Transport Committee on Sept. 12th, 2017

[Sean Fraser, Liberal, Central Nova, NS]

To shift gears a bit, under the previous model of extended interswitching in western Canada, being an eastern Canadian, I couldn't help realizing that certain regions of the country got this. I know, of course, that your interests might have been fine with extended interswitching, but do you see any reason not to extend a similar model to allow this sort of pseudo-competition where there is none to apply to different industries in different regions across Canada?

[Wade Sobkowich]

Personally, I don't see a reason. I can't get my head past the notion that it will be used only if the primary carrier isn't competitive. All they have to do is be competitive and it's not going to be used. I personally think that we should be able to apply it across Canada without reservation, but I do know that there were some concerns about some of the more densely populated areas in eastern Canada, where you have a large number of shippers in tight proximity and it would create some issues. It could potentially create issues if everybody is applying for an extended interswitch to that interchange. It could be a sort of backdoor way of regulating rates.

[Sean Fraser, Liberal, Central Nova, NS]

I think that's why in high-traffic areas like the Quebec to Windsor corridor you see an excluded corridor: because competition exists already.

If I turn my mind to reciprocal penalties, which you brought up, where the railway fails to meet its service obligations, you seem to be fairly happy with this—

[Wade Sobkowich]

Yes.

[Sean Fraser, Liberal, Central Nova, NS]

—unless I'm misreading you. Yesterday we had a witness from I think the Saskatchewan Association of Rural Municipalities who was quite worried that there wasn't a reciprocal penalty provision in the act. We heard discussions about whether they were mistaken. From the perspective of producers, you are happy with the reciprocal penalty mechanism built into this legislation. Is that fair to say?

[Wade Sobkowich]

We are. It's pretty well the way we asked for it. I read SARM's brief and I think they just were mistaken about where it's included and how.

[Sean Fraser, Liberal, Central Nova, NS]

I just wanted to make sure because I don't want to entertain amendments that may be based on misinformation.

Is your experience under the previous model, which has some similarities to long-haul interswitching, that in fact the real impact that it had was at the negotiating table? Rather than causing one railway to give up business to a competitor, is the real impact here that you achieve a competitive rate where there is no competition?

[Wade Sobkowich]

Yes, it's both. It was used both actively and passively. Something is only good as a threat, to be used as a threat, if you actually use it. It was used in both ways and a shipper would decide, I don't like the rate, I don't like the terms of service, I'm going to do an extended interswitch. They didn't have to apply to the agency. They didn't have to use the nearest interswitch as long as it was within 160 kilometres. It was what we would characterize as a competitive tool, whereas long-haul interswitching we would characterize more as a protection against abuse of monopoly powers. You have to go to the primary carrier first. You have to demonstrate that you couldn't reach an agreement with them before you go and use something else.

[Sean Fraser, Liberal, Central Nova, NS]

You mentioned during one of your responses to an earlier question that it's not really necessarily about balance but about getting goods to market for the sake of the Canadian economy, with which I agree. That being said, at a certain point in time I have to acknowledge that if the system is going to work railways also need to make money. Is there any threat that you see here with introducing competition where the rates become so low that the railways can't possibly profit?

[Wade Sobkowich]

I don't see that scenario. We're still talking about, in many, cases turning a monopoly into a duopoly, which ain't that great. We're talking about putting in place a small measure of competition. We're not talking about wild competition like you might see in the retail sector, for example, so I don't see that's the case. What's a fair return? That's why we talk about a cost-plus. In any competitive marketplace, somebody is looking at a 10% return, maybe a 15% return if you're being generous. That's reasonable and that's why we're talking about asking for amendments to the rates section of long-haul interswitching to be cost-plus.

[The Chair, Liberal, Judy Sgro]

Thank you, Mr. Fraser.

Mr. Lauzon.

[Guy Lauzon, Conservative, Stormont—Dundas—South Glengarry, ON]

Thank you very much. I'd like to address this question to Chris. The railways are asking us to amend Bill C-49 so that facilities within 250 kilometres of the border can't access the long-haul interswitching. What would that do for your members for the value-added processors? What effect would that have on their business?

[Chris Vervaet]

That's a good question.

Again, I mentioned in my response to a previous question that oilseed processors in particular have been using the interswitch quite extensively under the extended interswitch provision. If that were to be something that would be put forth, we'd certainly see a lot of limited access for our facilities that are located in southern parts of the provinces of Alberta and in Manitoba. It would preclude us in terms of having access to the interswitch locations that are located at the border between the U.S. and Canada, where my members anyway have had access to BNSF in particular to—as I mentioned in one of my previous responses as well—access to new markets. That's really what happens when we do have that access to an alternate carrier through the extended interswitch. Limiting it to 250 kilometres from the border certainly would preclude our members from making use of these interswitch locations.

[Guy Lauzon, Conservative, Stormont—Dundas—South Glengarry, ON]

I'm not sure who I want to address this to. I'm a visitor to this committee and I'm very intrigued by this discussion.

You mentioned, Wade, that interswitching isn't used that often but the threat is very valuable. That perplexes me. I would think that the railroad companies would have some pretty good negotiators there and they would be able to deal with that. You say that it's active and it's passive. How do you explain that? You're negotiating with me, and you say, if you don't give me the deal that I want I'm going to go to the competitor. That's business, but it seems that you get away with that bluff every time.

[Wade Sobkowich]

No, it's not a bluff. You'd be prepared to move your business to the competitor. You will go to the primary carrier and say, “What can you do for me for rates on service?” The primary carrier would say, “This is what I can do for you.” You would say, “That's not good enough. I need to meet a time window for my customer in the U.S. and you're not providing service that allows me to get product within that contract window.”

[Guy Lauzon, Conservative, Stormont—Dundas—South Glengarry, ON]

Is that time or money, in terms of costs?

[Wade Sobkowich]

It's both.

It could be rates or it could be service, or it could be both together. You would say, “Your rates are too high and you can't provide service, or you can't provide service in the time that I need it, so I'm going to a competitor” and then I'm going to get an interchange to move traffic from CN to CP, for example, or from CN to Burlington Northern.

[Guy Lauzon, Conservative, Stormont—Dundas—South Glengarry, ON]

Is that always available, to go with a competitor?

[Wade Sobkowich]

It's available with a competitor as long as there's an interswitch or interchange within 160 kilometres that can accommodate that track.

[Guy Lauzon, Conservative, Stormont—Dundas—South Glengarry, ON]

You can get a better deal from the competitors.

[Wade Sobkowich]

Exactly.

You don't need permission from the agency or anything like that. That would or would not prompt the primary carrier to take a second look at that and say, “Gee, that's a loss of business for me. That's a loss of traffic. Can I sharpen my pencil in any way here?”

[Guy Lauzon, Conservative, Stormont—Dundas—South Glengarry, ON]

One of the railway folks mentioned that it's cost-prohibitive to deal with anything.... If trucking works, they can't compete with trucking up to 500 miles. That's where they break even or where they are most cost-effective.

Why can't you do this? Does trucking not work? If they charge as much as truck transport for the first 500 miles—that's where their break-even point is—why would you not use trucking for the first 500 miles?

[Wade Sobkowich]

You mean to get to the interswitch?

[Guy Lauzon, Conservative, Stormont—Dundas—South Glengarry, ON]

Yes.

[Wade Sobkowich]

That's a good question. There's an answer to that, but it—