Transport Committee on Sept. 27th, 2016

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

Thank you very much, and welcome.

My first question will be about an observation that I think both of you made in terms of the landscape in the United States. You commented that there is no interswitching that takes place in the United States.

How many railways operate in the United States?

[Janet Drysdale]

There are five class I railroads. Essentially, there are four major railroads. Two of them operate exclusively east of the Mississippi River, two operate exclusively west of the Mississippi River. The fifth is more of a regional railroad comparable to a large short-line.

In terms of the relative competitive landscape, U.S. versus Canada, it's virtually identical, given that in Canada most of the geography is covered by two major railroads.

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

Okay.

I'd also like to follow up on the comment about interswitching being non-compensatory.

Two meetings ago, we heard from the CTA that they determine the regulated interswitching rate from the ground up by assessing the various input costs that railways face. They stated that they do not consider the commercial rate when determining the regulated rate.

I'm wondering how the rate-setting process can be improved to provide the railways with sufficient return to invest in their infrastructure.

[Janet Drysdale]

The regulated rates are essentially a variable cost, accounting for fuel and labour and not much more. Inherently, therein lies the problem. There is nothing accounted for in terms of the required investment to keep the railway operational on a go-forward basis.

Our view would be that the ability to negotiate those rates on a commercial basis would be the best practice.

[James Clements]

I would add that the methodology they use creates an average rate and treats every circumstance the same. The reality is that if you're going in and switching a grain elevator, it might be a very efficient move. If you're going deep into a chemical plant, it may require a whole day of switching by a crew. That creates some problems, as well as the points that CN has made here.

[Sean Finn]

If I may, in the U.S. it's important....

It's not just reciprocal in the U.S., it's commercially negotiated. It does happen that U.S. railways interswitch with each other, but it's based on a commercial negotiation at commercial rates. They don't have regulated rates that don't compensate for the costs of their infrastructure, for example.

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

Can you comment on the recommendation that the report made in terms of reviewing the rates annually?

[James Clements]

The comment I would make is that right now it's a fairly labour-intensive process. It requires on-site visits. The burden of doing it every year would seem a little unnecessary for costs that don't tend to change a lot, at least in this low inflation environment.

I would suggest that you look at a longer period for review.

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

My final question would be in regard to what we heard from the CTA at our first meeting, that interswitching at 160 kilometres wasn't actually accessed that much.

In that case, why would it be problematic to keep it in the act if it's not accessed as much, but it's there if needed?

[James Clements]

We believe that it creates some distortions to what normal market rates are based on.

The intent of the transportation policy is that it has always had regulation as the backstop, so why should we leave in something that has the risks? We should understand what the right policy is and then go forward with that.

[Janet Drysdale]

I would just add another comment to that. The regulation of the 160 kilometres was not based on a thorough fact-based, data-rich analysis. In the context of developing good transportation policy, I think we're trying to do that analysis before we make the policy. There's good justification to allow it to sunset and perhaps continue the research, if that's required.

I think the key point we've been trying to raise here is that the existence of that legislation is detrimental to encouraging investment into the supply chain network. When we think about the looming capacity issue with respect to grain cars, and when we think about the amount of investment that's required to sustain railway networks for CN, we reinvest over 50% of our operating income every year just to maintain the safety and fluidity of the rail network.

Those levels of capital investment need to be somehow reflected in legislation that continues to support the ongoing level of investment. Bill C-30 goes exactly against those principles.

[The Chair, Liberal, Judy Sgro]

Thank you very much.

Mr. Hardie.

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

Thank you.

One of the challenges we have here is limited time to ask questions and extract answers, and so I'm going to ask for a couple of things from you that you could submit after the fact, but at least then we can factor them into our deliberations here.

You mentioned reciprocal access to U.S. rail. What does that look like? What does the fix look like? Give me something simple on that.

In discussions with Mr. Emerson and others, we see a lot of pressure to move our grain-handling system more to a commercial basis at commercial rates, as opposed to regulated rates.

In order to maintain a reasonable profit, and in order to maintain the kind of infrastructure investment you think is worthwhile, what would an unregulated regime look like?

Right now, if you can answer this question quickly, what is the rate differential, first for moving grain generally, and second for the interswitching rate? Over a magnitude, what percentage would shipping rates go up if the regulations weren't in place?

[Janet Drysdale]

For reciprocal access to the U.S.—

Don't start with that one?

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

No, don't—

I need the question answered on that one. Just give me the other stuff by way of—

[Janet Drysdale]

In terms of a commercial—

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

In other words, if grain was shipped according to commercial rates, as opposed to regulated rates, what would the difference in price be, percentage-wise? How much more would it cost shippers to move grain?

[Janet Drysdale]

I don't have an exact number on that. We know that all rates in Canada for all commodities, and for all goods shipped, are among the lowest in the world. We've had studies from the OECD that speak to that evidence.

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

I understand that piece, but here we have a rough balance with grain shipping right now. What would change if we moved away from regulated rates, both for mainline traffic and interswitching? You can get back to me on that one, if you don't have a precise answer.

I also wanted to spend some time on containers. To what degree would shipping grain by containers alleviate the looming railcar shortage? What would it do to the provision of producer cars? Finally, what would it do with respect to the ability of short-line railways to provide that kind of interconnectivity from the farm gate to the mainlines?

[Janet Drysdale]

Shipping grain by container already happens today. It is a small piece of the overall grain supply chain. It tends to be more specialty crops that are shipped in smaller quantities to specific markets.

I think it can help alleviate some of the issues with respect to surge capacity. We've seen that as an example in our lumber business when we hit capacity issues with lumber cars. I think it can help part of the problem.

It's not going to solve the looming grain car problem by any stretch of the imagination.

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

Why not?

[Janet Drysdale]

Most grain needs to move in significant bulk volume, and it's just the inherent nature. You're going to ship a 150-unit car train of bulk grain, and the efficiency of doing the equivalent amount of grain in an intermodal container just doesn't compare.

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

Given the difference in efficiency, what does the plan look like to rejuvenate the bulk hopper car fleet?

[Janet Drysdale]

I think that's an issue that is in front of all of us that we need to try to figure out. We do have an issue with the hopper cars. It was government that had invested in them in a significant way in the last round. The cars are coming to the end of their useful lifespans. There is a significant problem with the maximum revenue entitlement and how it treats investments, which is what we refer to as the free rider problem, meaning that if CN goes and buys 1,000 new hopper cars, the formula by definition gives 50% of the benefit of that investment to my competitor.

I think there's work that needs to be done with modernizing the maximum revenue entitlement if we hope to have a situation where either railway companies or customers have an incentive to reinvest in the fleet.

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

You suggest then that there would still need to be some kind of regulatory regime to deal with the free-rider issue, for instance, and to ensure that when the railways are making their choice about where to put their money, it is done in a way that balances the national interest in moving grain.