Transport Committee on Sept. 27th, 2016

[Janet Drysdale]

Let me be clear. I think our preference would be not to have the maximum revenue entitlement. Notwithstanding that, at a minimum, we think that regulation needs to be modernized.

With respect to the specific formula that governs the investment component and how that's dealt with, that is an issue that both customers and railways understand well. They can very clearly be on the same side of the issue.

[Ken Hardie, Liberal, Fleetwood—Port Kells, BC]

Okay. That's fine. Thank you.

[The Chair, Liberal, Judy Sgro]

Mr. Aubin.

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

Thank you and welcome. It has been a pleasure to hear you speak.

However, I was a bit surprised by Mr. Finn's opening statement. I was on the Standing Committee on Transport when hearings were held regarding Bill C-30. Serious concerns were raised. Correct me if I'm wrong, but you said earlier that if Bill C-30 hadn't been adopted, the capacity of companies to deliver grain would not have changed at all, and the same goals would likely have been achieved another way.

I'll try a different tack. Did your companies experience negative effects or consequences as a result of the regulation requiring you to transport 500,000 tonnes of grain a week?

[Sean Finn]

Even if we imposed quotas, if the grain is not available for either climate or temperature reasons, we can't lengthen our trains to increase the volume of goods. Strictly speaking, it wouldn't have had an impact. We wouldn't have reached the quotas and we would have been penalized. However, as I explained, the quotas established were reachable because the people understood that, at a certain point during the week, a terminal may or may not be open.

What created the crisis in fall and winter 2013-2014? There were two factors. First, the amount of wheat harvested was far greater than normal. Second, the winter was unusual. You know that in Winnipeg, water pipes were still frozen in June. You must understand that these constraints are outside the rail companies' control. However, when the temperature improved beginning in March, CN and CP started transporting record quantities of wheat to deliver the bumper crop to the markets.

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

Could these deliveries have exceeded the 500,000 tonnes set out in Bill C-30?

[Sean Finn]

Maybe, but the obstacle was the network and railcar capacity. We could have exceeded the quotas if the network had had more railcars available and if there had been the capacity to receive more deliveries. However, since the crop was substantial, as soon as the temperature warmed up, we delivered the grain. We occasionally exceeded the 500,000 tonnes during that period. It's not that CN or CP didn't want to deliver grain. It's that we had a hard winter and a bumper crop.

Since that time, partly thanks to Bill C-30, but also as a result of the rail companies' recognition of the need to do more—because we're expecting larger and larger harvest volumes—this year, we're ready. At CP, we have more locomotives. Our rail crews are in place. We've invested in equipment in order not to need grain quotas. We'll deliver the grain as soon as it becomes available, to meet the demand. We're there to serve our clients and to deliver the grain to the international market.

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

That leads in to my next question.

Could we broaden rail transportation to include all natural resources that must be transported? In recent years, there has been a type of fluctuation that I suppose has been positive for the companies, CN and CP. When the transportation of grain increased, the amount of oil transported by rail decreased.

If, one day, all the markets are steady, would we manage or would a producer have to pay for the consequences of a deficient network that can't meet all the demand?

[Janet Drysdale]

Let me make a few comments.

I think it's important to recognize that when we speak about railcar capacity, oil moves in a completely different kind of railcar. Those railcars are actually owned by the customers who ship oil, not by the railway. In the context of actual equipment capacity, there is no conflict.

I think the different geographies were mentioned earlier as well. Oil typically moves from west to south and east, whereas grain is moving from west to further west. We have significant locomotives at the moment, probably in the range of 400, that are being stored because we have excess capacity. I think the key thing is, of course, the planning process, and how connected we can be to our customers and forecast that demand. Clearly, the demand that we saw in 2014, and expected to continue, has not materialized.

I would like to make one other comment specifically regarding grain, and address some of the issues that have been already raised.

Harvesting this year is about two weeks late. It's late because of weather. While I'm not suggesting that we should put quotas on the amount of grain that farmers need to deliver to the elevators, what I am pointing out is the interconnectedness of the supply chain. To the extent that we have vessels waiting on the west coast of Vancouver, and to the extent that last week there might not have been grain available, the reality is that part of the supply chain has been constrained by rain in the prairie provinces, which has constrained the farmers' ability to actually deliver the grain to the elevator.

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

My question is for either company.

In the study conducted in 2013, there was considerable discussion about service level agreements. Has the number of service level agreements between shippers and producers greatly increased, or has it remained about the same as before Bill C-30?

[James Clements]

As Mr. Finn has noted, we realized we had to do better. We now have over 70% of our grain moving in a new product that we call the dedicated train program. The dedicated train program has reciprocal commitments, from us to the shipper, and the shipper to us, around how we're going to use it, and what each of the players is going to do with that train. That has improved the communication and the planning within the supply chain. It aligns the interests of the stakeholders better.

If you unload the train efficiently, you get to benefit from the efficiencies that you've created. In the old system, you didn't see that benefit flowing to the player that was making those incremental decisions. We are seeing the cycle times on those railcars and those programs offer significant improvements versus what we saw in 2013. We think that's a result of the commercial innovation between us and our customers.

[The Chair, Liberal, Judy Sgro]

Thank you very much.

Go ahead, Mr. Fraser.

[Sean Fraser, Liberal, Central Nova, NS]

Thank you very much, and I will be sharing my time with my colleague, Mr. Sikand.

Ms. Drysdale, I think it was you who drew the analogy between direct flights and the need to move efficiently, which is interesting, but I think incomplete. Of course, I prefer to take a direct flight when I travel here from Halifax, but I also like checking the price on WestJet, Air Canada, and Porter.

When it comes to interswitching, what we heard from our prior witnesses is that, although not everybody's taking advantage of it, it creates competition during the negotiation phase where there really isn't any. You've highlighted a couple of instances where there may be some competition during the negotiation because you could ship on truck, for example, but when we're dealing with rural grain farmers who are shipping at 100 bushels an acre, we're talking about 640,000 bushels for a single section. I don't think truck is a realistic competitor for, say, a short-line railway, to get it even 50 kilometres to the CP or CN locations that you describe.

In the long term, we heard testimony about infrastructure being the solution to create competition, but we might be facing a short-term pinch with a year like this year, if we have another bad winter. Is there a short-term solution that can maintain competition in the negotiation phase if it's not interswitching?

[Janet Drysdale]

First of all, I would come back to grain on the farm, and the reality is that no matter the number of bushels that need to get off the farm, it is all going to start by moving in a truck. The efficiency to move it by truck to an elevator on CN or on CP is actually far better than what we're talking about with extended interswitching. To the extent that a farmer or grain company wants to choose which elevator on which railroad, that situation already exists today, and I think that tends to get overlooked.

In terms of rates, per se, the rates themselves are regulated under the maximum revenue entitlement, so it's not clear to me how interswitching is really leveraging a rate environment, whereby that rate environment already has existing regulation.

Certainly, with respect to service, if there is some condition in which service becomes an issue, there are already multiple layers of regulation where that shipper has recourse to actually raise those service issues. Whether it is through the level of service complaint, or whether it is through the service arbitration process, and even on the rate side for all commodities, we already have in Canada, which does not exist in the U.S., a final offer arbitration process that can deal with the rate issue in the case of commodities that may be impacted other than grain.

[Sean Fraser, Liberal, Central Nova, NS]

Thank you.

I'll pass it over to Mr. Sikand. If there's time at the end, I'll pick it back up.

[Gagan Sikand, Liberal, Mississauga—Streetsville, ON]

Grain producers want a level playing field. They don't think rail companies have the incentive to move their grain in a timely manner. Should CN and CP be forced with some type of sanction, if grain is not delivered on time?

[Janet Drysdale]

I think the issue there is what “on time” means.

The existing regulatory framework will pay the railways the same amount of money whether we move the grain in six months or in 12 months. So that regulatory framework that exists does put a kind of overarching framework, if you will, in terms of how and when grain moves. There is no incentive built into the system today to allow us to provide more at peak capacity. There is an issue also with the railcar component.

So to the extent that farmers want to move grain in a peak period, they're no different from any other commodity shippers that are trying to maximize their netback. When I'm speaking about netback, I'm really speaking about grain companies, not farmers, and we need to kind of separate these two as two distinct groups.

If a grain company wants to benefit from higher market prices and wants to ship more when those prices are high, it is behaving in the same manner all other commodity producers behave. The question is what incentives can be built into the regulation that would encourage incremental capacity.

Today it's up to the railways to provide that service, but I have a rate regulation that says I can't earn any more to service people more volume in a peak capacity. They'll get a higher margin, but I get the same margin. So there's something broken in the existing regulation, I think, that we need to fix if we really want to incent incremental peak-period types of shipments to benefit grain companies' margins, where the railways could at least somewhat participate in that upside potential.

James, do you want to add anything?

[James Clements]

As I stated before, grain is important to CP. We feel we already have incentive to move grain. It's an important part of our business. We want to move it, we want to provide great products and services to our customers, and that's why we have developed programs like the dedicated train program with the grain companies out there in the marketplace in order to help them deliver to the international markets.

In a bigger picture, we need the Canadian grain system, the entire supply chain, to be highly efficient. That's how we're going to compete in international markets, and that's how we're going to then see farmers, grain companies, railways, and all the other stakeholders have the returns they need to invest to grow production and grow the ability to supply those global markets.

We're very much interested in being part of that solution in providing the lowest cost transportation to tidewater, so that we can compete.

[Robert Taylor]

We're moving that tonne of grain from Manitoba to Vancouver for maybe $35 to $40. Our average rate per grain is in cents-per-tonne mile. So we're moving a tonne of canola, which is worth over $400, 1,500 miles for $35 to $40.

Another important fact not to lose sight of is that farm income from grain and oilseed production in Canada has increased from $4.5 billion to $13 billion over the last 15 years. That's a CAGR, or cumulative annual growth rate, of 7.3%.

We're not saying the system is perfect, we're not saying we're perfect, but some things are working fairly well, if you get to the facts.

[The Chair, Liberal, Judy Sgro]

Thank you very much. The time for this panel has finished.

Thank you all very much for the information you have provided today, which no doubt will be reflected as we continue our discussions on Bill C-30.

[Sean Finn]

Can we send the answers to your questions?

[The Chair, Liberal, Judy Sgro]

Yes, you can submit them to the clerk, and he will distribute them to all of the committee.

Thank you very much.

Could you all exit fairly quickly from the room, so that the committee can get on to committee business, please?

[Proceedings continue in camera]