Thank you, Madam Chair.
Good morning. We thank the committee for the opportunity to discuss the consequences of Bill C-30 for the Canadian grain supply chain. The majority of our comments this morning will focus on the provisions of the act that grant authority to the Canadian Transportation Agency to extend the interswitching limits in the prairie provinces from 30 kilometres to 160 kilometres.
As background, grain is CP's largest line of business. Grain accounted for approximately one-quarter of CP's total revenue ton-miles in each of the last three years. CP's grain movements are roughly two-thirds originated in Canada and one-third from U.S. locations. Both regions supply agricultural products to domestic and international markets. CP serves directly or indirectly multiple export terminals for shipments overseas with major outlets on the west and east coasts, the U.S., and Mexico. The majority of CP's grain traffic is regulated, with two-thirds of our 2015 grain revenue relating to that traffic.
The grain supply chain starts at the farm gate. Every tonne of grain is loaded on a truck, and as a result, producers have the freedom of choice as they determine both the destination and the timing of their deliveries.
There's a high degree of coordination required within the grain supply chain, particularly with respect to grain moving to marine ports for export. The capacity of that system is determined by the capabilities and operating practices of the entire supply chain, and not just rail.
I'll note that it's important to understand the context that led to the introduction of Bill C-30 by the previous government. In the 2013-14 crop year, CP moved a record amount of grain. The challenge that the system faced was driven by the fact that the capacity of the system did not match the demands created by an extraordinary grain harvest. The crop that year was 23.5-million metric tonnes larger than a typical year's grain crop. That's the equivalent of an extra 13 Rogers stadiums full of grain that hit the supply chain at once, or put another way, more than double Canada's typical export movement of potash.
The system's ability to respond to the challenge in moving the large grain crop was compounded by the winter of 2013-14, which was extremely harsh. The weather pattern set in for a lengthy period of time across the entire North American supply chain. As Mr. Emerson's report noted:
In spite of the challenges confronted by the grain-handling-and-transportation system, it still managed to move record volumes of grain under some very difficult conditions.
Temporary, extraordinary demands like the ones in 2013 pose a significant challenge. No efficient supply chain in the world is designed to handle extraordinary, atypical volumes under abnormally challenging operating conditions. A system built to handle these outliers would be under-utilized and/or under-compensated at all other times.
Although we are used to and prepared for dealing with challenging winter conditions in Canada, extremely cold temperatures require the railway to run shorter trains at slower speeds in order to operate safely. This reduces overall system capacity. The unusual, cold temperatures also caused the seaway, an important grain outlet, to be closed for a month longer than normal. Once the weather improved, the supply chain moved record volumes of grain. This performance was already in place before the legislation was passed, and it would have happened in the absence of any legislative intervention by Parliament.
Fundamentally, Bill C-30 was based on a flawed premise, namely, that Canadian railways had the ability to move an extraordinary volume of grain but were choosing not to. This premise simply defies logic because moving grain, our largest line of business, is how CP makes money.
The stated goal of the Fair Rail for Grain Farmers Act was, and I quote from a press release of March 26, “to help the entire grain transportation system reach the goal of getting product to market quickly and more efficiently following a record crop year for...farmers.” It was never clear how the legislation would actually achieve that goal.
At the time we cautioned that Bill C-30 would have a negative impact on Canada's competitiveness, threaten job growth and investment, and hinder the grain supply chain. The data over the past two years demonstrates that Bill C-30 has not resulted in the movement of any more grain. Regrettably, this legislation is harming capacity, efficiency, and competitiveness of the Canadian supply chain to the detriment of all shippers and the performance of the Canadian economy.
The extension of interswitching limits from 30 kilometres to 160 kilometres for all commodities in the prairie provinces is our major concern. The change has harmed the supply chain in three distinct ways: overall rail system capacity has been reduced as a result of the added complexity and variation; U.S. railroads have been given an unfair competitive advantage, which is drawing traffic away from Canadian railroads; and the regulated rate that Canadian railways can charge for interswitching is non-compensatory, so we lose money for every car that we interswitch, which undercuts investment in capacity-building infrastructure that could help move grain at a greater velocity in the future.
Overall system capacity declines because the extended interswitching limits reduce our operating efficiency. Interswitching creates additional work events to process cars to and from interchange locations.
The last thing a railway needs to do is to try to get air through railcars at -35° C. The extra work increases time and complexity in the supply chain. These inefficiencies reduce capacity and velocity for all players.
Bill C-30 also puts the Canadian railways at a competitive disadvantage to the U.S. railways because there is no reciprocal interswitching provision in American law. The expanded interswitching limit in Canada gives U.S. railroads significant reach into Canada, and has caused Canadian traffic to be interswitched to U.S. railroads. The lack of reciprocity in the U.S. prevents Canadian railways from doing the same in the U.S. For the 16 months from May 2015 to August 2016, BNSF obtained 3,945 carloads from CP through the application of extended interswitching regulations. Currently, the volume of this traffic is relatively low and involves six customers, but it is growing rapidly. Almost one-third of the BNSF interchange traffic related to non-grain commodities.
Perversely, an unintended but real consequence of extended interswitching is that 20% of the volumes are inbound to Canada, meaning that Canada is subsidizing U.S. exports into Canada, and these volumes included grain. All traffic interswitched with the BNSF runs the majority of its movement in the U.S., increasing density and therefore efficiency of the U.S. system, allowing U.S. carriers to earn profits and pay taxes to a foreign government, and providing jobs to U.S. workers.
The lack of regulatory harmony in the rail industry is inconsistent with the access reciprocity that exists in other transport sectors. Air transport access for the Canadian and American air carriers is governed by bilateral air agreements negotiated on the basis of reciprocity. Similarly, access regulations governing coastal and inland marine services in Canada and the U.S. are reciprocal. The lack of reciprocity for the rail industry harms Canada's economy, and the expanded interswitching reach is pulling traffic south of the border. We ask why the Government of Canada's preferred policy position is to see rail traffic moved to American railways for shipment?
The current government has made a promise to Canadians to make policy based on evidence, and we applaud them for that commitment, but Bill C-30 is a perfect example of a policy based on politics, emotion, and anecdote, without any reference to data and evidence. Now, with the benefit of two years of data generated after Bill C-30 became law, we submit that the evidence demonstrates that the extended interswitching limits cause far more harm than good, both for the grain shippers the act purports to help and the broader Canadian economy.
Every legislative review of extended interswitching limits has reached the same conclusion. The panel conducting the first review of the CTA in 2000-01 rejected calls for extending interswitching limits and recommended that the 30-kilometre limit be retained. The panel said at the time, “expanding the interswitching limits would worsen the market-distorting aspects of the interswitching rate regime and would be a step backward.”
The more recent review, headed by Mr. Emerson, recommended that the extended interswitching limit be allowed to sunset. The negative consequences for infrastructure investment, system capacity, and supply chain efficiency are strong grounds for the sunsetting of Bill C-30.
We urge the committee to listen to the evidence-based advice and analysis in the Emerson report and past reviews of extending interswitching, and allow the sunsetting of the Bill C-30 provisions. We have the most efficient rail system in the world. Layering on further regulation of the grain supply chain is not the answer.
What will help move Canadian grain to international markets? Market-based capacity-building infrastructure investments and innovation that drive operating efficiency improvements across the Canadian grain export supply chain. Here we have good news to share. Over the past two years, country grain elevator and port capacities have been increased. CP has invested record amounts in new and expanded infrastructure that will improve the rail system's ability to move higher volumes of grain more efficiently. CP has also developed new programs that improve asset management and availability for our grain customers and provide them better predictability to what they can sell to international markets. These are the features of a rail system that will actually improve the performance of the Canadian grain supply chain, and this should be our collective focus going forward.
Thank you.
