Transport Committee on Sept. 12th, 2017

[Martin Shields, Conservative, Bow River, AB]

Okay.

[Janet Drysdale]

I would echo Mr. Clements' comments. Certainly as it exists today, there are six major railroads in North America. Two operate in Canada, two operate in the western United States, and two operate in the eastern United States. It appears unlikely in the context of recent actions that the U.S. regulatory environment would proceed with any type of consolidation scenario. That said, as we think about the future and the longer term, the potential competitive threat from things such as autonomous trucking and the difficulties that the U.S. eastern railroads are facing with respect to significant declines in their coal business, over time there may be economic and regulatory justification for the U.S. railroads to combine.

[Martin Shields, Conservative, Bow River, AB]

Trucking, in a sense, is a cost to municipalities. Trucking is huge, and that's an unknown cost that you're not talking about, a competitor that the municipalities pay huge costs for. How critical is reciprocity in negotiations here as we go forward? As we consolidate the industry north and south, how critical is reciprocity?

[Janet Drysdale]

In any competitive industry, we want to be on an even playing field with our competitors, and we aren't today. When we look at the U.S. regulatory framework, there's no common carrier obligation. They're not obliged to carry traffic. There's no final offer arbitration, no group final offer arbitration. There's no level of service arbitration. There's no interswitching. There's no extended interswitching, and there's no long-haul interswitching.

[Martin Shields, Conservative, Bow River, AB]

How critical is it for you to have in order to survive?

[Janet Drysdale]

It's imperative that we have a level playing field with our competitors if we want to remain competitive in an industry that might eventually consolidate.

[Martin Shields, Conservative, Bow River, AB]

Does it threaten our industry?

[Janet Drysdale]

Yes, it does.

[James Clements]

I would argue the question this way. If I were looking at it from a U.S. carrier's chair—if I were the strategic planning individual at the Norfolk Southern—I wouldn't be interested in a Canadian carrier; I'd be looking west. You could have transcontinental mergers in the U.S. Then I could just pick the traffic I want off the border points because of extended interswitching, and I know I have no threat there.

A consolidation scenario, then, might leave the Canadian carriers out in the cold.

[Martin Shields, Conservative, Bow River, AB]

Is it a threat to your existence?

[James Clements]

I think it would increase the density and competitiveness of the U.S. network, if they could combine and our regulatory environment didn't prevent that.

[Michael Bourque]

Madam Chair, I could add a few comments, if that's all right. I'm the chief myth-buster for the railway industry, and there was a significant myth that was perpetuated here, and I must address it.

During 2013-14, there was additional grain—20 million metric tonnes of additional grain—produced by the agriculture industry. Yes, a lot of it was on farm; that's where they store it. We also had the worst winter in 75 years. In June, the ground was frozen in Winnipeg and pipes were frozen, so it was a significant winter. Nevertheless, we moved that grain. It required 2,000 additional trains of 100 cars each just to move the extra grain that was produced that year.

The industry moved the grain. It was a very anomalous situation of a bad winter; it had nothing to do with the movement of oil. There was no oil moved to the west coast, which is primarily where all of that grain moved, to the Port of Vancouver.

I just wanted to address that. Thank you.

[Martin Shields, Conservative, Bow River, AB]

There were no trains in [Inaudible--Editor] country for a year.

[The Chair, Liberal, Judy Sgro]

Thank you very much, Mr. Shields.

We go on to Mr. Fraser.

[Sean Fraser, Liberal, Central Nova, NS]

Thank you very much.

I appreciate the feedback. I can start by saying that I appreciate the strategic role that the rail industry plays in the economy. I accept in general terms the notion that deregulation over the course of the last 30 years has led to prosperous circumstances for the economy and of course for the rail industry as well.

I think we might part ways to a degree on whether there was somewhat of a market failure involving captive shippers and on what “captive” really means. I think it was Mr. Clements who said that we have the safest, most efficient, environmentally friendly, and low-cost transportation system in rail, potentially in the world. I forget the way you phrased it.

From the government's perspective, if I want to encourage more people to use a safe, cost-effective, environmentally friendly way to transport goods at a low cost, I'm wondering why trucking, for example, is the right comparator group.

[Janet Drysdale]

Maybe I can take that with an example.

We have an existing customer today located in a remote region that ships lumber, and they ship all of that lumber today by truck. In coming together on a commercial basis, we made a decision to make some investment in order to bring rail to that customer, which supports our climate change agenda and supports the low-cost enabling of the infrastructure and the shipping of freight. But by bringing rail to that customer who today ships all by truck, once we make that connection this bill now considers that customer to be captive to rail.

Our issue in terms of captivity really concerns the way in which captivity is defined. Particularly on short-haul movements, truck is a viable competitor. We also can't lose sight of other competition, such as the St. Lawrence Seaway, for example.

In the case of other shippers, including very much the petroleum business, there are actually options for swapping: producers will actually change the location from which they are sourcing product. We face competition from product sourcing, we face competition from trucking, in some cases from pipeline, and certainly in the context of the Great Lakes St. Lawrence Seaway.

We're very competitive in terms of the CN/CP dynamic. Our issue is with defining “captive” as only having access to one railroad, when the shipper actually may have access to other modes of transportation that are viable.

[Sean Fraser, Liberal, Central Nova, NS]

I think, Ms. Drysdale, it was you who commented that the interswitching regime generally requires you to essentially drop off someone's goods at an interchange point so that somebody else can pick them up.

When we went through a study of Bill C-30 previously in this committee, the widespread testimony that we heard—and there were comments to this effect today—was that in fact that's not really what's happening. The vast majority of circumstances are really impacting the negotiation, and it is creating a sort of pseudo-competition, whereas there is none in the rail industry.

Is that incorrect? Is a change taking place at the negotiating table, as was the intention, or is it actually causing rail carriers to lose business to competitors?

[Janet Drysdale]

We certainly have lost business to BN, as an example. In the context of negotiation, you have to remember that the vast majority of our customers are very large shippers. The top 150 customers of CN represent about 80% of our revenue. These are large multinational companies that have many means of exerting influence and pressure in the negotiation.

Even if we look at grain companies as an example, and we think about the amount of capital they're investing in new elevator capacity or in waterfront terminals, whether or not that elevator capacity comes on CN or CP is a huge amount of leverage in the context of commercial negotiations. When we look at a lot of the existing regulation, such as the final offer arbitration process or the level of service agreements, to suggest that shippers don't have various means of exerting pressure in the negotiation.... Some of these customers also, by the way, have extensive operations in the U.S., where the regulatory framework is different, but again, it gives them another means of exerting pressure. I think that pressure existed before this regulation. I think it's a nice way of saying “we need even more because shippers need even more leverage”.

I don't find that to be true in our case. I think our concern is that having that legislation and, with long-haul interswitching, broadening it even further, risks the sustainability and integrity of the Canadian rail network. We view that as a significant problem in the context of it really being the backbone of the Canadian economy.

[Sean Fraser, Liberal, Central Nova, NS]

If I can interject, I take your point that a major multinational corporation based in Canada isn't necessarily the weak partner at the bargaining table that some would have you believe.

I come from a very rural part of our country in Nova Scotia. If we ship east, it's going on a boat; if we ship west, it's going on a train. My concern is folks within the rail industry who really are captive to a single shipper. There's really one rail line in Nova Scotia. They do face a lack of an ability.... Realistically, they have to accept terms or reject them.

If I take a step back and look globally at what's in Bill C-49, this is about providing service to all kinds of shippers, those in rural areas and in smaller businesses as well. Do you see that Bill C-49's intent would be to increase service to these shippers, and do you think it will achieve an enhanced service to some of these rural shippers in particular?

[Janet Drysdale]

My concern with the rural shippers in those remote locations in particular is that it may actually be harmful to them, because to the extent it encourages that movement—those cars to be off the CN network, let's say—it will be very difficult for us to justify the investments required to keep remote lines operational. We've certainly seen that in Nova Scotia, where some of the lines have been abandoned.

[The Chair, Liberal, Judy Sgro]

Thank you very much.

Mr. Lauzon, you have five minutes.

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

Thank you very much, Madam Chair.

This is my first visit to the transportation committee. It's a very interesting subject matter that we're dealing with. From the get-go here—I might ask whoever wants to answer this question—we're into NAFTA negotiations as we speak. I'm wondering if you folks feel that transportation should be a priority in these NAFTA negotiations. What do you think of that?

[Sean Finn]

Maybe I'll start off. There's no doubt that as you negotiate free trade agreements, you have to move the goods to be a free trader, and there's no doubt that transportation plays a key role. Evidence has shown that because of NAFTA, over the last 20 years in Canada both railways have grown, both in Canada and also in cross-border movement. There's no doubt that transportation is an issue.

I don't think we'll find it at the forefront of the table, but we are monitoring it very closely. You can appreciate that many of our customers are in states that are the big traders with Canada. We've been successful in talking to state reps and state governors to make them realize—and to make sure Washington realizes—how important the flow of goods going north-south is, and then south-north when it comes to a lot of the Midwest states. To answer your question, there's no doubt that it's an important issue. There is I believe a reference to it in negotiating terms on the U.S. side, but we don't think it's going to be at the table other than to make sure of the free flow of goods.

I will repeat my comment that you cannot have a free trade agreement and you cannot trade goods without having very effective transportation. That allows us to also say that we've done a great job in Canada—both CN and CP—in moving goods to the U.S. Our concern, as I said earlier this morning, is that we don't want to be in a situation where U.S. railways have access to our network in Canada and we don't have the same type of access to the network in the U.S. That's a preoccupation of ours.

[James Clements]

I would echo those comments that transportation can play a role in NAFTA. Why are we giving up concessions on market access to the Canadian rail network in the middle of a negotiation with somebody who is a tough negotiator?

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

Thank you very much.

Does anyone else want to make a comment about that?