Transport Committee on Sept. 12th, 2017

[The Chair, Liberal, Judy Sgro]

Thank you very much.

We'll now move on to the Canadian Oilseed Processors.

[Chris Vervaet, Executive Director, Canadian Oilseed Processors Association]

Thank you very much.

Madame Chair and members of the committee, on behalf of the Canadian Oilseed Processors Association, or COPA, I would like to extend our thanks to the committee for the opportunity to contribute to this important study of Bill C-49.

COPA works in partnership with the Canola Council of Canada to represent the interests of oilseed processors in this country. We represent the companies that own and operate 14 processing facilities spanning every province from Alberta through to Quebec. These facilities process canola and soybeans grown by Canadian farmers into value-added products for the food processing, animal feed, and biofuels sectors. This not only creates incredible demand for oilseeds grown by Canadian grain farmers but also injects stable, high-paying jobs into the rural areas where we operate.

Our industry’s success is predicated on the ability to access foreign markets. Indeed, 85% of our processed canola products are exported to continental and offshore markets. Efficient rail logistics are paramount to getting our products to these markets in a reliable and timely fashion. To put this into perspective, about 75% of our processed products are moved by rail.

Given the importance of rail to the success of our industry, COPA has been working closely with the WGEA over the last couple of years to advocate for key policy recommendations that we believe are fundamental to creating a more competitive rail transportation environment. In our view, Bill C-49 is, on balance, a good bill. It is not a perfect bill but it contains several critical components that value-added processors feel will improve the commercial balance between shipper and railway. These include the ability to arbitrate poor performance penalties into service-level agreements, along with a dispute resolution mechanism to address disagreements in the application of a signed SLA. We also feel that data transparency and its robustness have been significantly improved in the bill, and we have seen a strengthened definition of “adequate and suitable”.

This being said, our concerns with the bill’s proposed changes to essentially convert the former extended interswitch provisions to long-haul interswitching are especially noteworthy. To be very clear, extended interswitching was an incredibly important tool for value-added processors. For the first time, interswitching breathed a semblance of real competition into rail logistics for our sector where there had never been any before, giving previously captive facilities access to a second carrier for U.S.-bound product in particular. Our industry saw a dramatic improvement in rail service to the U.S. while extended interswitching was available.

Extended interswitching was an extremely simple and effective tool. It put all interchanges into scope and involved no application or bureaucratic red tape to access. Rates were clearly published for set distances, giving shippers the certainty and predictability needed to book freight over a longer term. Moreover, it was also a highly effective negotiating tool with the local carrier, which we found to be much more service oriented and likely to enter into a conversation about better service or rates with the leverage of the extended interswitching.

By contrast, the long-haul interswitch mechanism contained in Bill C-49 presents a number of challenges and removes the key characteristics that we were leveraging in extended interswitching. Most notably, LHI proposes a multitude of complicated parameters and conditions to determine how and which interchanges are accessible for shippers. LHI also proposes setting rates based on historical comparable rates. All comparable rates, to date, have been set under monopolistic conditions. If the rates themselves are not competitive, there is no incentive for my members to apply for long-haul interswitch.

Left unaddressed, both of these provisions as currently drafted would render the LHI to be of little to no use. Therefore, we are interested in working with members of this committee to find solutions to put long-haul interswitch to work as a competitive tool for our industry, as we believe the government has intended in this bill. Similar to WGEA, we see three key areas of concern that need to be addressed to make LHI an effective tool.

You will find some of our technical amendments—again, similar to those of the WGEA—in annex A, which we circulated to the committee members prior to this meeting.

Number one in terms of our list of technical amendments is to clarify that access to the nearest interchange means an interchange that is in the reasonable direction of the traffic and its destination, whether or not a facility is dual served or if there is another interchange within 30 kilometres. Prescribing access that is simply based on shipper access to the nearest competing rail line without taking into account other considerations would limit the value of LHI. Practically speaking, when determining the nearest interchange, consideration needs to be given to whether, one, it is in the right direction of the shipment's final destination; two, it is serviced by the right rail company to move the shipment to the desired destination; and three, it is the right size with the necessary infrastructure to execute the interswitch.

The intended spirit of the LHI mechanism is to give shippers competitive options. These have to be options that we can actually use and are applied equally among shippers. Proposed paragraph 129(1)(a) of the bill stipulates that a dual-served shipper may not apply for a long-haul interswitch, for example. Excluding dual-served shippers simply on the assumption that they have competitive options is a false premise. In many instances, both rail lines do not service the traffic's final destination. As well, restricting access to long-haul interswitch places dual-served facilities at a competitive disadvantage to those who do have access to the long-haul interswitch.

Let me give you a quick example of what that means in practical terms. In annex B we have attached map 2. In Alberta, in the town of Camrose, we have a member operating a processing facility that is dual served by CN and CP. Currently under the long-haul interswitch they do not have access to apply for long-haul interswitch, even though there is an interswitch opportunity at Coutts in Alberta, at the border, where they could have access to BNSF. This not only limits their access to markets served by BNSF in the United States but also puts them at a competitive disadvantage in terms of other members or other facilities that do have access to that long-haul interswitch because they are not dual served.

Two, in terms of the key technical amendments we're looking to propose, we are also very concerned about the ability of the long-haul interswitch provision to address shipper concerns over rate-setting. In other words, the way that Bill C-49 is currently written, it places a floor on LHI rates, indicating that a rate cannot be less than the average of per-tonne kilometre revenue of comparable traffic. The bill needs language that gives the CTA the ability to consider commercially comparable competitive rates when determining the interswitching rates. Looking to historical and comparable rates as a reference to determine interswitching rates ignores the fact that these rates have been determined under monopolistic conditions. The CTA should also give regard to the actual cost to move the shipment, not what the railways have managed to charge in the past when monopolistic powers were at play. In this way, the agency can ensure that a railway gets a reasonable rate of return for conducting LHI business, on the one hand, and also guard against perpetuating excessive rates set under circumstances where competition does not exist.

The third amendment that we're looking to propose is that we are concerned about the ability of a rail company to take unilateral decisions to stop serving an interchange or tear it up altogether without any further check and balance. Again, this runs directly against the original spirit of the new LHI to give shippers more competitive options. We believe the bill requires tighter controls around decommissioning interchanges and in fact recognition of the other common carrier obligations that seem to already limit the ability for this to happen.

Finally, we just would like to add our voice to the growing number of grower groups and associations raising concern over the fact that soybeans and soy products have been excluded from the MRE. The MRE is a viable tool to protect farmers from exorbitant rate hikes. We know that the government and members of the committee share this concern for farmers, thus the decision to keep the MRE in this new iteration of the CTA. It is therefore surprising that soybeans and soy products would be excluded. As Wade mentioned, soy is now one of the major commodities grown in Manitoba and is expected to see similar growth in seeded acreage in the other two prairie provinces. With this growth in acres, there is increasing potential for value-added processing to expand into soybeans in western Canada, where there is currently no large commercial value-added processing for soy. There is no logical policy rationale to exclude soy over any other crop already under the MRE. COPA members and our farmer customers are asking that soybeans and soy products be added to schedule II.

In conclusion, oilseed processors are of the view that Bill C-49 is an important step in the right direction. Our suggested technical amendments on LHI would provide shippers an opportunity to access alternate carriers, which strengthens the overarching intent of the bill to provide a more competitive system.

Thank you.

[The Chair, Liberal, Judy Sgro]

Thank you very much.

We'll now go to the Canadian Federation of Agriculture.

Mr. Hall.

[Norm Hall, Vice-President, Canadian Federation of Agriculture]

Thank you, Madam Chair.

As introduced, I am Norm Hall. I'm the first vice-president of the Canadian Federation of Agriculture, but more importantly, I sit here as a farmer from western Canada, east-central Saskatchewan, Wynyard, on the largest saltwater lakes in Canada, which are rising. Thank you for the invitation to appear before this committee.

As you know, CFA has been a strong proponent of advocating for a review of the regulations and legislation that govern and manage the movement of grain for export and the review of transportation. The government's advisory council on economic growth had coined the phrase “unleashing Canadian agriculture”. An important component of unleashing agriculture is building an efficient export corridor through sound legislative and regulatory process, up-to-date infrastructure, and information systems with the full accountability of all transportation and grain-handling participants. It is very important in order for the industry to confidently develop new and larger export markets. The primary stakeholder in all of this is the producer of the product, the farmer.

In 2014-15, Canadian farmers paid $1.4 billion in freight charges to the railways under the MRE. This was not paid by shippers. Grain companies are cost plus brokers. Any charges from the railways get passed through to the producers. They pay the bill. The railways are basically cost plus facilitators. Under the MRE, they are guaranteed a 27% return. A recent study by one of our members, APAS in Saskatchewan, saw that the number was closer to 60% or 65% return to the railroads in profit. It is the farmers who take all the risk in the production stage and the farmers who pay all the costs of production, the cost of freight from farm gate to the inland terminals and transload sites, the freight to export position, and the cost of any disruptions or delays.

Canada's railways and an efficient, low-cost grain rail transportation system are critical to the country's agricultural economy and the financial health of grains and oilseed producers. To ensure that the system works overall, decision-makers must recognize that farmers pay the entire bill for transportation of export grain from farm gate to port. Western Canadian financial livelihoods are captive to the railway monopoly that is trying to maximize profits for its shareholders.

Between 35 million and 40 million tonnes annually are captive to the railway monopoly. Since transportation costs represent one of the highest input costs in grain farm operation, the importance of ensuring competitive environment through regulation and legislation can never be understated. As Emerson so aptly stated, transportation costs, for example, often represent a more significant hurdle to expanded trade than do the costs associated with international tariffs or trade barriers. This was all brought to a head with the failure of the 2013-14 crop year. Twenty million additional tonnes, as was stated by the previous presenters, could have been alleviated if they had contacted the industry and were able to plan that way instead of leasing 400 of their engines into the States and shorting themselves of power for the winter.

While Bill C-49 takes great steps in the right direction, it almost seems as if they are meant to look like improvements without involving real change, leaving railways with far too much room to not comply with the intent and ending up with far short of a competitive environment: requesting more information while restricting the agency's use of that data; institutionalizing long-term interswitching but with historical revenue-based freight rates and not actual costs; avoiding giving the agency powers to pre-empt problems and requiring formal complaints; regulating interswitch options without giving the shipper flexibility to choose interswitches that would really help the shippers and result in higher levels of competition amongst the railroads; continuing to allow the railways to randomly or arbitrarily close producer car-loading sites and interchange facilities; continuing to allow the railways to use 1990s costing data when they've implemented savings on the backs of farmers; and giving railways a full year post-implementation to comply with new information data requirements.

I also want to say that while my comments focus on general policy positions, the CFA fully supports the more detailed technical legislative amendments proposed by the Crop Logistics Working Group, which will be in a letter to your minister.

Under transparency, since 40 million tonnes of grain are annually slated to move by rail, it's absolutely imperative that the railways comply with new regulations for additional data and information to allow proactive logistics and marketing and planning by the entire industry. Real-time data is required to achieve this objective, and timelines for the release of data and information have to be short enough to allow for proactive planning. There is no justification to allow the one year after legislation to come into force before they have to comply.

The use of data information by the agency should not be restricted and should be fully utilized to facilitate and manage the flow of traffic and grain volumes to pre-empt delays, backlogs, and disruptions. For example, if information or data is used for LHI administration, it can be used in other areas and for other purposes. The agency should have the freedom to do so, not for public release, but just for their own use. Further, the agency must be given the authority to find solutions to problems proactively, without waiting for industry to file complaints. The legislation must be amended to give the CTA the added powers to correct service performance failures through their own volition.

Under reciprocal penalties, while this is a contractual agreement between grain companies and railways, I've already told you that any problems arising between these two parties eventually get charged back to the farmers. The CTA must have the mandate and the resources to monitor, regulate, and ensure compliance. Level of service and compliance mechanisms have to prevent the railways, with their monopolistic powers, from becoming nonchalant about service provided, since shippers/farmers have no other options. Producer car loading sites are a good example, and I'll talk about them soon.

The minister must monitor the railways' overall level of service and service availability, and cannot allow the railways to arbitrarily and randomly withdraw services that are required to efficiently and expeditiously transport grain to export markets that provide farmers and shippers with the opportunity to improve their competitive position in the market. Since we're going to be looking at the MRE penalties imposed as a result of this service deficiency or contract, non-compliance must not be allowed to be included in the cost calculations of the MRE.

Under the long-haul interswitch, LHI, railways are concerned about losing market share. Welcome to competition. In one voice, they want to talk about having market-driven agreements, yet as soon as that threatens their monopoly by allowing LHI and U.S. carriers to come up here, they don't want it. They want to have regulation in place.

Under the current interswitch, 30 kilometres, there are four points in western Canada that are naturally served by the two railroads. The 30-kilometre interswitch takes that up to a whole 14 out of 368. Under the 160 kilometres, that extended to 85% of all points, which allowed grain companies to use interswitch if needed, if service was poor.

That is why interswitch is there. It's because of poor service. It gives the opportunity for one company to search for another company for better service. It's supposed to be for competition.

[The Chair, Liberal, Judy Sgro]

Thank you very much, Mr. Hall. Have you completed your testimony?

[Norm Hall]

Just about. I have just a short bit on the MRE.

While maintaining the MRE is a must, individualizing the railway investment is a good move, but it defies logic that the legislation does not call for regular costing reviews. Tolerating a rail monopoly comes with an obligatory responsibility on the part of government to monitor actual costs to prevent the railways from abusing their monopoly. Efficiency improvements by railways have reduced their costs and have largely come on the backs of farmers. Closing down of inland terminals and forcing farmers to truck their grain further have increased costs for roads for provincial governments and municipalities to the tune of about $600 million of added freight costs for producers from farm gate to elevator.

Thank you, Madam Chair.

[The Chair, Liberal, Judy Sgro]

Thank you, Mr. Hall.

On to our questions, we'll go to Ms. Block.

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

Thank you very much, Madam Chair.

I want to thank our witnesses for being here. We have quite a diverse representation of witnesses today, which is good when we're talking about providing a balanced approach to ensuring that the needs of our shippers are balanced with those of our railways, which are providing a service to our shippers. I made the observation during our last panel that we definitely understand the importance of our railway system to the economy of our country and the importance of our producers within that environment.

I had the opportunity of asking a question of a previous panel in regard to what I think has been a somewhat confusing message that perhaps has come from our railway companies in terms of comments made in a study done a year ago, when we were reviewing the Fair Rail for Grain Farmers Act. As I mentioned earlier, stats were provided to our committee during that study that demonstrated that extended interswitching was not used frequently. What we heard from our producer groups was that while it wasn't used frequently, and I think you mentioned it today, it was an effective tool used in negotiating contracts. If the legislation before us is meant to ensure market access and a competitive environment for our producers, what I would like to hear from you is a comment on that confusion. We were told that it wasn't used extensively and that it was an effective tool in negotiating contracts but that there's strong push-back on the long-haul interswitching that's included in this legislation. I'm wondering if you could provide a little more insight on that.

[Wade Sobkowich]

Thanks for the great question. It's something that we're a bit confused about ourselves.

On one hand, we have a situation where both railways have said that they're concerned about extended interswitching because of poaching from the U.S. carriers into the Canadian marketplace. On the other hand, we have Canadian rail carriers that already have extensive networks in the U.S. Those are two elements, I guess, to this discussion.

We found that initially the rail companies were objecting to the extended interswitching provisions when they were coming into play, but they began using the extended interswitching. They began soliciting business under extended interswitching and using it as it was intended to be used, which was as a competitive tool. That's what we're after here. I mean, how many times.... This is the fourth time I've personally appeared before the transport committee on different bills to amend the Canada Transportation Act. The recurring theme is, how do we get the rail freight market to behave like a competitive marketplace?

That seems to be a well-accepted premise, yet when we get close to doing that, people seem to get scared and want to pull back. We are after a competitive environment. If the railways are providing good service at good rates to the locations they serve, then they will not find that shippers are looking for other competitive options. It's only when rates are too high or service isn't there that shippers begin looking for other alternatives to get product to the marketplace.

The railways, for reasons I understand, prefer to move product east and west because of the cycle times on the railcars. They prefer to move to Vancouver and to Thunder Bay because of the cycle times; they can get their assets back in the system quicker. When they go down to the United States, it takes a lot longer for them to get the railcars back—maybe 30 days—so they're not that interested in serving the U.S. markets that we find. When extended interswitching was brought into play, it allowed for Burlington Northern, primarily, to come in, fill that void, and take that traffic down to the United States.

Shippers were using it both actively and passively. If you look at the straight statistics on the use of extended interswitching, it seems that maybe it's not a lot of usage. That's active usage. Passively, what would happen is that a shipper would go to the railway and say, “I need service, and these are the rates that I think are reasonable.” The railway might say that it can't do that, it can't provide that service to the U.S., and that it's giving priority to shipments in other corridors, or whatever it is. Then the shipper would say that they're going to talk to Burlington Northern to see if they can get traffic switched over there, after which time the primary carrier would come back and say, okay, let's be reasonable here. They would give you a better rate, or they would provide you with that service.

The benefit of extended interswitching can't be measured just based on how much it was used.

[The Chair, Liberal, Judy Sgro]

Thank you.

Mr. Hardie.

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

For 100 years, this room has been hearing these stories—for 100 years—and if these walls could talk, they'd say, “God, we haven't heard anything new for 100 years.”

We're now at a point with a new piece of legislation where we're going to try to do something very ticklish, and that is to define what we mean by “adequate and suitable” service. If I listen to you guys, it's, “Let's lean toward the demand side: that's adequate and suitable.” If we listen to the railroads, it's, “Let's lean towards supply, towards what we've got available.” I didn't challenge them—and I know this is unfair—but I'm going to challenge you. What does a win-win definition look like, where you get something good and the railways get something good?

Mr. Sobkowich.

[Wade Sobkowich]

Thanks. That's also a really good question. To us, it's based on the premise that we have to take a look at what's best for the Canadian economy, and what's best for the Canadian economy is to get products to the customers we have throughout the world. That's going to return as much value as possible to Canadians.

Therefore, the premise of balancing the views of the railways and the shippers, we believe, is slightly flawed in the sense that the railways are a derivative market. They exist because shippers have products they need to get to somewhere else in the world. Shippers are drivers of the economy in that regard, so we need to make sure the definition of adequate and suitable provides the tools and the motivation the railways need to bring on as much capacity as possible to meet the demands of shippers, just as you would see in a competitive environment. In a competitive environment, if you went to a courier company and it wouldn't provide you with the service you needed in order to get your package to where it needed to go, you would go to someone else and you would get that service, and the package would get where it needed to go.

We need to try to simulate that here. If we had regular and normal competition in the rail freight market, that would just happen, but because we don't have that and because it's not really achievable, given the extensive cost barriers to entry of bringing in new railways and that sort of thing, we have to make the rail freight market behave as though it was a competitive marketplace. That requires legislation.

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

You could go on for a long time, I'm sure, but the fact is, at the end of the day, what the government would like to achieve is something where you're getting what you need, the railways are getting what they need, and there's no need for government to come in and subsidize anyone. It's kind of a net loss for the country when that has to happen.

Let's look at this as a network. We probed the railroads on the fact that they have extensive networks into the United States. I want to get a better picture of the origin and destination, where you would look at what would be going out of Canada and where it's going, and where the railways, with their current networks and what they could actually organize with American carriers, could actually serve the markets in Canada.

One of the things we heard in the fair rail for grain study was that the real attraction of interswitching, where they're actually going to use it, which was rare, was to get the product down to the States so it too could move to the west. That's what we heard there, but are there other considerations? Where's the product actually going and what role can our Canadian operations in the States actually play to fulfill this to make the whole discussion of interswitching almost moot?

[Wade Sobkowich]

To answer your question about where the product is going, it goes to most states. Most states in the U.S. receive shipments of Canadian grains and oilseeds. Some of the more notable ones would be the southern California dairy market, for example. The benefit of the interswitching is that you could get onto Burlington Northern and they would take it down to that marketplace for you, and because you have increased capacity to the United States, you could therefore make more sales to the United States.

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

What's to stop CN or CP from contracting with Burlington Northern to offer you a seamless service?

[Wade Sobkowich]

I don't believe there's anything stopping them from doing that.

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

Does it matter then that we could be in a situation where the U.S. rail lines, if they find themselves with extra capacity, basically dump their product on Canada?

[Wade Sobkowich]

I don't know the answer to that question. It's a good question.

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

Okay.

[The Chair, Liberal, Judy Sgro]

You have 45 seconds.

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

I'll leave it at that.

[The Chair, Liberal, Judy Sgro]

Thank you.

Mr. Aubin.

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

Thank you, Madam Chair.

I apologize to Mr. Hardie in advance if I am asking a question that has been asked for the last hundred years. I haven't been here quite that long.

Joking aside, we have often been told that the interswitching measures, and all the other measures in Bill C-30, were designed to respond to the problems caused by an exceptional harvest, followed by a very harsh winter.

Am I wrong to say that agricultural techniques are advancing so rapidly that what was once an exceptional harvest has become the norm?

[Wade Sobkowich]

I could take this one, and then maybe Norm could.

We've definitely seen an increase in harvest volumes year over year. We have an upward trend. If you take a look at the last five years, we're now talking about a crop of 65-million tonnes being an average crop. Man, if we'd gotten that number 10 years ago, we would have been busting the rafters of our elevators. We definitely have more and more grain coming off the fields during harvest time. That's attributable to changes in agronomic practices and changes in technology. Farmers are operating with better practices and that sort of thing.

If your question is what has changed to give us comfort that we won't end up with a similar situation to what we had when we started seeing some of these big crop volumes, from our perspective nothing has changed. We don't have a change in the competitive environment. When we had Bill C-30 and we had extended interswitching, we had a glimpse of a change in the competitive environment, but that has sunsetted. We don't have Bill C-49 passed yet, so really, nothing has changed in the competitive environment and nothing has changed in the legislative environment to give us comfort that if we don't get something passed here, with tools we can use like reciprocal penalties, we won't go back to the situation we had in the past.

Does that answer your question?

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

Yes, thank you.

So your producers are concerned about being in a situation where the measures in Bill C-30 have been abandoned and Bill C-49 will not be passed for a number of months. Yet harvest time is almost upon us.

Do your producers have serious concerns about the coming weeks and months?