to a second major point that I think needs to be addressed today and that is productivity. If we go back 30 years, successive governments realized that they couldn't run railways or contribute to the rail supply chain efficiently, nor could they afford the investment in infrastructure these required. In the late 1970s and early 1980s, the Government of Canada purchased 8,000 hopper cars for transporting grain. In 1981, the cost to repair the system in Canada was estimated at $3.2 billion, which is the equivalent of $9.3 billion in today's dollars. So how would you like to be sitting here debating how we're going to find the $9.3 billion to spend on infrastructure for rail? You don't because of what's happened.

By 1995, direct subsidies for the movement of grain to railways had peaked at $650 million. Since that time we've had a tremendous turnaround in the rail supply chain sector in Canada, thanks to good public policy. A commercial approach unleashed a range of market-based forces that allowed the rail supply chain to become efficient, competitive, and profitable over the next 15 years.

Railways are doing pretty much exactly what you would hope for. They're implementing innovative measures to operate the network more efficiently, passing savings on to their customers, and collaborating with their supply chain partners. Perhaps you have heard the term “precision railroading”. It's been in the news quite a lot these last couple of years. It's a catch-all term for improving the productivity of a railroad, based on customer demand. It focuses on asset utilization, velocity, and efficiency. These areas of focus are now widely accepted in other modes of transportation as the drivers of productivity.

We've heard a lot about the term “operating ratios”, which is interesting because railways have been driving these ratios down. What other industry can you think of that has succeeded not only in improving its productivity so demonstrably but also talked about it openly? I can't think of any other industry. You could name their indicator of productivity, but in railroads we talk about the operating ratio and we move it down. These improvements have led to efficient, competitive railways that enjoy significant investor confidence.

Again, railways are doing exactly what you would hope: increasing their productivity, keeping freight rates low, enabling the competitiveness of Canadian manufacturers and producers and, indeed, the whole supply chain, winning investor confidence, making money, and reinvesting in the network. In fact, last year Canadian railways invested more than $3 billion to enhance their infrastructure and equipment, and customer service programs. In doing so, they're helping the government achieve objectives related to job creation, economic growth, and long-term prosperity—and we're not sitting here debating how the government is going to do that infrastructure.

Let me turn to our recommendations for the bill, because I just got a signal that I've got a minute left. I would first say that we have been consistent in our message that we didn't think the bill was necessary. That is our position and our advice to this committee, that you recommend to the House of Commons that the bill not proceed.

However, the government has introduced a bill, and if we have to live with it, we would like to see some improvements. We have six amendments. We've circulated them. I believe the committee has them in both official languages.

Mr. Mongeau referred to three of those: mediation before arbitration, which is number 3; arbitration by the CTA, which is number 5; and limited recourse to customers who lack a competitive choice, which is number 1.

I'll take one second to explain number 6, which is that we would like to see clauses 12, 13, and 14 of Bill C-52 deleted. That is because a number of shippers have testified that they have not requested such a provision and that the provision is not required by them and would not assist them, nor did railways ask for penalties to be included in the bill.

Now I'm going to turn it over to Gord Peters from Cando on behalf of Canada's short-line railroad industry.

[The Chair, Conservative, Larry Miller]

Mr. Peters.

[Gord Peters, President and Chief Executing Officer, Cando Contracting Limited]

Thank you very much, ladies and gentlemen. Good afternoon.

My name is Gord Peters. I am the president and co-founder of Cando. For the past five years, I've also had the pleasure of sitting on the RAC board, a position that has given me a great seat to view the great improvements the railway industry has made in the past 15 years.

The Canada Transportation Act in 1996 allowed Canadian National and Canadian Pacific to reorganize their operations by selling or leasing some of their low-density segments. The result was exceptional growth in the number of short lines, from a mere 12 in 1996 to around 50 in 2010. This was part of the partial deregulation of the rail sector in Canada, and it has created a truly entrepreneurial industry within Canada, one that we believe is vital to the smooth functioning of the rail network. Our industry is very close to the rail customers and to the communities, and we're very close to the class 1 railroads; we hear them all.

Part of our short-line industry is partially regulated federally, because they are federal railroads, and therefore will be impacted directly by Bill C-52.

In 2011, Canadian short lines, to give you an indication of their scope and size, had revenues of more than $735 million, employed close to 3,000 people, and operated more than 8,500 kilometres of track, which is close to 20% of the track in Canada. Short-line and regional railroads face tough challenges because of high costs and, in our opinion, an under-appreciation of their benefits to the communities they serve. For example, short-line railroads reduce traffic congestion on roads, reduce greenhouse gases and other emissions, and reduce the need for road maintenance and construction.

Despite the comparative capital cost advantage of rail infrastructure versus highway, one of the main challenges facing the short lines today is the ability to meet their long-term capital requirements for line and yard upgrades. Short lines typically operate low-density feeder lines that connect to class 1 railroad networks, but this is only part of the story.

Let me speak to you a bit about Cando, as an example within the short-line industry in Canada today. Cando was created in 1978. Today, we're a Canadian employee-owned company with 300 employees, operating in five provinces and several U.S. states. Cando operates three short-line railways in Canada: the Central Manitoba Railway in Manitoba, the Orangeville Brampton Railway, and the Barrie Collingwood Railway in southern Ontario. Our head office is in Brandon, Manitoba, and we have regional offices in St. Thomas, Ontario, in Winnipeg, Manitoba, and in St. Albert, Alberta.

And we have a good MP.

The Central Manitoba Railway is a Cando-owned full-service railway located in Manitoba that services a mix of on-line industrial and agriculture customers. We also have an off-line service provided by Cando through our 34-acre transportation centre in Winnipeg. In addition to interchange traffic with partners CN and CP, we offer a full suite of auxiliary railway support services, including rail car and locomotive repair, rail car storage, as well as trans-loading and logistics support for many small shippers in the Winnipeg market.

The Orangeville Brampton Railway and the Barrie Collingwood Railway are community-owned short lines in southern Ontario that partner with Cando as the railway operator. We provide local railway services to on-line customers in these communities and interchange with CP. Orangeville Brampton Railway also features the Credit Valley Explorer, a railway excursion tour that offers unique views through the Credit Valley escarpment in the heart of Ontario's Greenbelt.

Cando's short-line railway operations and industrial switching ops philosophy is very simple. We run a highly disciplined and sustainable service, with emphasis on safety, community relations, and customer service, utilizing the operations as a base on which to offer auxiliary railway support services that add value to the on-line and off-line customers. Examples include trans-loading, logistics, rail car storage, rail car and locomotive repair, tourism excursions, and contract industrial track construction maintenance. Our success has been based on a great entrepreneurial spirit and a great team.

That's the story of Cando. I could spend a lot more of the committee's time, but I will move on to what impact we believe Bill C-52 will have on the short-line industry in Canada.

Today, I'm here on behalf of the vast majority of the short-line railroads represented by the RAC. Of the 30 short lines that are members of the RAC, there are 17 companies that will be regulated under this new provision, and many of them, just like Cando, are small to medium-sized companies whose services are sold by class 1 railroads to shippers as part of a larger quotation for services.

This situation raises two issues. If a shipper requests an arbitrated service agreement and receives a new price or service, we will have to implement this service, and yet it is not clear that our role, the costs, or even the feasibility of what is requested is realistic. In other words, in terms of the unintended consequences we have talked about, short-line railways, like other network and supply chain partners, could be negatively affected.

These companies will be subject to this provision directly, but many of us might also have a much more difficult time meeting the deadlines imposed in the bill and absorbing capital cost implications or reduced revenues, if forced to offer added services with no input into what those services cost our companies over the short or long term.

Short-line railways were created in Canada as part of a deliberate public policy towards commercialization. While it is not easy to be in this business, we all love it and do what we have to do to make it profitable, including offering a range of services, having a flexible workforce, training our own people, and cutting costs relentlessly. We still have a long way to go in most provinces to create a better understanding among policy-makers about the benefits to communities and to taxpayers of supporting the short-line railway industry.

The legislation here is perceived as a check and balance on an uncompetitive dual monopoly of CN Rail and CP Rail. The reality is that the railway industry has developed into a complex system of various carriers of various sizes, suppliers, and partners all playing an interconnected and complementary role. Legislation targeting part of the system could have unintended and serious impacts on a far wider scale than was intended.

The short-line railways considered whether it made sense to ask to be excluded from this bill, but it is just not practical. What makes the most sense to us is that the committee exercise its right to recommend that this bill not proceed. With our motivated entrepreneurial teams, we feel confident that we can continue to improve the rail system.

Thank you for hearing our concerns. I look forward to the committee's questions later.

Thank you.

[The Chair, Conservative, Larry Miller]

Thank you very much, Mr. Peters.

Now from Canadian Pacific Railway, we have Mr. Murphy and Mr. Taylor.

[Michael Murphy, Vice-President, Government Affairs, Law and Risk Management, Canadian Pacific Railway]

Thank you, Mr. Chairman.

On behalf of CP, it's my pleasure to be here today.

As you know, CP transports bulk commodities, merchandise, freight, and intermodal traffic. We are a core enabler of the Canadian economy, and we ship commodities worth about $135 million every day.

Up front, I would like to spend a little time outlining the significant traffic volumes moved by CP and the complexity of the network we optimize. Last year CP and its supply chain partners moved 40 million tonnes of grain, 23 million tonnes of coal, 11 million tonnes of potash, 2 million containers, and 162,000 carloads of finished autos. For 2013, you can add about 70,000 carloads of crude oil to the mix. In total last year, we moved 2.7 million carloads of traffic with an average length of haul of about 1,400 kilometres.

To accomplish this, we run a network that spans 22,000 route kilometres in 6 provinces and 13 U.S. states, which serves about 3,000 customers, originates 10,000 shipments a day, and interfaces with 5 other class 1 railroads and numerous short lines.

At CP, the importance of the supply chain is elevated further by the fact that over 70% of our traffic comes through or exits from a Canadian port or a border gateway. Our 3,000 customers are all served by the same set of expensive resources, including about 40,000 rail cars, 1,450 locomotives, and over 1,000 train crews.

As with any network or supply chain, service issues, vessel delays, labour shortages, port congestion, inclement weather, incidents, as well as other factors affect CP and its connections. Issues in any one area can often spread to negatively affect the network generally.

I would like to state that throughout the rail service review process, we maintained there was no need for additional regulation between railways and customers as it is the company's belief that reciprocal commercial arrangements, coupled with a stable, balanced regulatory regime as outlined by Mr. Dinning, remain the best approach to promote supply chain coordination, investment, and financial sustainability. Obviously, however, the government has decided to move forward on a different path.

Therefore, today I want to speak specifically to two amendments that would go a long way to bringing balance to the bill.

The first amendment would be to paragraph 169.31(1)(e) and would remove the ability for an arbitrator to determine if a railway can charge for a service in an imposed service agreement. We think that this change goes beyond service arbitration and could force us to provide a costly service at no charge.

The second amendment would be amending paragraph 169.31(3)(a) to clarify that movements subject to confidential contracts cannot be subject to arbitration under this new provision. This change in the wording of the bill would ensure that going forward, CP's approach to negotiating confidential contracts is protected. We are concerned that customers will be able to get an imposed service agreement after they have negotiated a confidential contract on commercial terms. This type of arrangement could allow some to abuse the process by not negotiating in good faith the first time and trying to get a premium service for a basic rate.

I would also like to take this opportunity to make it very clear that we think the rail service review panel's commentary in 2010 on railway market power was incorrect as well as unsubstantiated and, as we argued at the time, should have been withdrawn.

The panel's finding of market power was made on the basis of only a cursory discussion and without any research, or indeed reference to research. For example, the panel did not discuss what the relevant markets might be in respect of which railways allegedly enjoy market power. Nor did it discuss what direct or indirect evidence exists to support a finding of the existence of market power in the relevant markets. Nor did it consider constraints on the exercise of market power, including the countervailing market power of purchasers and the impact of the large suite of existing shipper remedies, including the grain revenue cap, interswitching, final offer arbitration, reasonableness of a charge, and running rights, that all of these have in the competitive marketplace. This is unfortunate, and it diminishes the overall utility of the report.

Since 1987, when confidential contracts were introduced, bilateral commercial negotiations have created a highly competitive rail supply chain that has resulted in the lowest transportation rates in the world. For example, system-wide at Canadian Pacific, we move a tonne of freight a mile for 4.1¢. That is truly remarkable. Compared to overall commodity values, the cost of rail transportation in fact compares very favourably.

The incredibly efficient rail supply chain in Canada is in part an enabler for Canadian exporters, who are highly successful in world and North American markets even though they sometimes are thousands of kilometres from tidewater or the marketplace. We must ensure that the regulatory regime is balanced and continues to support commercial undertakings first and foremost and is designed to provide a backstop that does not undercut all of what we have achieved to date, as well as support ongoing innovation that future success will require.

The current regime, with its commercial underpinnings, is also supporting significant levels of capital investment. This year at CP we will invest over $1 billion. In today's highly competitive global economy, customers, railways, and supply chain partners all have greater service expectations. Every car on CP has a plan before it is even loaded. A major input into these plans is a forecast of future traffic movements. The key is that as many movements as possible are forecast and predicted for a long enough period of time. This is because of the need to supply the crews, locomotives, rail cars, yard, and main-line capacity that I spoke of, all of which are expensive and not available on a moment's notice. We spend a lot of time, effort, and money to get assets to the right place at the right time to handle traffic. Getting those assets in the right place takes substantial lead time.

Furthermore, when forecasts are not accurate or customers do not have traffic to be moved, the cost is going to be borne by the railway. Everyone who rides a bus would like it to come at the time that most suits their individual needs, but bus routes are planned to provide the best possible service to the most people, rather than being tailored to reach each rider's specific desire. Service on a rail system is much the same: the system must perform for the benefit of all, not just one.

It terms of the sustainability of improved service, we are a strong supporter of working together with all of our supply chain partners and customers on improving reliability and predictability across all elements of the supply chain. This is why we have agreements in place with over 70% of our customers, by revenue, as well as our major ports and terminals. The only large part of CP's business not covered by agreements is grain, where the revenue is regulated by government.

The agreements we've put in place cover a range of best practices, including performance targets, performance indicators, dispute resolution, communication, and business development. They are delivering results. For example, container dwell at the port of metro Vancouver is consistently running at less than 2 days, and recently we announced a reduction of one full day on our transcontinental container service from Vancouver to Toronto.

The more recent improvements in the rail supply chain have come out of these collaborative efforts to improve reliability and predictability. Therefore we support the Dinning approach to service agreements, as it allows for the development of mutual accountability among customers and railways. That is why it's critical that if a regulator is going to impose service, that service cannot be considered from the perspective of any single customer in isolation; one must look at the overall network.

I have a couple of additional facts, Mr. Chairman, pass on. In fall 2012, the export grain supply chain through Vancouver set an all-time record, with extended periods of close to 5,000 rail car on-loads per week. Improvements of this magnitude are not easy, and we'll be happy to talk about that.

We also introduced a new remedy that allows for imposed service by a regulator. Any of that must be done very, very carefully. At a minimum, it must support commercial undertakings, as I've tried to stress. It should reflect the idea that visibility on the traffic offering is an important consideration, and service must be viewed from a perspective that looks at the entire network

In closing, I simply want to reiterate that throughout the service review we have maintained that there is no need for additional regulation among railways and customers. We're firmly of a view that continued improvement in our supply chain will be achieved through offsetting commercial undertakings—in particular, better traffic forecasting.

Thank you, Mr. Chairman.

[The Chair, Conservative, Larry Miller]

Thank you very much.

I just wanted to point out that we also have Mr. Sean Finn and Ms. Paul here from CN to answer questions.

Without further ado, we will now move to Mr. Sullivan for seven minutes.

[Mike Sullivan, NDP, York South—Weston, ON]

Thank you, Mr. Chair.

Thank you all for coming.

It's a vastly different impression that you've left of the industry than the one I heard from the shippers.

Mr. Bourque, you suggest that this network is many, many competitors big, but that's not what we heard. This isn't like the telephone industry, is it, where I can have whomever I want connected to the wires to my house? If I am close to a CN line, that's whom I have to use. Is that not the case? I can't have CP driving my freight on CN's tracks?

[Michael Bourque]

That's a difficult comparison to make. To answer your question, if you are close to CP and CN, you have the right to interchange. You might have only one rail line close to you, but if you're close enough to the other one, then there's an obligation by the other one to quote you a price. Gord or Shauntelle will be able to describe that.

[Mike Sullivan, NDP, York South—Weston, ON]

But it's only if I'm close enough. Essentially for some places anyway, it's a monopoly situation.

[Michael Bourque]

The other point is that you have to look at it as a total network. There's an intense amount of competition that goes on because, typically for a customer, especially for very large shipments, such as coal or grain shipments to China, or shipments of merchandise from China to here, what they're doing—and Shauntelle can perhaps speak to this—is that they're quoting the total price. So the customer is looking at the cost of shipping, the time that it takes. They're looking at the whole supply chain. So it's a globally competitive market.

[Shauntelle Paul, General Manager, Service Delivery, Canadian National Railway Company]

If we come back to forest products as an example, 55% of the forest products that are moved in Canada today don't even go by rail. They go by another mode. Of the 45% that's left, you have 15% that both railways can interchange and compete for. You have another 10% that is truck competitive; it's less than 500 miles. When you really get down to it, that gives you somewhere between 10% and 15% that you could really say is captive.

[Mike Sullivan, NDP, York South—Weston, ON]

Monopolistic?

[Shauntelle Paul]

Exactly.

[Mike Sullivan, NDP, York South—Weston, ON]

We heard from the shippers associations that part of what they're looking for as amendments to the bill is the ability to put dispute resolution into all the agreements.

Mr. Murphy, you suggested that there are already dispute resolutions in some of your contracts, but they're looking for ways to put these into all agreements and, if necessary, through an arbitration system, so they wouldn't have to go to court. Nobody really wants to spend a lot of money on lawyers.

We've heard from the government that their position is that any dispute as to whether or not a service had been upheld in terms of whether or not there were damages payable to the shipper should be dealt with in court, not through this bill. I'm wondering if anybody has any comments about how fast and how often you want to go to court.

[Gord Peters]

There's one comment I'd make. We've run an industrial switching operation in St. Thomas, Ontario, for Formet—Magna International—since 1996. We're handling up to 5,000 car frames a day. We load them and hand them off to either CN or CP.

Of course, we were very concerned when we signed that contract. For example, who's at fault if we shut down GM? GM would take it pretty seriously if we shut them down. They made us sign a huge bond, and we made it very clear that we had a matrix in place, that we could point to faults, and that if it wasn't us but CN or CP, whoever it was, they were going to have to pay. If we were at fault, we were going to have to pay. Since 1996, we haven't had one default on the whole thing.

[Mike Sullivan, NDP, York South—Weston, ON]

But you've built it into—

[Gord Peters]

But they're in it, the contracting system.

[Mike Sullivan, NDP, York South—Weston, ON]

—your contracting system.

[Gord Peters]

Yes. They're in it.

[Mike Sullivan, NDP, York South—Weston, ON]

Nobody is going to go off to court on this.

[Gord Peters]

Yes, we would have to go to court if there were a dispute, because we wouldn't know how big the problem was or whatever it was.

[Mike Sullivan, NDP, York South—Weston, ON]

Right.

[Gord Peters]

If there were a dispute, I don't know how you could put a number on it. It might be $1,000 or it might be $1 million. How are you going to know?

[Mike Sullivan, NDP, York South—Weston, ON]

The other thing the shippers talked about was the ability of the railroads to apply extra fees for demurrage. That was one of the things they talked about, whereas there's no countervailing ability for the shippers to seek damages from or have some kind of penalty on the part of the railroads.

Essentially this bill creates a penalty, but the penalty is really a tax. If you have this agreement and you fail, you pay the government, and then you go off to court and decide how much between you. It's really a way for the government to tax the railroads for failing to live up to their agreements. It may be an incentive for the railroads to live up to their agreements, but it's not going to solve the whole problem, because you're still going to have a dispute between the shipper and the railroad. Can you comment on that?