Transport Committee on Sept. 27th, 2016

[The Chair (Hon. Judy A. Sgro (Humber River—Black Creek, Lib.)), Liberal, Judy Sgro]

Welcome, everyone.

Thank you all very much.

To our committee, thank you for showing up at this hour, which is going to be our slot. My apologies for being away. I wanted to congratulate my vice-chair on doing such a fabulous job last week, but I'll have to wait until he's here to do that publicly.

Mr. Aubin, welcome to our committee officially today. We're very happy to have you with us, and we hope that you enjoy this committee as much as I think the rest of us do, as we work through some of these particular initiatives.

Of course we all know some of our substitutes who join us all the time and always make sure we're on our toes with this experience as well.

We'll start with the Railway Association of Canada.

Would you like to introduce yourselves, please?

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

Thank you, Madam Chair.

My name is Michael Bourque. I am the president and chief executive officer of the Railway Association of Canada. With me today is Gérald Gauthier, our vice-president.

I'm here to speak on behalf of our federally regulated railways and to discuss our concerns with the Fair Rail for Grain Farmers Act, and in particular, the effect that interswitching provisions have on the railway sector and the customers it serves.

The Railway Association of Canada represents more than 50 freight and passenger railway companies. Our membership includes the class I freight operations of CN and CP and more than 40 short-line railways across Canada. It also includes Canada's principal passenger, commuter, and tourist railways. Since you will be hearing from CN and CP shortly, I will focus on the impact on short-line railways, but the detrimental effects of these provisions apply to class I railways as well.

Short-line railways are a vital part of Canada's transportation system. They own approximately 20% of the national rail network. One in five carloads originates on a short-line railway. These railways transport everything from bulk commodities such as metals, lumber, and grain to manufactured goods, accessing the high-density continental network operated by CN and CP.

Short-line railways provide an essential feeder service for businesses situated in rural and remote areas across the country. This service provides shippers with a cost-effective and energy-efficient option for moving their products to North American and global marketplaces.

Short-lines compete with trucking, but they are significantly different. They run on private track, not on public roads. They have lower emissions, lower greenhouse gases, and they don't congest our roads or wear them out.

Under the existing interswitching rules, a shipper serviced by one federal railway can ask the railway to move its traffic to the point where its line connects with another federally regulated railway, or the interchange point, at a prescribed rate. These rates are cost based. Subsection 128(3) of the Canada Transportation Act states that:

In determining an interswitching rate, the Agency shall consider the average variable costs of all movements of traffic that are subject to the rate and the rate must not be less than the variable costs of moving the traffic, as determined by the Agency.

As the vast majority of traffic interchanged in this country is between CN and CP, it is their costs, not the costs of short-line railways, that are considered by the agency in its rate determination. This is a fundamental flaw in the methodology as it does not align with short-line railway's unique cost structure. The RAC, our organization, has voiced its concerns to the Canadian Transportation Agency many times, including during the very brief consultation process that supported Bill C-30. Rates under the interswitching provisions are not compensatory for short-line railways.

It is important to note that short-lines have access to a limited revenue stream and are unable to make systemic improvements or expand and build their infrastructure at a rate comparable to class Is. Short-line revenues are sufficient for the purposes of maintaining existing infrastructure in accordance with regulatory requirements, but they just do not have as much investment to put in as class Is.

Over the last three years, the costs of operating a railway in Canada have increased for short-line railways. The new rail regulatory requirements for rail crossings, minimum insurance requirements for dangerous goods, and increased fuel costs have put their long-term sustainability at risk. You will recall that as part of your review of Bill C-52, short-line railways testified that the proposed minimum insurance requirements would create a substantial cost for them, and they have.

By the way, we're not arguing against these safety regulations, on the contrary. I'm simply noting that they, especially crossing regulations, have been very costly for short-line railways.

If maintained, the existing interswitching zone of 160 kilometres can have a detrimental effect on the short-line sector by further eroding their access to the revenues they require to maintain, upgrade, and expand their infrastructure. Over time, the resulting effect will be a slow and steady decline of short-line railways in Canada. For shippers in rural and remote areas, their rail link to a low-cost, safe, and highly efficient class I rail network will be lost.

In closing, the reality is that interswitching provisions, in their current format, are harmful for the rail sector in Canada. In no way can this regulation stimulate or incent the investments that are required to improve the movement of goods by rail in the Prairies. In fact, there is a demonstrable need to create a dedicated funding program for the short-line railway sector, and I would be glad to come to talk to the committee about that at another time.

Short-line railways in the U.S. have a different support structure, which includes a variety of dedicated federal and state-level funding programs. To date, there are no similar programs available to short-line railways in Canada.

The interswitching provisions brought forward under the Fair Rail for Grain Farmers Act were introduced as a temporary measure, hoping to facilitate a more efficient movement of grain in the Prairies. With the 2013-14 grain crisis behind us, we believe that the provisions should be allowed to sunset and that the public policy discussion should focus on how Canada can stimulate the investments required to remain competitive and move goods to the marketplace more efficiently and safely.

Thank you.

[The Chair, Liberal, Judy Sgro]

Thank you very much.

Mr. Pellerin.

[Perry Pellerin, Chairman, Saskatchewan Shortline Railway Association]

Good morning, Madam Chair and committee. First, thank you for inviting me to speak today and for giving the Saskatchewan Shortline Railway the opportunity to supply our thoughts on your study of the amendments to the Fair Rail for Grain Farmers Act.

As you are aware, short-lines transport approximately $500 million worth of commodities per year in Saskatchewan alone. The vast majority of this is grain, with producer cars making up over 65% of that number. The success of grain farmers is critically important to us, and we appreciate the opportunity to contribute in this topic.

The sections under discussion today are timely and critical to Canada's reputation as a reliable export partner. The volume of grain being produced in Canada is growing each year, and we believe that the future of transportation should include improved, competitive choice for farmers and shippers. We believe to achieve this the following points are critical.

Firstly, maintain Bill C-30 provisions which afford the agency more power. Second, create a rail transportation ombudsman, in the hopes of achieving real-time correction of issues that adversely affect the economy. Third, re-examine the minimum volumes model. Fourth, extend interswitching provisions to local carriers, short-line railways. Fifth, we believe we need to act quickly on small, isolated issues. These are issues that usually fester and soon become very costly and much larger issues in a short time. I think over the past few years, since 2013, we've been looking for a global fix for the grain transportation issue, but instead maybe we should be looking at more isolated problems and fixing those problems before they become larger ones.

Regarding agency powers and the ombudsman, subsections 5.1 (8), (10), (11), and (12) of the Fair Rail for Grain Farmers Act deal with agency powers in some form. The Saskatchewan Shortline Railway Association does not support any changes to the act that would limit the minister's or the agency's ability to delegate, arbitrate, set penalties, or require a railway company to compensate those adversely affected by failure to fulfill service obligations.

To support and encourage competition, there must either be competitive choice by several service providers or an increase in policing of service obligations to ensure that a limited choice of service providers fulfill their service obligations. While interswitching, which I will discuss shortly, allows for some increase in competition, Canada is largely at the mercy of two national freight carriers, CN and CP. Any disruption to service obligations affects Canada's international reputation as a reliable, safe transportation network. The service disruptions in 2014 have already negatively impacted our reputation. With increased technology and yields, Canada's farms will only continue to grow, increasing the strain on the rail network.

The Saskatchewan Shortline Association feels that a critical piece missing from the grain transportation system is a transportation ombudsman. It is extremely foolish to let issues build to a breaking point as they did in 2013-14. The current system of dealing with the railway company's failure to fulfill its service obligation is slow, difficult to manage, and inefficient. This harvest season has already seen signs of 2013-14. But in the current system, again, we'll only be able to discuss issues after the fact, and cannot deal with them in a simple or timely manner.

We're having issues today on the south shore that would have directly affected customers such as Columbia Containers, which in week nine had to cancel all new orders because of a backlog of traffic. If farmers and shippers and stakeholders had an easy and accessible place to log concerns as they arise, it might be possible to avert issues rather than reflecting on them post-disaster. A public advocate, appointed by the minister, would be an excellent way to represent the interests of the public and stakeholders by investigating and addressing complaints and violations in real time. The ombudsman could easily identify systematic issues leading to poor service and attempt to resolve them through recommendations or mediation without the red tape so systematic in the current transportation system. We don't need more regulation. We need more timely actions.

In essence, an ombudsman would allow the government to protect Canada's export capacity proactively rather than reactively. It would also protect the smallest shipper to the largest shipper, and in some cases probably even protect the railways.

This brings us to the topic of minimum volumes. We support measures to encourage the movement of grain. However, there has been some unintended negative consequences to minimum volume regulations.

First, locations that are further geographically from the port are being unfairly disadvantaged. It is logical, less costly, and more logistically efficient to move grain from Alberta and western Saskatchewan to port than it is for the rest of Saskatchewan or Manitoba. This is not fair for farmers who are further from western port positions.

Second, customers shipping to the U.S., for example, those shipping oats, are negatively impacted, as CN and CP have trouble logistically meeting the minimum grain targets if they have to focus resources on these customers. This is not fair for farmers growing certain types of grain, and has a false impact on what farmers choose to grow in the future.

Third, small shippers are disadvantaged, as short-lines and producer cars do not always have enough volume to regularly ship assembled 130-car unit trains. As a result, large grain companies with huge storage facilities or mainline points are preferred for the mainline carriers.

The current obligation to move grain, which is in essence a positive provision, encourages CN and CP to favour large unit trains from large grain companies as close to western ports as possible, disadvantaging the eastern sites in western Canada and those shipping to the U.S., small shippers' producer cars, and subsequently short-lines. Small shippers deserve the right to move cars when sales are made, not when everybody else is done.

Michael did a very nice job on interswitching. Interswitching is, or could be, a useful and effective competitive access provision. It allows shippers access to the entire Canadian rail network and is a critical decision point for some shippers when deciding to do business in Canada.

Interswitching regulations do not benefit short-lines in their current form. We are only connected by an intermediate railway that can set intermediate or interswitching rates. A recent example of this is one class I carrier who set a rate of $2,600 to move a car one mile.

As a result, this makes short-lines a less attractive option to shippers looking for a location to build facilities with low-cost access to both CN and CP for competitive purposes. It would be ideal for short-lines to have interswitching regulations apply to us or not have the regulation at all. Currently this is actually a disadvantage for us, for the fact that if a new customer is looking to build a facility, especially in Saskatchewan, he's not going to look at a short-line. Under the current way that interswitching works, he doesn't have access to both carriers. He's much better to build on CN or CP.

In conclusion, we believe it is important to maintain the provisions of the Fair Rail for Grain Farmers Act, which provide the agency and the minister with the power to effect needed change. We also suggest taking one step further, the establishment of a rail transportation ombudsman to act in a timely fashion and prevent disasters like 2014.

As well, we believe there are added provisions needed for a minimum grain shipment section to ensure the act is indeed fair for all grain farmers.

Finally, we'd like to see interswitching provisions extended to short-line railways or abolished. Under the current form, as mentioned, it's a disadvantage to us.

I really appreciate the opportunity to speak here today, and thank you for all the work you have done. I want to express that time is of the essence. We've been talking about this, it seems like forever. Again, we're getting into trouble and we need to do something about it.

Thank you.

[The Chair, Liberal, Judy Sgro]

Thank you very much for coming in with your suggestions.

We're always looking for solutions to some of the problems that the government of the country is facing. We appreciate your thoughtful presentations this morning, and your assistance in trying to deal with a difficult issue for which we are looking for long-term answers.

Thank you very much.

We turn to Ms. Block for six minutes.

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

Thank you very much, Madam Chair.

I join her in welcoming you here today. It's been good to hear your testimony in the context of short-line railways. I think Saskatchewan has the most short-line railways of any province in Canada. You can correct me if I'm wrong on that.

[Perry Pellerin]

You're right. It has 14.

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

I recognize that this is a very important conversation for us to be having. I want to clarify just a couple of things that were said and perhaps ask for some more information.

First, we've heard that the bumper crop of 2013 could fast become the norm in terms of what we're producing in western Canada. Perhaps you could comment on that. We've heard that shippers haven't used the 160-kilometre distance as much as it was first anticipated they would.

My question to Mr. Emerson and other witnesses has been, “If it hasn't been used that much, what's the problem with keeping it in, in case it is actually necessary?” Perhaps you could comment on that. What would your solution be? Is there another solution other than just applying interswitching to short-line?

Anyone can answer.

[Perry Pellerin]

First of all, I'll start on the ones I can help you with.

Technology in the grain industry is unbelievable. Even this year, as we fight through rain and other problems we're having right now, we're going to see some exceptional yields in durum and oats. They're talking about durum getting close to 100 bushels an acre, huge amounts. That's only going to grow as we go along.

Maybe one positive side of global warming is that we're seeing that we're able to grow different types of crops farther north, especially in Saskatchewan. That's opening up what we can grow and, again, the yields up there.... We only see that expanding. Down the road, the size of the crop, even in a normal year, is going to get to be pretty significant. I think that will continue.

Why don't people use interswitching? Possibly one of the issues was that last year we ran out of grain. In May and June, we were basically out. When you're out of grain, the need to use competitive points isn't there. I'm not sure it was a fair test of interswitching last year. You may see that it is different.

Some of the railways have products, as you're aware, and in those products, or in the tariffs, they've gotten around interswitching a little bit by saying that you can only use those products at either a CP or a CN location. It kind of eliminates your ability to go somewhere else.

On a positive side, I've seen a real change, especially at CN this past year, towards trying to allow customers to manage their own destiny. They have not really stuck to products as much, but have tried to say, “What do you need to move your product?” I thought CN did an excellent job this year and it is in good shape. The other guy, maybe not so much, but I do think there are some positive steps there. That's why, when it comes to the interswitching provision, I'm not sure it will ever actually attain what it was intended to do, if that makes any sense.

[Michael Bourque]

Can I just jump in? I'm glad that you asked about the 2013-14 crop because it predates this committee, and there was a lot of information shared during that time that's probably worth repeating.

First of all, this was the largest grain crop in the history of the country. It was 20 million metric tonnes larger than the average crop. It takes 100 extra trains—I forget the exact metrics, but in fact, it's hundreds of extra trains—to move that additional crop to an export position. At the same time, we had the worst winter in 100 years, or certainly in 75 years. Those of you who are from Winnipeg will recall that in June the municipal water pipes were still frozen from that winter. Unfortunately, with existing technology, there's an impact on rail. From a rail safety standpoint, we need to shorten trains. In addition, there is broken rail. There are broken wheels. These are facts of physics that we prepare for, but which still affect railways.

We had this perfect storm, and what have the railways done in response since then? They have massively invested in their network. You can't expect them to have hundreds of railcars, crews, and locomotives sitting on standby for that once in a hundred years crop, but they have invested, and it's exactly the kinds of regulatory provisions like extended interswitching that can prevent additional investment. We have to ask ourselves, what is the formula for this success in having successful, efficient railways in this country that are globally recognized as being among the most efficient? The key there is investment.

[The Chair, Liberal, Judy Sgro]

Thank you very much.

Mr. Iacono, for six minutes.

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

Thank you, Madam Chair.

I will share my speaking time with my colleague, Vance Badawey.

Thank you, Mr. Bourque, for being here this morning and sharing your point of view.

My question is the following. How can the Railway Interswitching Regulations be changed to make them compensatory and applicable to shortline rail, in order to give producers access to a larger transportation network?

[Michael Bourque]

I focused quite a bit in my remarks on the fact that the rates are not compensatory. It's true that if those rates were adjusted, then it would be helpful, but the more important point is that it is a regulated rate. What my short-line members are telling me—the class Is can speak for themselves—is that they already exist within a highly regulated environment that allows for commercial interactions, and the marketplace can react more quickly.

I'm not speaking about grain, because that's already a regulated rate, but they want to operate within a commercial framework and not within a regulatory framework. The fact that those rates are not compensatory today indicates that the system will never keep up with the market, so you're better to leave that to the commercial marketplace and and make sure you have sufficient provisions in place that protect the customers in the event of a dispute.

I would argue that we already have a significant number of those measures in place. We have the Canadian Transportation Agency, which has significant powers. We have the maximum revenue entitlement. We have a common carrier obligation. There are a number of shipper protections, final offer arbitration, and mediation services available, so at some point you have to let commercial actors work it out themselves.

What we have seen in this country is that we've developed an efficient, highly productive, and well capitalized railway system. Where there is a lacune is that short-lines compete with trucks, the trucks drive on subsidized roads, and short-lines don't have that benefit of additional infrastructure spending from the government to help them and to level the playing field.

I would emphasize what Mr. Emerson said when he talked about the importance of these short-lines and that we need them to survive. We need to make sure those tracks don't get ripped up because in the future we're going to need them, particularly if you care about sustainability. We are a lot more efficient than trucks, and we are lower-emitting, and so on.

I'm sorry, that's a long answer to your question.

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

Thank you.

Do I have more time?

[The Chair, Liberal, Judy Sgro]

You have three minutes left.

Mr. Badawey, you can share it.

[Vance Badawey, Liberal, Niagara Centre, ON]

Thank you, Madam Chair.

I'm going to direct my questions to all three with respect to some of the comments that were made.

In 2013, and now in 2016, we're seeing similar yields, we're expecting similar yields. You mentioned your opinions on interswitching. Interswitching was put in place back in 2013 to really look after the challenges that were evident.

How do you see short-lines being a part of a solution in 2016, with similar yields, versus interswitching?

[Michael Bourque]

I think the most important thing to remember is that, from a grain perspective, all grain starts on a truck, and it is delivered to an elevator, to a point, by truck. Short-lines are competing with those trucks, but they're still accepting the product from a truck. For a short-line to compete, what they want is to be compensated fairly for moving the traffic from point A to point B. The interswitching provisions have not been used that much, and therefore there hasn't been the greatest impact. But I think that just tells you that it's not a tool that does short-lines any good. Really what they're telling us is that they want to work within a commercial framework and negotiate with the parties to move that traffic.

[Vance Badawey, Liberal, Niagara Centre, ON]

Now from a macro point of view with respect to looking at an overall strategy beyond what we're discussing here today, with the yields and the crops in 2013 and 2016, how do you see overall strategies utilizing all methods of transportation as being an advantage to short-lines, but ultimately being an advantage to the actual markets that you're servicing?

[Michael Bourque]

It's a good question. From a strategic standpoint, we have to understand that we're operating within global supply chains and that Canadian supply chains are competing with other supply chains. Everything is connected. The shipping sector is connected to ports and ports are connected to rail and truck. Grain companies are big and are big actors there. So we all need to work together.

One of the things that I find people don't understand well, and certainly people don't get enough credit for, is the precision railroad model that has been introduced into Canada. What's happening with short-lines is that they are increasingly working into that precision railroad model. There is, in fact, private sector investment that's looking for opportunities to enhance that connection, to bolt on a precision railroad model at the short-line level to the class Is. From a rail perspective, the productivity has been there, the investment has been there, the efficiency gains have been there, but for the other parts of the supply chain I'm not so sure that has happened. For short-lines, what they need is a little bit of help from government, quite frankly, because of this competition with truck, as I explained.

From a broader strategic standpoint, I think what we need to look at is that government in particular is a huge player in the overall transportation network. They own the ports, they own the bridges, they own the roads, they own the tunnels for the most part, and they are the regulator. They're the elephant in the room of the supply chain and they need to look at how they can incent additional investment.

You've seen in Australia, for example, that governments have sold ports. I took note of the fact that when they sold the most recent port some of the revenue from that is going to be used to close 50 railway crossings. Why do they want to close 50 railway crossings? It's because it's going to increase the fluidity on the rail network and it's going to be safer, because the safest crossing is one that doesn't exist.

So there is an important strategic standpoint.

[The Chair, Liberal, Judy Sgro]

I'll give you a second, Mr. Pellerin.

[Perry Pellerin]

I think one of the things we have to look at is that, yes, we do compete with trucks in this. We are doing an experiment this fall with CN Rail where we take cars and we're moving them from a branch line to an inland terminal within Saskatchewan. At that location they're going to unload the cars, clean the grain, and ship it out in unit trains. If that's effective, it accomplishes several things. Obviously, as was mentioned, it's better for the road network, better for the environment, and it's more efficient for the producer or the shipper off that short-line because he gets the car when he needs it. He doesn't necessarily have to sell the car to an export position at the west coast, he just wants to sell his grain the week when he wants to sell it at the best possible price. So we're offering that service. It is a good example of co-operation that we've received from CN.

Our next biggest issue is not rates, it's car supply. If we don't get the cars or have the ability to use our own cars, we can't compete against the trucks, and that's where we lose out.

[The Chair, Liberal, Judy Sgro]

Thank you very much for that information.

Mr. Aubin, for six minutes.

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

Thank you, Madam Chair.

Thank you, gentlemen, for being here this morning to share your expertise. I want to address two topics with you in the next six minutes. I will ask the questions, then leave you time to respond.

My first question is two-fold and concerns the interswitching costs. If the real financial interests of shortline rail companies were taken into account when calculating costs, would the measure seem adequate? For example, could an annual update of the interswitching rates be considered to make the measure more acceptable? That's my first question.

My second question concerns the crisis in 2013-2014, when both tremendous production and major climate problems apparently occurred. However, in the following years, we noted a significant decrease in oil transportation, which likely freed a certain number of trains and enabled us to fulfill our mission for grain.

The day we have significant agricultural production, which seems to be more and more the case, and also a steady oil market, will we still have the capacity to transport both?

[Michael Bourque]

I'll take two minutes, Perry, then you can take all the rest of the time.

On the first point, as I've said, on the interswitching provisions, what my short-line members are telling me is that it's potentially harmful to them. I realize that if the rate was fixed temporarily, perhaps, we would have something that's compensatory. But we would be working within a further regulatory environment. That is not what my members are looking for.

Instead, what they're looking for, in terms of a government role, is for assistance with their needs to improve their infrastructure so that they can compete with trucks and have a level playing field with trucking. Don't forget, the regulation that government has imposed has caused more cost and there has been no additional funding put forward to help these short-lines.

I'll let you go ahead.

[Perry Pellerin]

One part of the CTA review that was critical for us was that Mr. Emerson identified the need for short-lines to receive funding, which couldn't have been said better.

We took over a lot of lines that were in tough shape and we are struggling to keep our head above water. In a lot of cases, we take very seriously every single car we ship, and we are really an advocate for our customer, especially since the demise of the Wheat Board. We find short-lines, especially in Saskatchewan, to be the voice of a lot of producers.

In instances like this, we find that not only are we talking for the short-line but we're talking for the producer, because right now he doesn't know who to talk to who can give him any help.

When it comes to interswitching, as I mentioned, under the current form it really has no advantage to the short-line and doesn't help us. If that doesn't change, we'd rather see you get rid of it for the fact that it's an advantage to the class Is.

We also think that we can compete very well with trucks. We can compete with our class I customers, as long as that playing field is level and as long as we end up in a situation that we're afforded the same car supply and access as those mainline points. If we can obtain that, I think short-lines will be a valuable piece.

As was mentioned here, as we get into situations, short-lines can be a very valuable, let's say, surge capacity in a tough year. As was mentioned about winter conditions, we have the same winter conditions and we operate in the same fashion. But because we are able to react quicker and almost as efficiently as the class Is, we think there's incidents where we could help out. We simply have to work together. I think the relationship is growing between the class Is and the short-lines so that we can do that.

Not all of this is negative; there are some positives. But, really, the interswitching, when it was all done, didn't accomplish what it was supposed to and, like I said, I'm not sure it ever will.