Transport Committee on March 5th, 2013

[Ed Holder, Conservative, London West, ON]

Thank you. It's—

[The Chair, Conservative, Larry Miller]

Thank you.

I was very generous, Mr. Holder.

Mr. Aubin, five minutes.

[Robert Aubin, NDP, Trois-Rivières, QC]

Thank you, Mr. Chair.

Thank you all for coming.

I must confess that, the more groups we meet, the more it seems to me that the problem this bill is causing is a profound one.

I thought I knew CN and CP. As for the Railway Association of Canada, I took a look at their website just so that I could get to know it better. So my first question goes to Mr. Bourque, although it is open to everyone.

As I was looking at your website, I found some words that I found a little harsh. Let me quickly read them to you, Mr. Bourque. You say that it seems that the only groups arguing in favour of a return to regulation are those who prefer a managed economy rather than a market economy. I confess that I still have a lot of hesitation in feeling that we in Canada, when we are talking about Canadian railways, are in a market economy.

So here is the first question I would like to ask. Do you really think that the objective of this bill, a bill introduced by the Conservative government, is to create a managed economy?

[Michael Bourque]

I am going to answer in English.

[Robert Aubin, NDP, Trois-Rivières, QC]

No problem.

[Michael Bourque]

What I was trying to communicate in the remarks of mine that you just cited is that many of the people whom I had spoken to about this potential legislation were frankly outraged that the government would step into an area that was working in a commercial context. In particular, if you look at it historically—and that's why I tried to refer to some of the history today—over the last 30 years, successive governments have made good public policy to ensure that railways and their customers are operating in a commercial context. That's why railways can invest as much money as we have in our infrastructure. That's why we've created a short-line industry, which has been able to pick up these pieces. I said the reverse of.... Really, most people were outraged that the government wanted to introduce new legislation, including the railroad industry, which didn't really want this provision to be introduced.

[Robert Aubin, NDP, Trois-Rivières, QC]

Thank you.

Still on the subject of a market economy versus a managed economy, I was wondering if you thought that there really is free competition between CN and CP.

As an example, for short lines, many customers, some of whom I have met personally, have a hard time pointing to any notable differences in the CN and CP rate structures when both are available. I am trying to understand it and I do not have the answer. Maybe you do. Perhaps when CP sells a stretch of rail line to another company, the profits could be a factor in the rates provided to future customers.

Is it your impression that there really is free competition between CN and CP and that, as a result, we really do have a market economy?

[Sean Finn]

We said this on Thursday, but let me repeat it today: there is no doubt that the competition between us for most of the traffic in Canada is fierce.

In western Canada, for example, grain leaves the farm by truck and there is a choice between going to the elevator served by CN and the elevator served by CP. That choice is clearly the farmer’s. In the places with the 30 km interchange zone, customers have the right to ask the prices at both places and choose the better one. But we do not have the choice of letting the other rail company use our tracks.

My experience at CN allows me to say that we compete fiercely, to the extent that our former president is now the president of CP. I can guarantee you that the competition is fierce.

[Robert Aubin, NDP, Trois-Rivières, QC]

In that case, why do you think the government has chosen to support fixed service agreements rather than the laws of commercial transactions?

[Sean Finn]

Until the act was introduced, I feel that the government’s intention was to strongly encourage the parties to find a solution. I sat on Mr. Dinning’s committee, after all. We had a couple of dozen meetings in which we tried to reach a business solution on the matter. The issue that some shippers had was that they preferred to wait for legislation that would impose a higher standard, rather than negotiating.

But you don’t have to worry. At the moment, we are inviting all our customers, big ones, small ones and medium-sized ones to sit down with us to come to a service agreement that will include hours of service, the number of switch windows per week, the number of cars and, if possible, a guaranteed minimum level of traffic. Then there will be discussions about the consequences if we do not meet our mutual obligations.

You can be sure that this is not being done in a vacuum. At the moment, we have a number of agreements with a number of customers. As I said earlier, all Canadian ports have information and service exchange agreements governing what is going through those ports.

[Robert Aubin, NDP, Trois-Rivières, QC]

Thank you.

[The Chair, Conservative, Larry Miller]

Thank you very much.

Mr. Toet for five minutes.

[Lawrence Toet, Conservative, Elmwood—Transcona, MB]

Thank you, Mr. Chair.

And thank you to all our guests who are with us today.

It is interesting how we definitely hear some different aspects on this. One of the things I want to come back to, and it's been talked about a lot, is everybody's desire on the commercially negotiated contracts. I think we've also been very clear that this bill is actually what we want see it as, as a backstop, so that we can create commercially negotiated contracts. That's where it sits. When I look at it, I see some things in this bill that will actually be advantageous going forward in negotiating these contracts.

One of the things I look at is that the arbitrator is required to consider the full network implications when he is making decisions based on what has been brought forward. Mr. Peters' concern about the short-line aspect of it. Well, that is part of the network. The port is part of the network. All of that has to be looked at by the arbitrator when he comes forward with his final decision. To me, I think this also sets the precedent for when you're negotiating with the shipper: they now know that the network is part of it. From what they were saying initially in some of the hearings that we had, there was a sense that the network wasn't part of it or shouldn't be part of it. I think they're coming to understand that the network does have to be part of it, because we don't want to overburden the network and have it collapse on us. That would be advantageous to no one, neither them nor the railways.

I just wonder if you could comment on that aspect, that it actually sets up a good clear parameter that may help you not to have this backstop but to actually have the commercially negotiated contracts you're looking for.

[Michael Murphy]

I can start, if you'd like.

I fully agree with your commentary. I tried in my opening remarks to give a sense of the importance of this. I think it's one of the biggest issues that we've had throughout this process and that continues to be there, given what we've seen of the proposals by some of the associations who want to see the bill amended to take that away from the process. I think that would be right at the top of the list of mistakes that you'd make, because of the reasons you've just outlined.

On our ability to function, we just talked about the kind of collaboration agreements we've done with ports and terminals and the kind of work we do with other supply chain partners. When you think about moving any particular commodity, our average haul is about 1,400 kilometres. Think about the number of touch points that you're going to have there: two out of three cross a border, so you're into ports, you're into terminals, you're into terminals inland. You could be transloading, you could be interchanging traffic. There are just so many pieces that move here in order to finish a movement. From our standpoint it's absolutely critical. So I agree with you.

Robert, I don't know if you have anything add.

[Robert Taylor, Director, Government Affairs, Law and Risk Management, Canadian Pacific Railway]

Just very quickly, I think that the ability to optimize the network is why we have the lowest freight rates in the world. So when we're moving a tonne for $33 over 1,400 kilometres, it's because of the network. If you lose that, you've lost everything, really.

[Sean Finn]

Just to your point about the backstop, I think it's important through the process and our discussions with our customers today to have agreements. We always look to mediation. So, you're trying to negotiate commercially and you get to a point where there are a couple of outstanding issues. As you know, the railways are very much of the view that there should be a mediation process prior to imposed arbitration. That should be the ultimate backstop. We don't think it should be there. As you know, today there's no requirement in this bill to have the parties mediate before they arbitrate, and typically that would be the case. Most of our experience has been commercially. When you negotiate with the party and you can't arrive at an agreement, you go into mediation before you get to arbitration.

[Lawrence Toet, Conservative, Elmwood—Transcona, MB]

One of the other things I heard about in the testimony today—and it sounds as though there has been progress in this too—was the railways' inability to receive a future commitment from clients and shippers and how having such a commitment would help you in addressing long-term things.

I look at the bill and see that a lot of that is going to be helped by the bill. Shippers do not have to come forward to the arbitrator with commitments, but the arbitrator does, according to the bill, have to take that into account. In other words, a shipper who has future commitments, including longer-term commitments, would be part of that process going forward. We have set a framework or parameter or mindset for the shipper saying that this is going to be part of what you need in order to be in the negotiation; that you can't go to the railway and say: “I don't want to make any commitments, but I want you to do this.”

I think the bill has actually helped you in the process of the commercial negotiations, because it has set the parameters for the shippers. There's a better understanding of what they're going to have to bring forward to the arbitrator to have their cases taken seriously. The reality is, we all know, that if they go to the arbitrator and say that they're making zero commitments, that nothing is going to happen, that they're not telling whether they're going to ship five cars or five million cars but that they want the arbitrator to side with them, chances are that the arbitrator is not going to do that.

So we've set that mindset. Maybe you could comment on how those things are actually helping you to create the atmosphere....

Mr. Murphy, you talked about 70% commercial negotiations now. I'm assuming you'd like to see them at 100%, when you would have these contracts with everybody. I think this bill will actually help to push that 70% to a higher level.

Maybe both of you could comment on how you see that going forward.

[Robert Taylor]

That's the essence of a commercial negotiation. If you want to get to 100% rail service and you want a penalty for non-performance, then there has to be a commitment on the other side. Without visibility on traffic or a hard commitment, it's impossible to get 100% rail service all the time.

So we agree. I think Mr. Dinning's report did a good job of putting additional definition around this.

[The Chair, Conservative, Larry Miller]

Thank you.

I'll move to Mr. Toone for five minutes.

[Philip Toone, NDP, Gaspésie—Îles-de-la-Madeleine, QC]

Thank you, Mr. Chair.

To start with the Dinning report, I think it would be very opportune that Mr. Dinning come here to testify. I think his testimony would be appreciated and very enlightening. I hope he'll be showing up at this committee some time soon.

But I have a question about the rates. We talked about it a little earlier, but I would just like to explore the matter a little more.

I assume that the rates are based on volume. The better the customer, the better the rate. That is sort of what one would expect. Can I assume that the rate would be adjusted if the volume decreased, even for a major customer? I assume the rail transport would cost more? Would that generally be true?

[Sean Finn]

Normally, a major customer will have a confidential contract. There will be a commitment for a certain volume and a business discussion will take place if the volume is not met, without anything being imposed on one side or the other.

Of course, you understand that major shippers often have their own fleet of cars. So the price of the cars is not a factor. When we have to supply the cars ourselves and the traffic changes, then, overnight, we have lost volume but have bought the assets we need to serve the customer. That is an issue.

I will not say that the link is a direct one. These are long-term confidential contracts. The rate does change depending on the volume. It is explained by the simple fact that the more we ship, the more cars we put on and the lower the costs. That is only normal, since they are being shared.

[Philip Toone, NDP, Gaspésie—Îles-de-la-Madeleine, QC]

Yes, as I asked the question, I was thinking of VIA , which has its own equipment, in general.

Nothing in the bill that we are studying today would prevent you from increasing rates. We know that VIA Rail is going to decrease its service, drastically at times and especially in the regions. In some cases, a route has been cut completely. In the Maritimes, for example, the service is being cut by 50%. So nothing in the bill prevents you from increasing the rates for VIA Rail.

[Sean Finn]

We have a contract with VIA Rail. The contract is negotiated by the parties for the entire network, not just for one section in particular. It is very difficult to predict what will happen if, to take your example, the service between Bathurst and Moncton goes from six days to three. But for us, the rates apply to the entire country, we do not apply them to individual lines as such.

The question that is asked a lot more in terms of VIA RAil is whether its fleet of trains and rolling stock are economical or not. I will let VIA Rail answer that question. It is not up to CN to do so.

[Philip Toone, NDP, Gaspésie—Îles-de-la-Madeleine, QC]

Mr. Peters, during your earlier testimony you talked about patchwork regulatory structures. Could you elaborate? What kind of impact does that have on short lines?

[Gord Peters]

As a small-business person, I think it's well known that for small business, red tape is a burden to understand and to deal with. If anybody has been in a small business helping mentor lots of young kids trying to get into business, with all of those things there's a huge weight of learning how to run the business.

Quite frankly, the bigger we get in business, the more the regulations. I rather like it, because it keeps a lot of people out.