Transport Committee on Sept. 12th, 2017

[The Chair, Liberal, Judy Sgro]

All right.

Next is Mr. Pellerin from Western Canadian Short Line Railway Association.

[Perry Pellerin, President, Western Canadian Short Line Railway Association]

Good afternoon, Madam Chair and committee. Thank you for inviting me to speak today, and for giving the western Canadian association our opportunity to input into the transportation modernization act.

First, I'm thinking after listening this morning that this might be my last trip to Ottawa. According to CN, we're dead in the water—all our members. We don't operate over 500 miles of track. Some are as little as 23 miles, to as high as about 247 miles.

Let me start by saying we've just done a bit of an update on the western Canada association. On a positive note, we've been encouraged by Transport Canada's willingness and interest in working with us in short lines. Our relationship over the past couple of years has grown very strong, and we appreciate being consulted with and included in discussions surrounding direction of both policy and regulatory changes. This co-operation with Transport Canada is making us safer and better-informed short-line partners.

We've also been encouraged by some inroads with, believe it or not, CN. There's a renewed sense of co-operation on such efforts as our safety training program in Saskatchewan. There are some joint efforts where CN has allowed short-line partners to do intercompany switching, or switching at terminals where maybe they weren't very good and the short-line partners got in and supplied some excellent service. There were discussions this morning about where there is a win-win. I think that is one of them. They've also allowed one of our short-line partners to operate on their track into one of their mainline terminals and set off cars and take out their own cars. Again, that's a very efficient operation and cost-effective way of doing business, and a win-win for both.

The Western Canadian Short Line Railway Association, previously the Saskatchewan Short Line Railway Association, is a not-for-profit, membership-based organization that represents the interests of 14 short lines in western Canada. This morning I think CN talked a bit about its having 70% of its customers locked up in service agreements. The WGEA mentioned that it has about 90% of its farmers involved in its organization. I'd venture to guess that the other 10% to 30% are customers of ours, and we're here today to talk on their behalf.

While present in all western provinces, Saskatchewan has the most extensive network of short-line railways. Saskatchewan short lines own and operate 24% of Saskatchewan's 8,722 kilometres of track. We employ about 183 residents. When I say “residents”, these are folks who have grown up and live in the area where we work.

It should also be noted that we serve 72 small and medium-sized businesses and transport approximately 500 million dollars' worth of commodities each year. Every one of our head offices is within one mile of our own track. Also, I think it should be important to know that all of these small and medium-sized businesses that we support are also some of the bigger businesses that CN supports today. Not everybody starts as a corporate company. Some people have to start as single-point shippers and build their business from there. I think short lines are a great place to do that, because we're able to help them get that leg off the ground without a huge expense at the start.

Our members, our railways, and our customers depend on competitive rates and rail transportation options. We believe that the future of transportation should improve competitive choice for farmers, shippers, and small business. It is our fear in the proposed legislation that it will further deter competition. The newly introduced long-haul interswitching rate mechanism is designed in such a way as to be inaccessible to our shipper customers. Using commercial short-haul rates, which are currently higher than that of trucks, makes competing virtually impossible for us.

The legislation is prescriptive, and small shippers are not capable of spending years in litigation with class 1s, meaning that they will not bother to apply some of the mechanisms available to them, as was discussed this morning. It's inconceivable for a producer to take on a class 1. They're not only scared, but financially it does not make sense.

Paired with the sunsetting of the 160-kilometre interswitching mechanism and the rapid disappearance of the producer car, this risks putting shippers and short lines in a worse position should the legislation be passed as it is. We believed that the intent of this legislation was not to put small business or short lines out of business, but that appears to be the direction we're going.

I will begin with a quick discussion on the current rate structure for short haul and single car movements to provide some context to what I have been saying. Short-line railways have a variety of customers. Many shippers are single car shippers or, what we refer to as, producer car shippers. We would like to assist all of our customers with their transportation needs and movements. This is not feasible because of excessively high short-haul and single car rates imposed by the class 1s. These goods are often forced or shipped by truck and add significantly to greenhouse gas emissions, destroying our provincial highways and roads, and decentralizing small business economic growth.

Shipping by truck, for distances less than 500 kilometres, is typically more affordable than shipping by rail. The only point to add to that is the fact that, on a short line, we are cheaper than a truck. We can compete with the truck. The problem is that when they give that car over to our class 1 partners, they are unable to compete at that rate, as you heard from them this morning.

To give you an example, we have a line we run from Leader to Swift Current. We go 120 kilometres. We can run in there for about $650, which would be about half of what a truck would be, but if he wanted to move that car to Moose Jaw, which is another 122 kilometres away, we've been quoted rates from CP of about $2,600. All of a sudden, we can't compete anymore. What does the producer do? He puts his grain in his truck, turns on Fox News, and heads off to a distant large terminal or shipper.

As was mentioned this morning, the WGEA members supply competition, but some of that competition is increasing the number of trucks we're putting on the highway. That creates another problem and there will be another committee to decide what to do with our highway infrastructure in the future. Please keep in mind that it is important we understand that we are dealing with the current situation, but what will the future be?

We do need the capacity to move grain. There were discussions the other day about truck driver shortages. Rail is still going to be an option to do that and rail to mainline terminal points doesn't necessarily have to be to the export position. It could be to an inland terminal, which in turn, cleans that grain up and readies it for shipments in those larger trains, which CN and CP do a very good job of hauling.

The other challenge for us is that there is getting to be quite a spread between single and multiple car rates. Right now, even between single and 25-car rates going to the U.S., we see a difference of about $1,000 a car. If a shipper wants to ship 15 cars, he is probably looking at a $15,000 added expense and there is just no way he can justify doing that. Again, he is putting that grain in a truck and not always sending it to the most local inland terminal. He is sending it to where, in his mind, he is getting a better deal and that's a whole other discussion.

The other thing that we want to talk about is interswitching, of course. It is a major part of the legislation. The loss of the 160-kilometre interswitching option is very disappointing to our members. While not available to shippers on our entire network or short lines, it did provide a strengthened bargaining position in most locations. The return to a 30-kilometre switching zone will only make that available to the two of our 14 members that can make it cost effective, while the rest will be outside of that.

This affects our ability to attract new customers. Without access to multiple rail lines, businesses recognize that they will be captive to the class 1 that connects to our short lines. This decreases our ability to build new business on our lines.

Unfortunately, the proposed long-haul interswitching is not a good alternative to the 160-kilometre interswitching that has sunset. It is our understanding that the intent of the long-haul interswitching was to increase competition by providing expanded transportation options to shippers. We do not feel that proposed long-haul interswitching will achieve that goal.

[The Chair, Liberal, Judy Sgro]

We thank you very much, Mr. Pellerin, for your time. Whatever you have left, maybe you can fit it in with some answers to some questions there.

From the Alberta Wheat Commission, we'll have Mr. Auch, please, for 10 minutes.

[Kevin Auch, Chair, Alberta Wheat Commission]

Thank you, Madam Chair.

My name is Kevin Auch, and I am pleased to appear before this committee this afternoon alongside our industry partners from the Western Canadian Shippers' Coalition and the Western Canadian Short Line Railway Association to provide a producer perspective as part of this committee's review of Bill C-49, the transportation modernization act.

I am chair of the Alberta Wheat Commission, an organization dedicated to improving the profitability of over 14,000 wheat farmers in the province of Alberta. I also farm in southern Alberta near the town of Carmangay.

I am here today because rail transportation has been one of the commission's top priorities since its inception in 2012. Costs associated with railway failures are ultimately passed down the supply chain to producers. As a price-taker, I cannot adjust the price of my product, so ultimately, these increased costs reduce my profitability. They also negatively impact my cash flow, making timely bill payments an issue.

These challenges are not unique to my operation. They are widespread and that is because when it comes to rail transportation in Canada, the agriculture sector operates in a monopoly environment. Most of the elevators where farmers in western Canada deliver their grain have only access to one railway, leaving both shippers and farmers captive to monopoly carriers.

This is a significant problem because wheat is a crop that relies heavily on export markets and rail transportation to ship our product from the Prairies to port terminal facilities along the west coast and Thunder Bay, as well as our neighbours to the south of the border. While we appreciate this government's efforts to increase market access for farmers through the establishment of free trade agreements, we will lose credibility with international buyers if we are unable to fulfill their orders due to railway failures. We experienced this in 2013 and 2014 when buyers simply sourced their grain from other countries. Canada's reputation as a reliable supplier to global markets is at risk.

Canada's grain supply chain is making significant investments in order to take advantage of new and growing market opportunities. We are seeing major expansion both in port terminal and country elevator capacity. Grain companies have invested hundreds of millions of dollars to ensure they are ready to service growing international markets, and farmers are preparing to take advantage of these opportunities as well. Farmers' significant investments in research as well as new and innovative technology have led to significant yield increases over the years. In fact, just last month CN Rail announced this growth when they implored the Canadian government to invest in new rail infrastructure in order to accommodate the influx of grain. In 2017, CN moved a record 21.8 million metric tons of grain.

My point is that ensuring adequate rail service is paramount to the growth of our sector and Canada's reputation as a reliable supplier of grain to international markets.

AWC appreciates the government's commitment to legislation that will ensure a more responsive, competitive, and accountable rail system in Canada. We believe that Bill C-49 is in fact an historic piece of legislation that paves the way for permanent long-term solutions to the rail transportation challenges that Canadian farmers have faced for decades.

That is why AWC is pleased to see the inclusion of provisions aimed at improving railway accountability, including shippers' ability to seek reciprocal financial penalties, a clear definition of adequate and suitable service, and enhanced interswitching—all measures that AWC has long advocated for. Bill C-49 also contains important provisions that will enhance the inquiry powers of the Canadian Transportation Agency and require that data on rail system performance be made available to the public.

Furthermore, AWC supports the decision to retain the maximum revenue entitlement with modifications that will reflect individual railway investments, incentivizing innovation and efficiency.

With respect to the role that reciprocal penalties play in this legislation, railways have always had a variety of measures that govern shipper efficiencies, including asset use tariffs. These tariffs are used to penalize shipper failures through monetary fines in order to gain shipper efficiencies. For example, when the railway spots cars at my local elevator and the grain company fails to load them within 24 hours, the grain company faces automatic monetary penalties. On the other hand, if the railway shows up two weeks late, there are no penalties. Therefore, the railways are the only link in the grain logistics supply chain that are not held to account.

In order to create an efficient supply chain, one with balanced commercial accountability, railways need to be held accountable for service failures.

We were recently made aware that CN Rail has included a form of shipper tariffs in about 70% of their service-level agreements. On the surface this seems like good news, but these tariffs are limited to a failure to spot cars and still neglect to address common challenges, including timely delivery or the provision of accurate information. We are encouraged to see that CN has taken some steps to increase railway accountability, and we are confident that the provisions outlined in Bill C-49 will ensure that, going forward, penalties are truly fair and reciprocal.

In addition to increasing accountability, reciprocal penalties will create the incentive needed for railways to focus on performance and invest in the assets that can improve efficiencies. This recommendation positions railways to compete in order to drive efficiencies, lower shipper risks, and ultimately better serve foreign markets for Canadian exports.

Under Bill C-30, which expired on August 1 of this year, extended interswitching provisions proved to be a powerful competitive tool for grain companies. Bill C-49 proposes that, under some circumstances, interswitching distances will be increased to 1,200 kilometres, but unlike the previous extended interswitching option, there are conditions within the new provisions that seem to contradict the true intentions of the legislation, making them less effective than the provisions under Bill C-30.

For example, the previous interswitching provisions allowed shippers to access any interchange within 160 kilometres without the need to obtain a permit from the Canadian Transportation Agency. The provision outlined in Bill C-49 stipulates that shippers must seek permission from the originating carrier or obtain an order from the agency to access the interchange, and it must be the interchange that is closest to them. Not only do these changes make interchanging more onerous and complicated, they can essentially render the provision useless in a variety of scenarios, including if the interchange in question does not service the appropriate corridor. In other words, if it moves the product in the wrong direction, if the nearest interchange cannot accommodate the size of the car load, or if it is serviced by the wrong rail company, the nearest competing line does not necessarily have lines running the full distance to the shipment's final destination.

To address these challenges we would ask the committee to consider the amendments put forward by the crop logistics working group, of which AWC is a member, that would allow shippers to access the nearest interchange that can accommodate their requirements with respect to the direction, size, and preferred carrier.

Costs incurred by shippers are ultimately passed down the line and on to producers. That is why our members are also concerned about the formula outlined in Bill C-49 to determine the rates associated with long-haul interswitching. Proposed subsection 135(2) directs the agency to set a rate not less than the average of the revenue per tonne kilometre of comparable traffic. In our view this encourages monopoly rate setting as it is based on revenue as opposed to a cost-plus model. Rates should allow for a reasonable profit, but should not reflect those previously charged in a monopolistic environment.

In closing, the Alberta Wheat Commission strongly supports the quick passage of Bill C-49 because we believe it will help to correct the imbalance between the market power of railways and captive shippers. We encourage the federal government to continue the conversation with Canada's agriculture sector as it works to develop the regulations to support the spirit and intention of the legislation, which seeks to create a more responsive, competitive, and accountable rail system in Canada.

With that, I would like to thank the committee for the opportunity to share the producers' perspective with you today, and I invite any questions you may have with respect to the comments I've made.

[The Chair, Liberal, Judy Sgro]

Thank you, all, very much.

We'll go on to questions.

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 today.

Six minutes isn't a lot of time, and I do have a number of questions. I'm going to direct my first question to Mr. Pellerin.

I'm glad to see that you are alive and well, and here representing our short lines. I have a very direct question for you. You stated that the long-haul interswitching is inaccessible to your members. Can you clarify why that is the case?

[Perry Pellerin]

I sure can, yes. What it means, as I think other people have discussed, is that the rate will be determined by the commercial rates in place for that similar move today. If that similar move, as I discussed earlier, is $2,600 to go 100-and-some kilometres, the average of $2,600 will still be $2,600. The rate that will be determined will be cost-prohibitive for any type of interswitching distance, which effectively puts us out of the game, especially for our short-line members.

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

Just as a quick follow-up, what would you recommend needs to be put in place that would be helpful to short-line railways?

[Perry Pellerin]

You know, I think the encouraging part about today was that there was a lot of good discussion that, hey, everybody has to make a profit, but let's look at a cost-plus system that sets what that should be. There's the idea that “commercial rate” is sometimes short for “expensive”. If we had a mechanism where we would at least know ahead of time what it would cost, it would help us a lot.

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

Thank you.

To the Western Canadian Shippers' Coalition, I noted that you did not get the chance to speak to long-haul interswitching. I note as well that you have a recommendation in your presentation with regard to extended interswitching, so I'd like to turn over the rest of the time to you so that you can share it with us.

[David Montpetit]

Sure. I'll start off, I guess, and briefly touch on long-haul interswitching. Thank you for that.

For my specific members, this remedy and tool will not be very useful, just based on geography. If you look at the map in front of you, the exclusion zone is basically B.C. and parts of northwestern Alberta. When you look at the western Canadian map, a significant area where my shippers are present or have facilities in is exempted. It's one of the several exemptions that have been presented within the amendments. We're struggling with how useful this will be for my members.

Lucia, you may want to comment further.

[Lucia Stuhldreier]

This map will look different from the description of the excluded corridors, but realistically any shipper in that area that's shipping traffic to the Vancouver area, to terminate on a rail siding there, would not be able to use this. We can draw a very similar map for Quebec to show that some of the most captive shippers in the northern part of that province will have exactly the same problem, because their only connection to any other carrier will be in that Quebec-Windsor corridor.

Quite apart from these things, though, one of the underlying issues that WCSC has with this remedy is that it will fundamentally succeed or fail with the willingness of any one of the railways to act as a connecting carrier and to compete for that traffic using long-haul interswitching. Just like its predecessor the CLR, that can make or break that remedy. We haven't seen any willingness to do that, to compete using CLR since the early 1990s, and we don't see anything in the long-haul interswitching remedy that changes that dynamic.

On top of that, the scope of traffic that's eligible for long-haul interswitching, geographically as well as in other respects, is much narrower than what could theoretically take advantage of competitive line rates.

Third, there are a number of hurdles built into this remedy that don't currently exist with CLR.

From that perspective, and given the experience with CLR, even though we may have seen some willingness to compete up to 160 kilometres under the Bill C-30 regime, we haven't seen anything beyond that. CLR has been on the books that entire time. We're concerned that we're not going to see what is really required, which is a willingness to compete on the part of CN and CP—certainly in western Canada the majority of interchanges is between those two carriers—that is necessary to make a remedy like this work.

Yes, the requirement for an agreement with the connecting carrier is taken away, but the fact that people haven't been able to get that agreement is really just a symptom of that underlying, more fundamental issue, which is that CN and CP have “declined to compete”. Those, I want to make sure you know, are not my words. Those are the words of the statutory review report that was issued in 1992. They were repeated in 2001, and I think there was also something along those lines in the most recent report.

[The Chair, Liberal, Judy Sgro]

Thank you very much.

Mr. Badawey.

[Vance Badawey, Liberal, Niagara Centre, ON]

Thank you, Madam Chair.

In my first question, I want to dig a bit deeper on the remedies. We can look at some of the documents in front of us from the different presenters.

My first question—and I'm not sure who I can direct it to—is in terms of investigative powers. What are your thoughts on the investigative powers of the CTA?

[David Montpetit]

I'll start on this one.

In my opinion, it has been a bit of a miss in Bill C-49. I think Mr. Emerson touched upon this yesterday, and it has been brought up in some of the discussions thus far.

I think it's an area that should be looked at again. If you have investigative powers, you can be proactive versus reactive to these problems, especially with regard to systemic problems within the transportation system and the transportation corridors. That's why we highly encourage this. In every submission and at every chance we've had in meetings with the minister's office, Transport Canada, and even the agency, we're encouraging having more ability and more power to do this.

[Vance Badawey, Liberal, Niagara Centre, ON]

Mr. Emerson talked a lot yesterday and spoke in great depth on governance, and of course on good governance. Do you feel that the investigative powers of the CTA will promote better governance with respect to our trade corridors?

[David Montpetit]

I do, yes. Especially if you are looking at long-term sustainability and enhancement of these trade corridors, I think it's important.

Also, from a competitive standpoint, not just domestically but internationally, I think it's important to make sure that our trade corridors are fluid, active, and competitive, and that ongoing issues in some areas we face.... Don't forget that some of these issues do ebb and flow based on weather and on commodity movement. Some commodities are softer at some points, and sometimes there is heavy movement. We've seen that with grain, with coal, and with different commodity groups. You want to ensure that you can address any issues or ongoing issues within those corridors in giving the agency that ability to look into that and find remedies for it.

Again, however they want to structure that or how it should be structured, or whether it's an order to improve it, that's left up to them. But I think it's an area that does need to be focused on.

[Vance Badawey, Liberal, Niagara Centre, ON]

Would it be your opinion that you would add to the accountability credibility of the capital side when it comes to maintaining the infrastructure, whether it be a rail line, a canal, or an airport and things of that nature? Do you feel as well that it would move away from self-interest and agendas more to the value and ultimately the return to the Canadian consumer? As well, thirdly, it would add to our overall enhancement of our economic global performance.

[David Montpetit]

I can direct my comments more to the rail area, since we focus more on the rail and trucking area, but from an overall perspective, without having expertise in air, etc., I think the overall perspective is that anything you can do to enhance, without an agenda such as that, would be beneficial, because there are agendas. Everyone is going to have their own agenda—the whole bit. Organizations will. An unbiased look at it would most likely be preferred and beneficial.

[Vance Badawey, Liberal, Niagara Centre, ON]

Thank you.

I'm going to switch to the short lines, something that was near and dear to my heart in my former life. I brought a short line into our area. The reason was that we were somewhat abandoned—no pun intended—by the mainline operators. With that, I want to open up the floor to you to address three things.

One is why you exist; I think I just touched on that. The second is what you do. You are one group that attaches yourself directly to the customer. That's done directly. There's no middle person. You're it. To some extent, you're depended upon with respect to their viability. My last question, of course, would be, where do you get your funding from?

[Perry Pellerin]

We could start with that. When the meeting's over, we're going to go around and take a small collection to get us going.

First, I'll start with why. I thought CN did a good job this morning of outlining why they want to get off some lines. I'm not convinced that those lines they want off of are still not productive, and I think short lines have demonstrated right across Canada that, given the opportunity, we can make a go of it. Part of our problem has been that maybe we overpaid for these lines nobody wants, and that put us in a hole at the beginning. Then we get into trying to finance a loan and trying to maintain the railway.

I think, given the opportunity, short-line operators are very innovative. They're very customer-focused. They do a very good job, and they allow our customers to expand. I always said to the folks there when we bought our short line that the key to it is this: if you allow your line to disappear, be it a short line, a producer car site, or a siding, it'll never come back; it's gone. That is the key. We have some stories, especially in Saskatchewan, of where short lines were given up on. However, at the far end of the line they discovered that was a great place to load oil or to do that type of industry, or some grain customer came in there and put in there. Those lines are very valuable and viable now and will be for the conceivable future. What we have to do is figure out how to do that with the other lines.

With regard to your last point, we are very customer-focused. I think our customers really like the idea that they can phone and somebody answers. That's kind of unique. We listen to what our customers need. We're able to be a little more nimble than maybe the class 1 railroads and are able to help them out. This is especially true when we're trying to entice new business to Canada. I think it's critical that we are the points that really could get them off on a good start with good service and a low-cost start-up compared with some of the requirements on the class 1s.

[The Chair, Liberal, Judy Sgro]

Thank you very much.

Again, I'm sorry I have to cut you off, but....

[Perry Pellerin]

If I could just comment on the funding, we are on our own. We don't get a dime from nobody.

[The Chair, Liberal, Judy Sgro]

Monsieur Aubin.

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

Thank you, Madam Chair.

My thanks to our guests for joining us and for sharing their expertise with us.

When we do this kind of study, consensus is relatively rare. But we seem to be getting one on long-haul interswitching. Some people don't want it just because it's not competitive and others don't want it because it's not effective.

It is occurring to me that Bill C-49 is not achieving that objective at all. If we were to rethink the objectives of interswitching, where should we start from? Should we go back to what was proposed in Bill C-30 or should we correct Bill C-49 so that it includes a provision on interswitching that favours those who need it?