Transport Committee on Sept. 20th, 2016

[The Vice-Chair, Conservative, Luc Berthold]

Hello and welcome everyone.

On behalf of our chair, Mrs. Sgro, who is ill today unfortunately, welcome back to Ottawa. On all our behalf, if I may, I wish her a speedy recovery so she can return fit and filled with her usual determination.

I hope you had an enjoyable summer. It looks like we have an interesting session ahead of us.

I would also like to welcome a new member, Mr. Aubin, who is replacing Mrs. Duncan. I must accordingly give the floor to our clerk so we can elect a new vice-chair.

[The Clerk of the Committee, Mr. Andrew Bartholomew Chaplin]

Pursuant to Standing Order 106(2), the second vice-chair must be a member of an opposition party other than the official opposition.

I am now ready to receive a motion to that effect.

Mr. Iacono, you have the floor.

[Angelo Iacono, Liberal, Alfred-Pellan, QC]

I nominate Mr. Aubin as the second vice-chair.

[The Clerk]

It has been moved by Mr. Iacono that Mr. Aubin

to be elected as the second vice-chair of the committee.

The committee has heard the terms of the motion. Is it the pleasure of the committee to adopt the motion?

[Some hon. members]

Yes.

[The Clerk]

(Motion agreed to)

[The Clerk]

I declare the motion adopted and Mr. Aubin is duly elected as second vice-chair of the committee.

[The Vice-Chair, Conservative, Luc Berthold]

That was a very short election campaign, Mr. Aubin.

As shown on our agenda, we will now begin our study of certain provisions of the Fair Rail for Grain Farmers Act. We will hear from two groups of witnesses this morning.

First, we have officials from the Canadian Transportation Agency and I invite them to introduce themselves. They will give a presentation of about 10 minutes, followed by a round of questions from committee members.

Mr. Gaspar, please go ahead.

[Fred Gaspar, Chief Compliance Officer, Canadian Transportation Agency]

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

My name is Fred Gaspar and I am the chief compliance officer for the Canadian Transportation Agency and with me today is Randall Meades, who is our chief strategy officer.

We are pleased to appear before you again and to answer any questions you may have concerning your study.

I'd like to start by offering a brief reminder about our organization and its mandate. The Canadian Transportation Agency is an independent body. As a federal quasi-judicial tribunal and regulator, we have jurisdiction over a broad range of air, rail, and marine matters. The agency essentially has three core mandates. The first is to help smooth the national transportation system, keeping it running efficiently. The second is to protect the human rights of travellers with disabilities by ensuring that the transportation system is fully accessible. The third is consumer protection for air travellers.

The Canada Transportation Act is the agency's enabling statute. It outlines the extent of the agency's authority and jurisdiction as well as the agency's role in administering the act.

The agency also shares responsibility for certain provisions of the Railway Relocation and Crossing Act and the Railway Safety Act. These provisions are focused mainly on resolving disputes and cost recovery.

When it comes to rail transportation, the agency's mandate applies to railway companies under federal jurisdiction, of which there are currently 21 active railways, including class 1s and short lines. Briefly, the agency is responsible for a number of regulatory functions that range from ensuring that federal railways carry the required third party liability insurance requirements to establishing the annual maximum revenue entitlement for CN and CP in moving western grains.

The agency also plays an important role in helping to resolve rail transport disputes. In addition to our formal adjudicative function, we also have expertise in alternative dispute resolution services, including facilitation, mediation, and arbitration services. In our experience, these methods can be faster and less expensive, producing a resolution that benefits all sides.

Of relevance today, I'd like to highlight that the alternative dispute resolution process administered or provided by the agency now includes three forms of arbitration: rail level of service arbitration, rail arbitration, and final offer arbitration.

Since 2013, under the new rail level of service arbitration framework, the agency has had the authority to impose administrative monetary penalties for the contravention of any requirement imposed on a railway company, up to a maximum of $100,000 for each violation. In addition to this, the 2014 amendments gave the agency the power to order railway companies to pay compensation as part of its level of service complaint mechanism.

Although the agency has a number of rail-related responsibilities, today I'd like to focus exclusively on Bill C-30, Fair Rail for Grain Farmers Act. It was first passed on August 1, 2014 and further extended by this Parliament on June 15, 2016.

Bill C-30 was aimed at getting grain crops to market quickly and at increasing predictability and transparency in the supply chain. As you will, recall it was introduced as an urgent response to a unique set of circumstances: an unprecedented crop year and a polar vortex.

The key new provisions that were set out in that bill empowered the agency in three new ways: to specify by regulation what constitutes operational terms for the purpose of rail level of service arbitration; to provide confidential advice to the Minister of Transport in establishing minimum grain volume requirements for the movement of schedule II grains; and, to set out an interswitching rate for areas of commodities that the agency specifies.

When the Fair Rail Freight Service Act was enacted in June 2013, it introduced arbitration for rail level of service where parties are unable to negotiate the terms of a level of service agreement confidentially.

This arbitration is limited to matters within subsection 169.31(1) of the Canada Transportation Act, and specifically, “the operational terms that the railway company must comply with” for the “receiving, loading, carrying, unloading and delivering” of “traffic, including performance standards and communication protocols”, as well as any other “operational terms” that the shipper must comply with that are related to the company's own operational terms; any “incidental” service provided by the railway company; or “the question of whether the railway company may apply a charge with respect to an operational term” or for an incidental service provided by the company.

The level of service arbitration provisions do not define operational terms themselves. At the time, the agency had no power to define them by way of regulation. The Fair Rail for Grain Farmers Act further amended the CTA to provide the agency with the authority to then make regulations specifying what constitutes “operational terms”.

In order to establish the regulations, the agency consulted broadly. We conducted targeted and focused consultations both with the shippers and the railways and with other stakeholders. Now in force, those regulations bring clarity to shippers and railways as to what might be the subject of a level of service arbitration.

Today, the regulations and operational terms for arbitration on the level of service of railways support efficient arbitration within a statutory deadline of 45 to 65 calendar days, and they've reduced the need for parallel adjudication by the agency as to the eligibility of certain matters that may be submitted for arbitration.

To clarify, an operational term refers to railway and shipper obligations in receiving, loading, carrying, unloading and delivering of traffic, including performance standards and communication protocols. They are an extensive but non-exhaustive list of terms that are eligible for arbitration.

Bill C-30 also amended the act, and requires the agency, after consulting with CN and CP and the owners and/or operators of grain handling undertakings, to provide advice to the minister on the minimum amount of grain that CN and CP should be required to move during each month of the crop year, on or before July 1 of each year preceding that crop year.

Third, and probably most important to this committee, Bill C-30 introduced provisions that enable the agency to expand interswitching to 160 kilometres for Manitoba, Alberta, and Saskatchewan. Interswitching, as you will know, is an operation performed by railway companies whereby one carrier performs the pickup of cars from a customer and hands off these cars to another carrier that then performs the “line haul”, or the majority of the carriage. The interswitching arrangement is made in cases where a shipper has physical access to a single carrier but is within a defined distance to one or more competing carriers.

To ensure fair and reasonable access to the entire railway system, interswitching has been regulated in Canada since 1904 and is a commercial agreement between railway companies whereby one railway company will carry traffic for the other railway company and vice versa, to ensure that shippers captive to the rail system have access at a regulated rate. Railway companies reconcile these costs between themselves on a yearly basis. Interswitching allows shippers to negotiate, through normal commercial processes, suitable terms and conditions of carriage with competing carriers for the line haul portion of the overall car movement.

The Railway Interswitching Regulations set the rates to be charged for interswitching services provided by the terminal carrier, thereby establishing a predictable and fair pricing regime that is applied equally to all terminal carriers providing interswitching services.

Under the Canada Transportation Act, the agency may make regulations prescribing terms and conditions for the interswitching of traffic, as well as determine the rate per car to be charged for performing this operation and establish distance zones for that purpose. The interswitching provisions of the act are considered to be competitive access provisions, allowing the shipper to choose their carrier despite having physical access to only one carrier.

Please note that the agency reviews the railway interswitching costs annually and revises the rates as required or as part of the five-year statutory review of the regulations, which was last done in 2013.

The new interswitching rate regulations now establish five interswitching zones: 6.4 kilometres, 10 kilometres, 20 kilometres, 30 kilometres, and on a temporary basis for Manitoba, Saskatchewan, and Alberta 160 kilometres from an interchange. The amendment created this new interswitching zone 5 that is applicable to movements for all commodities in those prairie provinces.

The rate for zone 5 follows the pattern established in the current rates, namely that the zone rate will apply to the first 40 kilometres of track distance travelled within the zone, and then a per kilometre rate will apply for each kilometre of track travelled beyond the 40 kilometres within the distance.

After this brief overview, we would like to thank you for your attention. We will be pleased to answer all your questions.

[The Vice-Chair, Conservative, Luc Berthold]

Thank you very much, Mr. Gaspar for this very informative presentation on your role.

I will now give the floor to Ms. Block for an initial six minutes.

[Kelly Block, Conservative, Carlton Trail—Eagle Creek, SK]

Thank you very much, Mr. Chair. I join you in welcoming everybody back from a full summer I'm sure. I look forward to the work that we're going to do this fall, and also want to welcome Mr. Aubin to the committee.

I look forward to the study that we are doing on Bill C-30 and interswitching in particular. I do note that this act was introduced in the House of Commons by the Minister of Agriculture and Agri-Food. It was read for the first time in March. I think what that highlights is the relationship that we often see between different ministries—as we are the committee for transportation, communities, and infrastructure—that exists in developing legislation like this. So I'm wondering what, if any, input the agency did have in developing those sections pertaining to its authority in this legislation.

[Fred Gaspar]

You caught me at a bit of a disadvantage as I wasn't there in 2013 when it happened, but I can assure you that there is a pretty robust and ongoing discussion amongst officials. We talk to Transport Canada officials at a working level on a constant basis. Obviously, the work between us is iterative so I'm quite confident that there would have been those discussions. Similarly the legislation enabled the regulatory frameworks and we then developed, as I mentioned, operational terms. All I can speak to is a high degree of confidence that there probably were those discussions because those discussions occur on a regular basis.

[Randall Meades, Chief Strategy Officer, Canadian Transportation Agency]

If I can add, Fred, it's also consistent regularly with our mandate because they're operationally driven as opposed to there's been no policy authority or anything like that. It's strictly been operational, which is consistent with what we do.

[Kelly Block, Conservative, Carlton Trail—Eagle Creek, SK]

I'm going to turn now specifically to interswitching. We know that the Emerson report recommends excluding interswitching from the maximum revenue entitlement calculations. I think this is to remove a barrier to the use of interswitching. Can you comment on that? How long would it take to enact this recommendation, and what would be the financial benefit to the railways?

[Randall Meades]

I can give you a little perspective on the take-up of interswitching. Our first full year that we have data for is 2015. We have a little bit of data for 2014, but the measure was only in place for six months, so 2015 is our marker. We'll probably have 2016 this time next year to compare. We have about 16 carriers that took advantage of the 30- to 160-kilometre interswitching. That represents about just a little over 2,900 cars. That's the type of input. Again, it's operation and data-driven input that we will provide to Transport Canada that goes into their process in evaluating the recommendations from the CTA review.

[Kelly Block, Conservative, Carlton Trail—Eagle Creek, SK]

I note that in the legislation a new subsection 128(1.1) specifies that the agency can prescribe different interswitching distances based on specific regions or goods. Has the way the regulated interswitching rates are calculated changed since the geographic limit was extended, and could the regulated interswitching rates be set every year?

[Fred Gaspar]

My colleague Randall will speak in more detail, but I can tell you that the methodology that we use for determining the interswitching rates as well as for the maximum revenue entitlement, MRE, is pretty prescribed. The MRE is actually prescribed in legislation so I don't think there would be much adjustment to the methodology.

[Randall Meades]

In terms of interswitching, as I'm sure you're aware, we have to by law review the interswitching regulations once every five years. As part of our assessment of going from the 30 to the 160, that was the last time that the rate was set, specifically for zone 5 because we did not have a rate for zone 5. At the time a rate was developed with extensive consultation throughout both the shipper and the carrier community.

[Kelly Block, Conservative, Carlton Trail—Eagle Creek, SK]

I also note that Mr. Emerson recommends that the agency be permitted to set interswitching rates annually to better reflect actual costs, and not only when the railway interswitching regulations are reviewed or published, as you've mentioned.

Would that be something the agency would welcome?

[Randall Meades]

Anecdotally we've heard from shippers and carriers that reviewing or revising rates only every five years may not be the best practice when you're taking a look at a market-based economy. The transactions are driven by price; that's part of the price determination. In that respect, you would have to balance doing it more often against the benefit, because sometimes there are not great changes year over year, and to put the resources into something that doesn't particularly change would, number one, have to be reviewed.

Number two, we're in a bit of an awkward situation now with the provisions being extended for only one year. From our vantage point here, as an economist I'd like to have the system set and steady, so that I can take a look at it long term.

[Fred Gaspar]

While being respectful of the time, I think it's important to note that while we do have the obligation to review them every five years, there's nothing preventing us from reviewing at different periods, and certainly, depending on the outcome—

[The Vice-Chair, Conservative, Luc Berthold]

Mr. Gaspar, you will have the opportunity to continue your explanations later on.

I have to give the floor to a government MP now for a first series of questions.

Mr. Iacono, please go ahead.

[Angelo Iacono, Liberal, Alfred-Pellan, QC]

Thank you, Mr. Chair.

I would also like to welcome all the members of the committee. Thank you also, Mr. Gaspar, for your presentation.

Please note, Mr. Chair, that I will share my time with my colleague Ken Hardie.

Mr. Gaspar, I have two related questions.

Since the Fair Rail for Grain Farmers Act was implemented, what are your observations on the effectiveness of the measures and on the transport of grain in general?

Secondly, how many times in the past two years have rail companies had to pay penalties under the revenue entitlement program and what was the total amount of the penalties paid?

[Fred Gaspar, Chief Compliance Officer, Canadian Transportation Agency]

I will start with the second question. We will provide the exact figures to the committee later on because we do not have them right now.

As I recall, over the past two years, as regards maximum revenue entitlement, I believe that companies earned more than the limit set by the agency. In these cases, the companies are required to pay a penalty to a grain research foundation. This is not unusual. It makes sense because the companies do not know in advance how much money they will receive to provide the service. We try to anticipate what will happen. Indeed, it is not unusual for this to cause ...

I'm sorry, I have forgotten your first question.

[Angelo Iacono, Liberal, Alfred-Pellan, QC]

Since the act was implemented, as regards grain farmers, what are your observations on the effectiveness of the measures and on the transport of grain in general?