Thank you, Sean.
There are a number of provisions in Bill C-49 that run a high risk of unintended consequences. The part of the bill with the greatest risk potential is long-haul interswitching, which I'll subsequently refer to as LHI. LHI is a remedy which, until it appeared in this bill, had never been recommended, discussed, or considered. No assessment of this remedy on the rail industry has been performed and we believe that significant unforeseen and adverse consequences could result from its implementation.
CN has an extensive network of branch lines serving remote communities in all regions of the country. Those branch lines present a challenge, as they are expensive to service and maintain while at the same time handling low volumes of traffic. In many cases, the reason we are able to justify keeping those lines in operation is the long-haul business they generate. LHI makes it possible for a customer to require us to take the traffic to an interchange point and hand it to a competitor, who would then get the majority of the move and its associated revenue.
Under this remedy, the other railway is in a good position to offer lower rates, as it bears none of the cost of maintaining the remote branch line where the shipper is located. Needless to say, if this were to become a common occurrence, it would be difficult for us to justify the ongoing investments required to keep those remote lines operational.
During second reading debate, LHI was identified as an option to captive shippers that would “introduce competitive alternatives for their traffic and better position them in negotiations for service, options and rates”.
Let me start with the notion of captivity. The bill defines captive as having access to only one railroad, completely ignoring the shipper's access to alternative modes of transportation. So if a customer ships product today using both rail and truck, Bill C-49 considers them captive to rail. We are proposing an amendment to clarify the definition of captive such that if a shipper uses an alternative means of transportation for at least 25% of its total shipment, that shipper must be considered to have competitive options and therefore should not have access to LHI.
With respect to negotiating service options and rates, Bill C-49 maintains the shipper's access to all of the existing remedies respecting rates and service, including final offer arbitration, group final offer arbitration, complaints against railway charges, level of service complaints, and arbitration on service-level agreements. Consistent with Canada's national transportation policy and that LHI provides a competitive option, we are proposing an amendment whereby a shipper that can access LHI should not have access to the other rate and service remedies.
LHI also provides a non-reciprocal competitive advantage to U.S.-based railroads. Railways in the U.S. already have a significant advantage because of the much higher density of traffic on their lines. They simply have much more traffic per mile of railway. That higher density means more traffic over which to spread the high fixed cost of maintaining the network. Railways are most profitable on long-haul moves. Under LHI we can be required to move goods a short distance and then transfer them to a U.S. railway that would get the long-haul move and most of the revenue. That is revenue that then becomes available for investment into the U.S. network at the expense of Canada.
We don't understand, particularly at a time when NAFTA is being renegotiated, why Canada would give away this provision with nothing in return. Providing such an advantage to U.S. railways creates a risk to the integrity and sustainability of Canada's transportation network, ports, and railways, which depend on a certain volume of traffic to generate the capital necessary to keep Canadian infrastructure safe and fluid and to keep good, middle-class jobs in Canada.
We acknowledge that the exclusions in the act limit the areas where this new remedy is available, but those exclusions are insufficient, especially near the Canada-U.S. border in all three prairie provinces. If we had access to similar provisions in the U.S., we would not be objecting. However, there is no right to interswitching in the U.S., and this absence of reciprocity is prejudicial to the Canadian rail industry. We are therefore proposing an amendment that would create an additional exclusion to provide that a shipper not be entitled to apply to the agency for an LHI order if the shipper is located within 250 kilometres of the Canada-U.S. border.
Another area where we do not understand the need for intervention is the attempt to define the level of service requirement. The current provisions have been in place and effective for a long period of time. In our view, the current provisions are balanced and do not require the proposed amendment. We are also proposing an amendment respecting the provisions of Bill C-49 that introduce penalties when railways fail to meet service obligations.
In 2012, Jim Dinning, a facilitator appointed by government, recommended that penalties of this type should only be introduced when penalties also apply to shippers that commit volumes and fail to meet their commitment. BillC-49 has no such reciprocity. We are proposing amendments that better balance penalties between shippers and railways by making railway penalties contingent on shippers having similar obligations.
We would like to commend the minister for his decision to move forward with legislation making the use of locomotive voice and video recording devices compulsory. This is an important step in our collective goal to increase rail safety. While it is important to have the information provided by these devices available when determining the cause of an accident after it has occurred, they are even more valuable in our ongoing efforts to prevent accidents.
We want to say a word about the provision of the bill that increases the ceiling for the percentage of CN shares that can be held by a single shareholder. The current limit of 15%, a limit no other railway has, impedes CN in attracting the kind of patient, long-term investors that we require in our extremely capital-intensive industry. This change is a good first step to correcting the uneven playing field vis-à-vis our competitors. We will be asking members to consider a minor amendment to ensure that this change takes effect immediately upon royal assent.
Finally, we have a word about grain shipments. In the crop year that just ended, CN moved 21.8 million metric tonnes of grain, the most we have ever moved in a year. We beat the previous record set in 2014-15 by 2% and exceeded the three-year average by 7%. I'm also pleased to be able to tell you that, in advance of the start of the crop year, grain shippers secured approximately 70% of CN's car supply under innovative commercial agreements that provide shippers with guaranteed car supply and that include reciprocal penalties for performance.
We have entered into a period of dramatically increased service, innovation, and collaboration with our customers. We have achieved this through commercial negotiation, improved communication, and a better understanding of the challenges we each face. If the Canadian supply chain is going to move the increased volume of trade that we all support and that we all believe can be achieved, it can only happen with collaboration across the supply chain. Regulation has its place, but experience shows that we reach our goals when it is the exception.
We appreciate the opportunity to speak with you today and look forward to your questions.