[Recorded by Electronic Apparatus]
Wednesday, October 25, 1995
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[English]
The Chairman: Good afternoon. Consideration of Bill C-101, the Canada Transportation Act, resumes.
We welcome, from the Canadian Wheat Board, Lorne Hehn, chief commissioner, and Tami Reynolds, adviser. Welcome to the transport committee. We look forward to an executive summary of your submission to the committee so we can allow some time to ask some questions of you, Lorne, and your organization. When you're comfortable, you can begin.
Mr. Lorne F. Hehn (Chief Commissioner, Canadian Wheat Board): Good afternoon, ladies and gentlemen. I'd like to start by thanking you, Mr. Chairman, and the committee for the opportunity to appear this afternoon. We're certainly honoured to be here and to speak on behalf of the Wheat Board and the 120,000 farmers for whom we work.
We've take a great deal of interest in the writing of Bill C-101 because it will affect a significant portion of our business. A large part of what we do at the Canadian Wheat Board is to coordinate the movement of wheat and barley from farmers right through to the end users in some 75 countries in the world. This piece of legislation will establish, we believe, how effectively we will be able to do that job, at least from a transportation perspective.
We outline in our submission many aspects of Bill C-101 that we are comfortable with and satisfied with. We believe the aspects we outline will assist in making the environment a healthy one in which we can operate effectively.
We appreciate, for example, many of the monitoring aspects of the bill. Subclauses 43(1) and 43(2) provide for annual reports from the agency, plus an assessment of the operation of the act. That is a very useful assessment and piece of the legislation.
Subclause 54(1) calls for a review of the act every four years after it becomes effective, and again it is a very useful suggestion.
We also appreciate the flexibility that has been built into this bill. For example, subclause 48(1) gives the Governor in Council the ability to take any necessary steps to stabilize the system in the event of an extraordinary disruption, and that's important.
Clauses 128 and 129 allow the agency to establish such things as an interswitching order, provide facilities and set interswitching limits, and determine compensatory rates.
These are the types of provisions we believe, from a grain transportation perspective, will add value to our product and certainly add value to the Canada Transportation Act. We fully support these measures.
There are also some concerns, however, and for the balance of my opening remarks I'd like to focus on three critical concerns that, in our opinion, could have a significant effect on the effectiveness of the act itself.
The first of these critical issues is the reference to ``significant prejudice''. In our opinion, this clause tends to complicate the conflict resolution process because it requires the agency to decide if the applicant would suffer significant prejudice if the relief sought were not otherwise available before the agency reviews an application.
At the extreme, the agency could choose to interpret ``significant prejudice'' to mean that a company would have to be driven out of business, when the likely scenario is one in which a shipper is charged an incremental freight cost that impacts seriously on its sales competitiveness. Even at today's relatively good returns, I don't have to remind this committee that the cost for rail freight alone represents 15% to 20% of the overall sales revenues from the sale of grain.
This subclause removes the agency's discretionary powers to review each application on its own merit and we think establishes a great deal of uncertainty and risk. Because ``significant prejudice'' is not defined, a number of decisions will have to be made by the agency before shippers and carriers receive a clear indication of what is really implied by this term.
Because there's no effective modal competition, we ask does this approach not give the railways the licence to extract the maximum rent from any particular shipper?
In the United States, we see vivid evidence of this happening already. At a time when Burlington Northern is moving record volumes of grain, it is also charging record premiums of $400-plus per car over and above the tariff rate for cars with guaranteed service. We have been told the United States Department of Agriculture is so concerned about this situation it's now monitoring the railway's performance and will do so in the future.
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As we stated in our joint submission with the Western Grain Elevator Association, we feel this subclause substantially weakens and could render ineffective some of the other shipper provisions. Among these are the competitive line rates, final-offer arbitration and common carrier obligations.
We also believe it tends to weaken the industry's negotiating position with the two major railways by removing the pressure to negotiate a settlement between the two parties. This subclause was not in the National Transportation Act of 1987, and the reason for including it is unclear to us. The National Transportation Agency had an excellent record in making decisions, and therefore, in our opinion, this subclause should be deleted.
The railways, in their submissions to this committee, have asked that a captivity test be added to subclause 27(2). Such an addition would take this industry back to the environment before the NTA 1987. This test was taken out, we believe, because it was extremely difficult to develop a satisfactory definition of just what captivity means. This is an unworkable and unreasonable hurdle, in our view, for shippers to prove.
Transport Canada, in its presentation to this committee as we read through it, stated that subclause 27(2) does not apply to final-offer arbitration, but our understanding is that it certainly does. If it does, the legislation should be amended to exclude final-offer arbitration in order to be perfectly clear.
In our opinion, clause 27 should be expanded to allow not only shippers but other affected parties to make application to the agency. As it currently stands under the CTA, only shippers can bring forward applications. But there may be times when farm organizations, a group of farmers or even an individual farmer may want to bring forward an application.
Again, I don't have to remind this committee that farmers pay the transportation bills. They pay the rate and they are directly affected by service conditions. They are, in fact, the shippers of the grain when you get right down to it. Therefore they should have an opportunity to make such an application.
My second point of emphasis concerns clause 114 to clause 117, which cover shipper provisions. These clauses lay out the common carrier obligations to ensure that the railways are required to provide service and necessary equipment. These provisions have been retained, and we are pleased they have been retained in essentially the same format as in NTA.
We not only share this view with the Canadian shippers, but we note the U.S. shippers are also of the same view. Class 1 railways, regional railways and short-line groups in the U.S. have asked that similar obligations be retained in their government's transport legislation. Railway obligations such as these are a critical negotiation mechanism for shippers in order to balance the market power of the railways.
Grain shippers, like many other shippers, are generally served by only one railway. These mechanisms provide for competitive access, and they certainly ensure that the railways will provide not only a rate, but service consistent with the rate.
My final point of emphasis this afternoon concerns clause 147 to clause 155. These are the clauses dealing with the grain provisions. We're pleased to see that the grain provisions of Bill C-76 have been incorporated. These provisions allow for a maximum freight rate for grain, a tariff of rates and a statutory review.
We note that at least one railway, in its submission, has asked that the reverse onus for maintaining the maximum rate structure be reinstated. CN based its request on a claim that competition exists in the grain transportation sector, and 70% of all farmers are within 30 kilometres of a competitive rail line.
That statistic tells us something else. It tells us that nearly one-third of farmers are not within 30 kilometres of competitive lines. As well, that 30 kilometres does not take into account physical barriers such as mountains, lakes, roads and all sorts of things that could prevent the movement of the grain. A farmer may live 20 kilometres north of his line while a competitive alternative line is 30 kilometres south, making him 50 kilometres from a competitive line.
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It would be very hard to make the case that competition between the railways exists in the grain sector. In fact, the very opposite argument is made in CN's prospectus. I quote from their prospectus:
- Market share among railways in the Canadian grain and grain products market is merely a
function of crop production and origins.
- We believe the authors are absolutely correct. Among the railways, market share for grain is
mainly a function of location of production.
In 1994-95, 369,905 rail cars were loaded with grain to unload at export position, and we would term ``export position'' here as being Vancouver, Prince Rupert, Thunder Bay or Churchill. This represents 30.3 million tonnes. Even if half of this moved in trucks, approximately 352,700 super-B trucks, at 43 tonnes a truck, would be travelling the highways. How realistic is this type of movement?
In 1993 the government had an emergency trucking program for western grain going to Thunder Bay, as you know. Over a two-month period, the total tonnage moved in trucks was only the equivalent of ten rail cars. In our view, that's not very realistic.
The grain provisions outlined in clauses 147 to 155 represent a balancing of power in that most unequal environment; therefore we recommend they remain in the bill, subject of course to government review, which we mentioned earlier.
In conclusion, we are happy with many aspects of this bill, as I mentioned initially. We believe this piece of legislation establishes a solid framework within which the grain industry can effectively move and transport its product. But I want to reiterate those three points of concern.
The requirement in subclause 27(2) that the agency must find an applicant to suffer significant prejudice before even reviewing an application conflicts with the conflict resolution process and complicates it.
Secondly, clauses 114 to 117, which stipulate that the railways are required to provide adequate service and necessary equipment, are essential to our business, and we want them maintained.
Finally, clauses 147 to 155, outlining a maximum freight rate for grain, a tariff of rates and a statutory review, in our view should also be retained.
We thank you for the opportunity to participate, and Tami and I look forward to the questions.
The Chairman: Thank you very much, Mr. Hehn and Ms Reynolds. The Canadian Wheat Board is well served by your representation here today. We thank you for your submission.
We'll move right to questions.
Mr. Gouk, you want to split your time with Mr. Hermanson, do you?
Mr. Gouk (Kootenay West - Revelstoke): Yes. Thank you, Mr. Chairman. I have a couple of questions, and then I'll turn it over to our people who have more agricultural expertise.
Your submission covers points that many interveners before you have brought up and that we've discussed at length. I certainly have my own concerns about and will be dealing with those things.
In two of those you brought up a couple of new points. Under subclause 27(2) you mention people other than shippers having access to the board. You make the statement that farmers pay the transportation rate. But when they are not in fact the shippers and they have organizations they ship through that would go to the board, to what exact process would the farmers apply under these provisions you've suggested? What would they want the board to do - say their own shippers are not bargaining hard enough on their behalf and make them bargain harder? What exact resolution or remedy would they be asking for?
Mr. Hehn: In effect, a farmer can be a shipper if he's shipping a producer car.
Mr. Gouk: Then he has access.
Mr. Hehn: But it's a very difficult road for an individual to access, and that would be a key concern.
Mr. Gouk: Okay. So you're talking about farmers who are producer-shippers as opposed to farmers who get someone else to do the shipping but want to be able to appeal the cost, even though they're not shipping themselves.
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Ms Tami Reynolds (Adviser, Canadian Wheat Board): The second part of that is that the public interest provision of the bill is no longer in there. It is under the NTA 1987 but isn't under the current proposed bill. From that perspective, this provides a mechanism to allow farmers to take advantage of that particular aspect if it is allowed.
Mr. Gouk: Your second one is with regard to clause 120, which calls for railways to give 20 days' notice. You have it that the tariff will increase. The quote directly out of the legislation says ``shall publish a notice of the increase''. You're the first ones who have brought forward the idea that this doesn't mean that they have to publish what the increase is. Frankly, I'm inclined to go along with the idea that this does in fact require them to publish the increase.
Ms Reynolds: What we experienced when we saw a change in the WGTA freight rate was that a notice of intent of increase was published and then, shortly before the new rates were to come into effect, the new rates were released.
That would have been in unusual circumstances, because we were coming from the WGTA and moving into the NTA. But in speaking to the railways and asking the question - because my understanding was that the rates, because they were an increase, were supposed to be released 20 days prior to the effective date - I was told that in fact they weren't. In speaking to them, they clarified for me that all they'd have to do is put a notice of intent notifying that the rate would go up but not exactly what the rate would be.
Mr. Gouk: I don't read it in that way, but I hear your concern. I will look at that some more, because I have some other concerns within that area anyway.
Mr. Hehn: I think the uncertainty surrounding the magnitude of the increase is as critical as the notice of an increase itself. It affects choices in terms of where you might move and market your grain. It affects the farmer's bottom line.
Mr. Gouk: I have a different amendment in mind that will encompass your concerns, so maybe they are covered anyway.
Mr. Hermanson (Kindersley - Lloydminster): With the loss of the Crow rate, the WGTA, producers are now paying the full cost of transporting their grains to tidewater. The railroads have argued that with the implementation of the cap that you support, the freight rate cap in clauses 147 to 155, or wherever it is, they will not be able to pass along some efficiencies on their more efficient lines where there are 50 or 100 car spots, some of the larger terminals that the shippers are building to accommodate. We've seen a rationalization of the system.
Aside from road costs and all those subsidiary issues, which I know are important, by how much do you foresee the freight rates increasing if the cap were gone, given the competitive position that the trucking industry would have on the short hauls of, say, 50 to 60 miles?
Mr. Hehn: That's a difficult question to answer. It could be unlimited, because I don't think the short haul has that big an impact on the overall rate. I mentioned that 80% of the grain that's transported in western Canada goes to export position. Trucks do not factor in that haul to any major degree. You simply can't truck grain from the central prairies to Vancouver; it's not a feasible proposition.
Mr. Hermanson: That's not what I'm talking about. I'm talking about the instance where a truck would ship maybe 50 or 60 miles to either a CN or a CP line in many cases and increase competition for that tonnage between the only two railroads that we have that have the capability to move significant amounts of grain.
I'm not talking about the haul to port. That of course is out of the question. I agree with you totally that it's physically impossible to move production from the prairies to tidewater via truck. But certainly, when we're looking at the increased costs that the railways are indicating would be created because they are unable to pass on the efficiencies on the more efficient lines because they are restricted by this cap on the inefficient lines, I'm wondering if the competition in the trucking sector, which is really strong for the short hauls, the under 100 miles hauls definitely and perhaps often under 50 miles, would compensate and provide a lower total cost of transporting grains to port than if we maintain the freight cap and don't get the efficiencies from the railroads on the more efficient lines. I ask this because they use that as an excuse for not lowering the rates on their more efficient lines.
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Mr. Hehn: I think you'd have to look at it line by line. There's no question that we do have some very high-cost lines. I think what you're saying in the case of those very high-cost lines is true, but I think you have to balance that against the removal of the cap. And I come back again to the fact that we are captive to the railroads for moving product to export position. In the absence of that rate cap, what do we rely on to ensure that the rates are going to remain at a level that seems to be reasonable from a farm perspective?
We are different. Grain is unique. Because that's the case, I think the WGTA recognized this uniqueness and that's why we had rate protection. That's why we had performance guarantees. That's why we had costing reviews. That's why we had monitoring of the railway infrastructure and of their expenditures into the infrastructure. And that's why we had provision for competitive and contiguous rates. When you look at that vast geography in western Canada, I think that all lends itself to supporting a cap on the rates.
It's not as if the cap suggests that the railways won't be whole. The cap is related to cost. It covers their variable costs, plus it makes what I think is a reasonable contribution to fixed costs. So the cap is reasonable.
Ms Reynolds: May I add to that?
If it's true that there would be competition, you would in fact see that competition now. We have some programs that move commercially, and what we find quite often is that the rates that are quoted are within cents of each other - less than a dollar apart. If we could in fact see the competition in other aspects of our business now, we would more greatly appreciate the opportunity that trucks could provide. But even with the possibility now, certainly on the commercial moves, we're not seeing that significant a difference.
Mr. Hermanson: So you think that if the rates increased, the trucks wouldn't pick up the slack. That's really what you're saying: if rates increased, it wouldn't make a quantifiable difference in the....
Ms Reynolds: Essentially, no. As Mr. Hehn said, it's not the short haul that really makes a difference; it's the long haul, and that's what the railways want to capture. What essentially happens is that you know you can't shift significant tonnage from one line to another line because there isn't sufficient capacity to do that. You're therefore not going to see the type of competition that you'd like to see.
Mr. Hermanson: Very briefly, as you know we're operating in a vacuum now because the WGTA is gone and Bill C-101 has not passed. As of yet, we also haven't determined how we are going to allocate cars. Will the determination of car allocation be impacted by Bill C-101? Is there something we should be looking at in Bill C-101 that relates to car allocation, or are they two totally separate areas that we don't have to be concerned about in terms of relating the two together?
Mr. Hehn: It depends on the railroads' involvement in car allocation. If car allocation is left totally to the railroads, then, yes, I think you should be concerned.
As you know, there's an industry committee looking at car allocation. Hopefully they'll come to some resolve that will take into account the concerns of all of the stakeholders involved.
The Chairman: Mrs. Cowling, and then Mr. Comuzzi, please.
Mrs. Cowling (Dauphin - Swan River): Thank you, Mr. Chairman, and welcome, Mr. Hehn.
My question is with respect to a comment that you had made about grain being unique. Could you compare the movement of grain to that of other products that are moved by rail?
My next question deals with the massive changes that have happened in western Canada: do you believe there should be an adjustment time or a transition time before we move into a deregulated regime? What are your thoughts on complete deregulation of the rail system?
Mr. Hehn: Those are very good questions, and I'm not surprised you asked them since you come from that rural area of Manitoba. Certainly farmers are asking us the same kinds of questions.
First of all, let me deal with the first question that you asked: what's the difference between grain and other bulk commodities? I think there is a decided difference. If we're going to compare grain to something like coal, potash or sulphur, we have to be very careful in terms of making that comparison. First of all, we burn coal and we eat grain. Grain is food and there are health and quality aspects of grain that certainly do not apply to the bulk commodities to the same degree, although I do recognize there are various levels of quality in something like coal and potash as well.
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I think the biggest difference, though, is that we are drawing grain from what I would call 120,000 manufacturing plants instead of four or five mines. The second big difference is that if you're looking just at the grains produced in western Canada, we have seven major grains, and there are several classes of grain within each major kind of grain. For example, we have seven classes of wheat. There are a minimum of two grades within each class, plus other protein and quality splits. So that is also a difference. This is not a stockpile-to-stockpile operation by any means. It's a very, very coordinated operation.
And we in western Canada are quite different in another respect. If we were to compare our system to the U.S. system, for example, our ratio of storage to grain transported to export position is quite different from our major competitor, the United States. For example, they have a little over 200 million tonnes worth of workable commercial storage space. They export about 90 million tonnes. We have the exact reciprocal of that. We've about 12 million tonnes of workable commercial space but we export 30 million tonnes. So we have to be much more meticulous about the grain we bring in.
If you're in fact going to call one system a push system and one system a pull system, we would have to call ours a pull and theirs a push. We pull right from farms. We start with a three-month planning cycle and boil that down to a five-week shipping cycle once we have the sales contract firm. It's quite a different operation from a stockpile-to-stockpile operation when you're loading the vessel from the stockpile of quality. Our stockpile is 120,000 farms, so we have to be very meticulous.
As for your question on transition time, I think it depends on the magnitude of the change. With some of the changes we're looking at and with the kinds of freight costs that farmers are now seeing, you certainly have to have some period of time to factor these kinds of very big changes into the overall business of operating a farm. I would think a minimum of ten years is not unreasonable as a transition time. The senior executive group is also looking at that transition time as a major consideration.
Moving to your question on complete deregulation, I have to admit I don't know how to answer it except to say that when you live in a country that takes something like five hours to fly across, and when we depend so much on exports for our livelihood and our economy, I don't see how this country can exist and be competitive in a global environment if it doesn't have some infrastructure support from government on the transportation side. I think it's imperative.
Mrs. Cowling: Thank you.
The Chairman: We still have five minutes. Mr. Comuzzi.
Mr. Comuzzi (Thunder Bay - Nipigon): Thank you, Mr. Chairman, and welcome, Ms Reynolds and Mr. Hehn.
Let's talk about the designated cars for just a moment. I think the Canadian Wheat Board owns 22,000, or has control of -
Mr. Hehn: No, we own 2,000, but we are also responsible for the administration of the 2,000 leased cars. So in total we have 4,000 that we're responsible for administering.
Mr. Comuzzi: What is the ownership or control of the balance of the designated fleet?
Mr. Hehn: The government owns 13,000 outright, we own 2,000, and the government has 2,000 leased, for a total of 17,000; and each of the provinces owns 1,000. The railroads then put in their own equipment, and some additional equipment is also leased directly. For example, we lease cars directly for the U.S. milieu. In total, I believe the fleet right now is about 25,000, right, Tami?
Mr. Comuzzi: It's between 23,000 and 25,000.
Ms Reynolds: Yes.
Mr. Comuzzi: Do you see any advantage to the Wheat Board retaining ownership or control of those cars presently under the control of the Canadian government and cars under control of the Wheat Board?
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Mr. Hehn: Indeed it would, but I think you can look at this from two perspectives: the perspective of control, or the perspective of administration.
We do have the infrastructure to handle the ownership question per se. How the cars are handled after that is another matter. So I think, from an ownership perspective, we do have everything in place to administer that and could do it quite straightforwardly.
Mr. Comuzzi: It would be then your position, because you handle about 20% - I think that was your figure - of the rail volume of both CP and CN, that by controlling the grain cars, whether it's by ownership or by administration, that would give the farmer some leverage. Would that be the Wheat Board's position? That's what I'm trying to ascertain.
Mr. Hehn: Our position going into the SEO meetings was along those lines, that yes, it would make sense for the Wheat Board to assume the ownership of the cars and assume all of the requirements that one would.... If the cars were sold to farmers, for example, for $1, we could assume the administrative detail of those cars and ensure that the farmers' rights were protected.
That was the position we had going into the senior executive officers' meetings. We hope to come out of those meetings with a consensus, so I'm not sure what the group's consensus will be coming out of those meetings.
Mr. Comuzzi: But it's a very important component to the farmers' concerns, is it not?
Mr. Hehn: Yes, I would say it is.
Mr. Comuzzi: You would be opposed to any sale of the designated cars to either of the railways.
Mr. Hehn: Well, it would seem to me that if one were to sell the cars for a reasonable value - whether it's depreciated value or market value - and if that is to be reflected in the rate over a period of years, farmers would in effect own those cards anyway, so why not give them ownership from the beginning and reflect it in the rate?
But again, I say that's the position we had going into the SEO meetings. What the consensus will be coming out of those meetings is still subject to discussion.
Mr. Comuzzi: Would you keep the committee informed as to what your position would be with respect to those designated cars?
Mr. Hehn: Indeed.
Mr. Comuzzi: Thank you.
I have only one other question, Mr. Chairman. What we hear as we go through these interviews is that on the one hand the railways are asking us, in essence, to remove the regulatory regime and get rid of some of the trackage, and let them get cost-efficient; that they are competitive - there are many competitive factors out there; the railways are competitive with each other, there's trucking, and so on - and that the farmer is eventually the customer and they have to satisfy the customer. That's the one position.
On the other position we hear the concerns of the users of the system not having a great deal of trust. One is saying trust us; we'll do a good job for you. The other side is saying, well, we're not really ready.
That's fundamentally what we're getting at. It's a question of trust, isn't it?
Mr. Hehn: When I look to the United States, where they have the kind of system you are, in a sense, describing, where there is a minimal amount of regulation, I get pretty concerned.
I mentioned that here we are in a situation this year where the most efficient railroad in the United States as far as grain movement is concerned, Burlington Northern, is looking at record movements of grain, record volumes. They are also looking at record premiums for a market car of $400-plus a car, in addition to the regular tariff.
So I have to be concerned. I put my farmer's hat on, if I might, Mr. Chairman, and I say to myself, you know, I've always been led to believe that when you have record production, your unit costs go down.
That would suggest that railroads say no, they're going up, so therefore we have to charge more for these cars. So in this kind of complicated environment, why question whether you can leave all of these decisions to what I would call a market-driven environment, especially when you look at the fact that we take a product approach to sales and marketing versus, say, the U.S. commodity approach? We are not only price-sensitive; one of the big tools in our marketing toolbox happens to be quality, uniformity, and also quality services - we provide a technical service package to go with it.
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So I think we're quite different in the way we operate and it's given us a niche in the marketplace that no one else except Australia has. It's served us well.
Mr. Comuzzi: Thanks. Those are my questions.
The Chairman: Mr. Gouk.
Mr. Gouk: I just wanted to clear up one area. I missed part of your comment when you were talking about final-offer arbitration. Was that with regard to it as a dispute settlement within Bill C-101 or were you talking about labour legislation generally?
Ms Reynolds: We were talking about Bill C-101.
Mr. Gouk: You're not in favour of final-offer arbitration? Was that your comment? Could you just briefly recap your comment?
Ms Reynolds: Our comment on final-offer arbitration was that there seems to be some discussion about whether or not you have to first clear the hurdle of significant prejudice before you can access FOAs. Some organizations are interpreting it that you don't need to, that you can go directly to an FOA.
Mr. Gouk: Is that what you would promote?
Ms Reynolds: Yes.
Mr. Gouk: Okay, fine. Thanks. I just wanted to clear that up.
The Chairman: Mr. Fontana.
Mr. Fontana (London East): Excuse me, but that's exactly what you have. Perhaps the clarifications didn't come early enough, but I think the assistant deputy minister has made it clear. I think the wording is such that there are certain matters that the agency handles, such as the CLRs and the interswitching and so on and so forth. Clause 27 says that those are dealt with by the agency.
FOA matters are not dealt with by the agency at all. Therefore, they have absolutely nothing to do with one another. I don't know where this confusion has come up with respect to some of the witnesses, but the FOA has absolutely nothing to do with the agency and those other matters that are purely and simply agency matters. I think in the past two weeks we've tried to clarify that the two have absolutely nothing to do with one another, unless of course you have a lawyer who obviously is trying to earn his money and suggests that's exactly what's there.
Secondly, with respect to subclause 27(2), I have to ask you the question again. I think it's a matter of misunderstanding that subclause 27(2) does not deny access to the commission whatsoever. It is to be dealt with on the remedy side of the decision. It's not that you have to clear a hurdle to get to the commission, but the commission will use the significant prejudice test as a guideline towards the remedy in its decision.
Again, I think we've tried to make clear that in fact it's not a two-step hurdle. It doesn't deny access. On what basis do you understand that it denies access?
Ms Reynolds: Thank you for the clarification you've given us. Our only point on the FOA is that if this is true - and we've heard it in a couple of fora - then just put it in the bill. It would be very simple to add a clause that specifies that, and then there's no misunderstanding or misinterpretation possible.
If that's the way it is, then excellent. We'd certainly support having something in there that just clarifies it so there's no misunderstanding.
In terms of the second one, the way we read subclause 27(2) is that it requires the agency to decide if there's significant prejudice, if this relief was not otherwise sought before the agency reviews an application. When we read that clause, that's our interpretation of it.
If that interpretation is wrong, then maybe that clause could be rewritten so it's clear that this is not a hurdle you have to pass before the agency looks at reviewing it.
Mr. Fontana: Okay.
Can I just ask you some very quick things? Your brief doesn't refer at all to clause 138, on provincial running rights. I take it that because you don't mention it, you're in favour of our section with regard to clause 138 as well as the conveyance and abandonment process, which is in clauses 140 to 146. I take it that you have no difficulties with those parts of the bill.
Ms Reynolds: We don't actually have a position on the running rights and we have no serious concerns with the abandonment.
Mr. Fontana: What does that mean, that you have no position? Do you mean it's not of interest to your members or it doesn't affect you one way or the other? Therefore you're in favour of it,I take it.
I know you talk about the good things about the bill, but I suggest that if it doesn't come up,then obviously it's not a concern. Therefore if you don't bring it up, I take it that means you're in favour of it.
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Mr. Hehn: Well, there is impact, but we're leaving that section of the bill to the key stakeholders, the people who own the roads and the people who own the trucks.
From the Wheat Board's perspective there's no question that there's an impact on the abandonment side related to the commercial storage, but we are finding that there is considerable investment made in terms of throughputs. What is lost on the commercial storage side may very well be made up in terms of throughput capability on the other side in the new facilities. I think those questions are better answered by the people who build the roads, and they are the local authorities and the municipalities.
The Chairman: Ms Sheridan.
Mrs. Sheridan (Saskatoon - Humboldt): This question for you gives you an opportunity to make something clear that hasn't really been discussed in your presentation. You may want to put your farmer hat back on to answer this one, if you brought one with you.
My riding is like Marlene's. Hers is all rural and mine is partly rural in Saskatchewan. There are some farmers who are worried about what Bill C-101 will mean at the end of the day. And I'm not going to criticize lawyers any more than they already have been, because I happen to be one myself and my self-esteem is quite low these days.
There are going to be those people who ask, what's the problem with you farmers? They will say that about a quarter of the railway's total traffic is grain and grain products, so that's a pretty powerful lobby. They'll say what's the farmers' problem; farmers should be able to strike a pretty good deal with the railways. They'll say farmers should have a lot of negotiating power. They'll say farmers shouldn't whine, but should get out there and be the lobby they could be.
What's your response to that?
Mr. Hehn: Well, I could give you one distinct example from the Wheat Board perspective. You know, as the board, we represent a big part of the movement. These are confidential rates, so I'm not at liberty to give you the actual rates, but when we went to get tenders for all-winter rail movement last year, the two bids came in within pennies of each other.
I think we are captive. I think farmers are captive. And generally I think grain is captive. I think there is a major concern. If you are captive to two carriers and there's no more competition.... It's not like trucking, where I can flip open the yellow pages of the phone book and I have 75 different numbers to call and I can start assessing and playing one off against the other. I don't think you can do that in terms of the two railroads if they decide the grain has to be moved and they're the only ones who can move it. We are captive.
The Chairman: I have a quick supplementary before we wrap up with these witnesses. I'm not quite sure, given that comment you just made on the difference by coppers, Lorne. How many carriers do you expect it would take in order to widen that span on a competitive basis?
Mr. Hehn: Well, when we're talking about a rate that is in excess of somewhere between $20 and $30, I would have thought that they would have come in at least maybe 50¢ or $1 apart. Maybe it's just coincidence.
The Chairman: Well, if you to McDonald's and you buy a hamburger and you go to Burger King and buy a hamburger, you'd be surprised how close those are too.
Mr. Hehn: Some days they are, some days they aren't.
The Chairman: We're talking about...I think you get my point.
Mr. Hehn: Yes, I do.
The Chairman: Mr. Hehn and Ms Reynolds, thank you very much for your submission to the committee.
Mr. Comuzzi: Mr. Chairman, just don't let that go.
The Chairman: That's it, Joe, we have to move on to our next witness.
Thank you very much for coming before our committee.
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Colleagues, we welcome to the table a familiar face, T. Norman Hall, president of the Canadian Shipowners Association.
Welcome back to the committee, Mr. Hall. Please introduce the gentlemen you've brought with you today. If you could give your report to the committee in 15 minutes or less so we can have some time to ask questions of you and your organization, we would appreciate it.
Mr. T. Norman Hall (President, Canadian Shipowners Association): That's assuming we wish to answer the questions, Mr. Chairman?
The Chairman: Absolutely.
Mr. Hall: Thank you very much, Mr. Chairman. We're going to have to stop meeting in this way, with all these different hearings going on.
I have with me today Captain Rejean Lanteigne, who is manager of marine operations with the Canadian Shipowners Association; and a consultant and adviser to the CSA, Mr. Ed Weinberg, who is a former member of the National Transportation Agency. Probably many of you have run into him in the past.
Before we get into it, I am reminded of a little story I heard last week at a conference in New Orleans, where the minister was giving his blessings at lunchtime. I think it is somewhat analogous to what we're facing with Bill C-101.
Some gentlemen were on a safari in Africa and one of them wandered off alone. Suddenly a pride of lions came along. He started running like hell. Suddenly he realized he couldn't outrun them, so he knelt down to say a prayer. He got up and looked around and suddenly the lions were all kneeling down. That's the good news; the bad news was, ``Dear Lord, bless this food which we are about to consume''.
The Canadian Shipowners Association represents 12 companies operating 104 Canadian flagships engaged primarily in the domestic or Great Lakes trade, as well as the St. Lawrence Seaway, the east coast of Canada, and the Arctic.
Before I begin, on behalf of the membership of the CSA allow me to congratulate this committee on the report entitled A National Marine Strategy. The association believes the report and its recommendations are brave, forward-thinking, and indeed long overdue. Canadian shipowners were pleased to learn that the Ministers of Transport and Fisheries and Oceans were favourably disposed to it and that the government will act upon these recommendations - hopefully sooner, rather than later.
The Chairman: Thank you for the compliment, sir.
Mr. Hall: You're welcome, sir.
The national marine strategy demonstrates a clear understanding of the importance of export grain traffic to the St. Lawrence Seaway, the operations of the Canadian shipowners, and the port and grain-handling facilities extending from Thunder Bay to the northern Quebec ports of Baie-Comeau and Port-Cartier.
It also recognizes that iron ore from the northern Quebec ports of Pointe Noire, Sept-Îles, and Port-Cartier serves as a backhaul to the eastbound grain movements. To quote from that report:
- Export grain, iron ore from Quebec and Labrador mines, and British Columbia and Alberta coal
are the main commodities that move through the seaway.
We are here this afternoon to discuss Bill C-101, which contains certain provisions that, when considered in concert with other government initiatives, have the potential to significantly diminish this successful commercial formula that has worked so well. They have serious negative implications for the ports and the marine carriers in the eastbound movement of grain and the westbound movement of iron ore. They are contrary to the notion of fair and equitable competition between competing modes of transport east of Thunder Bay.
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The CSA submission focuses on three principal areas: the implications of the unrestricted freedom for railway line rationalization; the lack of a compensatory freight rate requirement for freight rates other than those that relate to the rail mode; and, though it's not encompassed by the act, the disposition of the taxpayer-funded, government-covered hopper car fleet for grain.
The CSA understands that Bill C-101 is clearly intended as a rail renewal bill to assist railways to better compete with other modes of transportation in Canada. The bill will grant railways significantly greater freedoms in plant rationalization. This new freedom will largely achieve the government objective. Rationalization of very low- and low-density trackage will amount to savings of $260 million per annum.
With greater freedoms of rationalization, the recently failed co-production of underutilized main-line trackage in northern Ontario east of Thunder Bay will likely soon be resurrected. Given the difficult terrain, severe climactic conditions, heavy maintenance and low-density trackage in this region, considerable cost savings will accrue to both railways from the co-production and abandonment of one of the two main lines.
The abandonment of the second main line of trackage and the consolidation of the main-line tonnage of both railways on a single main line of railway will allow both railways to realize significant economies of scale, sizeable capital savings and significantly reduced railway operating costs. The remaining single main line of railway will parallel the Great Lakes-St. Lawrence Seaway routing, will have the main marine mode and will offer a new, lower-cost, competitive threat.
Railways, like other modes of transport, require the freedom to rationalize underutilized plants and facilities. Notwithstanding the new competitive threat to the marine mode that will be posed by the greater rationalization freedoms, the Canadian Shipowners Association nevertheless supports the government's initiative.
We in the marine industry, however, are greatly concerned with the failure of Bill C-101 to include a compensatory freight rate requirement for commercial freight rates. The compensatory rate requirement has heretofore served as a deterrent to the railway predation of marine cargoes since Jack Pickersgill's National Transportation Act of 1967. It may not be modern, but it is even more relevant today, under a regime dominated by confidential contracts, than it was in the pre-1987 era of published tariffs.
In the past two to three years CSA members have encountered a number of situations where CN in particular has engaged in non-compensatory pricing for the purpose of cashflow generation and market share. The CSA believes this practice is consistent with a policy outlined in an appearance by the CN before this committee on March 31, 1993, which we have included in our formal presentation.
In the last few years shipowners have witnessed the loss of hundreds of thousands of tonnes of salt at non-compensatory freight rates and the loss of significant volumes of grain to eastern Canada destinations under non-compensatory freight rates and WGTA subsidy. We have also learned that, contrary to conventional transportation economics and freight rates that are clearly non-compensatory, CN is able to compete with a 25,000-tonne tanker over distances of less than 200 miles, notwithstanding the necessity to acquire freight cars and make significant new track investments. Here we are referring to the so-called ultra-train, at a total cost of some $48 million. Further, as we understand it, the cost of the main line has been discounted, as it is considered a sunk cost.
We have also witnessed the diversion of a million tonnes of U.S.-bound potash away from the marine road to the railroad over the U.S. subsidiaries of Canadian railways, and a similar diversion of several hundred thousand tonnes of U.S.-bound metallurgical coal. These are the same tonnages that this committee's national marine strategy report identified as supplementing eastbound grain tonnages on the seaway as forehaul for iron ore from Quebec and Labrador. They clearly indicate a growing railway interest in low-value, non-time-sensitive traffic, which has been traditionally moved via the marine mode.
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The committee is respectfully reminded that the lack of compensatory freight rate requirement does not represent a free lunch or free ride to shippers. In an appearance before this House of Commons standing committee on March 31, 1993, the CN explained the impact on the railway of providing railway services at non-compensatory freight rates. I quote:
- ...because CN is operated strictly on a commercial basis and cannot afford to provide rail
services where the economics of the situation are basically losing money. Because we have to
carry that burden, Mr. Keyes, we will be charging higher freight rates elsewhere as a result. If
we charge higher rates elsewhere, the shipper of that commodity that is carried on our train is in
a disadvantaged position.
The new subclause 27(2) will present a new obstacle to captive shippers seeking any possible regulatory relief. The non-compensatory pricing of railway services to lure market share away from the marine mode will have the effect of increasing marine transportation rates to and from the northern Quebec ports of Sept-Îles, Pointe Noire and Port-Cartier, as well as Quebec City with respect to imported Brazilian ore, where it is transferred at that port to the winds of the Great Lakes.
These ports are not physically connected to the national rail network - I exclude Quebec from that - and are dependent on essential marine services to reach markets. The higher marine rates will result from the loss of forehaul tonnage attracted to the rail mode at below-cost, non-compensatory freight rates. The continued loss of significant forehaul tonnage, i.e. grain, could ultimately jeopardize the continued competitive presence of Quebec-Labrador iron ore on the highly competitive ore markets on the Great Lakes.
It is clear from the national marine strategy report that this committee clearly understands the relationship between forehaul and backhaul tonnages.
The government is also presently contemplating a disposition of its fleet of 13,120 covered hopper cars. A recent article in The Globe and Mail indicated the government may elect to sell the fleet to the railways for a token $1. The publicly funded fleet was acquired at a cost of some $570 million and maintained by western farmers and the government under the WGTA at just under $5,000 per car per annum.
Freight cars maintained to this extent are basically new. The sale of this grain-carrying fleet to the railways for any price less than their replacement cost - roughly $1 billion - would constitute unfair subsidization of railway cargo carrying capacity. It will allow for the unrestricted use of these cars in eastern Canada and divert eastbound grain to the rail mode in direct competition with the marine mode.
The use of these cars east of Thunder Bay will constitute the provision of taxpayer-subsidized railway carrying capacity in direct competition with the privately owned, privately financed and privately maintained marine carrying capacity. This is unacceptable, though perhaps not a matter within the ambit of Bill C-101.
Clearly, the Bill C-101 provisions of greater line rationalization freedoms - particularly for the mainline railway - the lack of a compensatory rate requirement for commercial freight rates, and the related issue of disposition of the government fleet of covered hopper cars will together significantly diminish and directly harm what has been described as a successful formula that has heretofore worked well. Together, these three provisions will result in a significant harm to the shipowners, the seaway, Quebec and Ontario ports, and the important iron ore industry of Quebec-Labrador, for no commercial or productive purpose.
The Canadian shipowners welcome fair intermodal competition with the rationalized railway facilities in eastern Canada. However, the privately owned marine industry should not be required to compete with government-subsidized carrying capacity and below-cost, non-compensatory pricing for railway services under confidential contracts.
The CSA supported the commercialization of the Canadian National Railways before the Nault parliamentary committee. The forthcoming public security offering of CN will not be assisted by the knowledge that the railway attempts to augment cashflow by pricing services below cost to better compete with other modes.
Investors will not likely be impressed by the fact that the railway disregards its costs and prices railway services at non-compensatory freight rates to improve market share. The CN railway debt at $1.5 billion will not be reduced by freight rates that might contribute to cashflow but do not contribute to railway profitability or fully cover costs. Nor will non-compensatory freight rates allow CN to replace its plant or assist it in paying dividends on its common shares.
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In this context it is relevant to consider the position on compensatory freight rates which Canadian Pacific has consistently maintained in appearances before this committee, and I quote:
- No cost definitions other than long run variable costs were seriously considered as the basis for a
statutory minimum compensatory rate. Long run variable cost is the most appropriate basis
because it recognizes that only revenue above this level will cover the cost of resources applied
to the movement of traffic, including the cost of cars and locomotives, and will contribute to the
value of the railway as a going concern. Revenue levels above long run variable cost contribute
to the constant costs of the railway which must be covered if the railway is to be able to continue
as a viable enterprise. The current use of long run variable costing for minimum rate purposes is
the result of exhaustive studies over many years.
- There are two elements to long run variable costs. First, the costs must vary in response to the
changes in the volume of traffic. Second, they must be ``long run''; that is, they must capture all
variable costs regardless of whether they vary in the short, medium or long run...it is absolutely
necessary that the revenue equal or exceed costs which are variable in the long run.
- Revise to make it clear that any interswitching rate set by the Agency must be greater than the
variable cost of moving the traffic. CP had expressed concern that the Agency could set a rate
that met the ``commercially fair and reasonable'' test under section 113, but was below the
railway's variable cost. As well, removing the reference to ``compensatory'' removes the
implication that a compensatory rate is a profitable rate; in fact, it covers only a portion of the
railway's total cost.
Finally, it is also noteworthy that in the U.S., where all railways are privately owned, there is a requirement that freight rates exceed a reasonable minimum normally exceeding variable costs. Further, it should be noted that under the federal government maritime reform program, of which this committee was a part, the marine industry is currently facing cost recovery for coast guard services with a target of up to $60 million dollars per year within four years.
Bill C-101 introduces two new compensatory rate requirements - subclauses 129(3) and 134(4) - that do not exist in the 1987 act, and a requirement that rates be commercially fair and reasonable under clause 113 for matters relating to the rail mode. There is no compensatory rate requirement, however, for modally competitive freight rates. This omission is inconsistent and prejudicial to the marine mode. It places the private marine bulk fleet and investment at risk to the short-term cashflow requirements of the railways under unprofitable and below-cost railway pricing for no commercial reason or purpose. This constitutes a destructive and commercially irresponsible policy that is both inequitable and unacceptable to members of the Canadian Shipowners Association.
If long-run variable costs are relevant for matters relating to railways and were relevant to the payment of $7.7 billion in WGTA subsidy, of which $1.5 billion represented railway contributions, then long-run variable costs are still relevant to the determination of compensatory freight rates. If they are relevant to the determination of losses on thousands of miles of uneconomic branch lines, then they are also relevant to the determination of predation.
Below-cost pricing of railway services at non-compensatory freight rates are anti-competitive and the antithesis of the minister's intention to ``ensure the long-term viability and competitiveness of the Canadian railway industry.'' The Canadian Shipowners Association respectively requests that the Standing Committee on Transport re-establish a level playing field for intermodal competition between the railway and the marine modes by recommending to the Minister of Transport the requirement for and inclusion of a strengthened compensatory freight rate requirement in Bill C-101 for modally competitive commercial freight rates.
I thank you very much for your attention, and I'll be happy to try to answer all your questions. Thank you, sir.
The Chairman: Thanks, Mr. Hall. We appreciate the work the Canadian Shipowners Association does in its usual fashion to go through the bill with a fine-tooth comb and make its submission to this committee, presented in its usual eloquent fashion.
Mr. Hall, I wonder, for the benefit of some, if you could give us another couple of minutes to explain what exactly is a compensatory freight rate and what your definition of that might be.
Mr. Hall: Well, I'm not in the railway business, and I'd ask Mr. Weinberg to supplement my response, but it is my understanding from what I hear that it's supposed to cover your variable costs. Now, railways have very creative accounting departments, so it may vary from railway to railway as to what the true variable costs are; I honestly don't know. I'm not even sure if the NTA knows. I'd ask Mr. Weinberg to respond.
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Mr. Ed Weinberg (Consultant, Canadian Shipowners Association): The long-run variable costs to the railway include its direct operating costs, and a return on capital at the authorized cost of capital for variable capital - in other words, cars and locomotives. Someone has to pay for those and they're included in the cost.
They include costs for depreciation of plant and facilities; they include all the railway overheads; they include all the railway benefits; all the railway costs. They include crew wages, locomotive repairs, car repairs, signals, plant - the whole myriad of railway components. They include all the railway's costs, and as included in the CP definition, not only the short-term costs, but the medium-term costs and the long-run costs. It's the full cost allocation.
They were the same costs that were used for the calculation of the WGTA - you've heard the numbers - and they were the same costs that are used for the determination of uneconomic branch lines. They were used for subsidies out of Atlantic Canada, under ARFAA. They are used as the basis of any costing that the government does, including the costing of VIA, which came up the other day.
The Chairman: Why, then, doesn't clause 113 alleviate your concerns?
Mr. Weinberg: Because clause 113 is very subjective. It is reasonable wording, but it sets no criteria. What is ``fair and reasonable''? What's fair and reasonable to the railways is quite different from what it is to the shipper. What's fair to the railways may include a compensatory rate requirement, or a short-term cost, or it may include anything else. It depends on what the railway deems as short term in the market situation - that's basic.
The Chairman: Thanks, Mr. Weinberg.
Mr. Gouk.
Mr. Gouk: Gentlemen, do you believe the railroads should operate in a compensatory return fashion at all times?
Mr. Weinberg: Yes, sir.
Mr. Gouk: Do ships operate on compensatory return on their rates at all times?
Mr. Hall: Yes, we do. I think the difference, sir, if I might respond, is that in the case of the railways there are two railways. In the case of our group, we have 12 companies all competing for whatever business is out there. They make darn sure that everybody stays honest, and if they're not honest, or if they try to offer non-compensatory rates, they're not around for very long.
We had 136 ships ten years ago; we now have 104. We had 18 members ten years ago; we now have 12. So there's competition out there. I'll say one thing - the state of the industry is such that we know darn well that it's operating pretty close to the line, otherwise we'd be building new ships today.
Mr. Gouk: I fly back and forth to British Columbia a lot on the two Canadian airlines that operate the run that I take from Montreal to Vancouver. If they travel with a full load from Vancouver to Montreal, and they don't have a break-even load in Montreal to go back to Vancouver, are they operating in a non-compensatory fashion or are they simply operating their business?
Mr. Hall: I think they're operating their business. As I've said, one of our main concerns here is the loss of the grain business, which has been the traditional seaway business ever since it opened. The opening up of the iron ore mines in Quebec and Labrador probably spurred on the idea of building the seaway. The big American steel mills and mining companies discovered this ore deposit, and I'm convinced they convinced the two governments - U.S. and Canada - to build it so they could use bigger, cheaper ships.
We didn't have that backhaul before. There was pulpwood and things like that, but pulpwood gradually died out. It got to be too expensive to move it by ship because the quantity was too big, so it's now done by truck. You take your chances in this business and if you're there.... I guess the airline business would be somewhat different from ours. They've got a licence to provide a regular service and I guess they have to provide that service.
Mr. Gouk: Could I just clarify one other thing? Take a circumstance under which a railway would haul a product from point A to point B. Obviously, in order to take same run again, they've got to get the cars back. Now, if they take a cargo at a less than fully compensatory rate in order to get the job, it's still money in their pockets because the alternative is to deadhead back, because they still have to get those cars back. Could that situation occur?
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Mr. Hall: That goes with the trade.
Mr. Gouk: But you're saying you wouldn't allow that because they cannot haul that smaller cargo back to point A unless it is compensatory for the total cost of your variable cost of operating back from point B to point A.
Mr. Hall: As I said before, we have ships that go back empty. There's nothing I can do about it. I get so much per tonne to take it from A to B, but I can't get from B back to A with a cargo.
Mr. Gouk: In response to an earlier question, you told me you felt that railways must at all times haul products only if the rate for hauling them is compensatory.
If they have to get these cars from point B back to point A and they haul some product, even though it's not compensatory, it's still putting a lot more money in their coffers than if they deadhead those cars back to point A so they can take that run again.
Mr. Hall: They don't own the cars in the first place.
Mr. Gouk: I think you're clouding the issue. It doesn't matter who owns them, they can't haul them again unless they get them back to point A. If they say it's going to cost them $100,000 to run those cars back to point A and they have a cargo that will give them $50,000, are they losing $50,000 or making $50,000?
Mr. Weinberg: I'll answer your first question first. With regard to airlines, the difference between airlines and the rail mode is that airlines operate a fixed capacity with a perishable commodity. In other words, if you have to run the flight and have excess seats, you discount your fares because otherwise you would get nothing. Railways don't operate that way.
Second, with regard to running backhaul cars, I think you're under the assumption that we're saying railways should return 100% empty. That's not the truth. Included in the railways' costs - and I didn't include it in my answer to Mr. Keyes - is an empty return ratio that reflects the fact that railways do indeed backhaul equipment, the same way the marine mode does. A boxcar coming from Vancouver to eastern Canada will normally be loaded with something going back a portion of the route.
We're not suggesting the individual components have to be compensatory. We are suggesting, however, when you're going after marine traffic with cars that are going to run 100% empty on the return movement, those rates should be compensatory. That's why when we say there should be a compensatory rate requirement, we suggest it should be for modally competitive traffic.
I'm suggesting to you that salt moving between Windsor and Bécancour - which is in the federal court so perhaps we shouldn't be talking about it - involves salt moving in covered hopper cars that are running back 100% empty, and the rate is still below cost. That traffic was previously handled by the marine mode. That, in my view, is predation.
Mr. Gouk: Could I just back up a touch? I just want to get this clear. You're saying they're running it back, but where did we get into this part about the empty hopper cars? They would have otherwise been running those cars back empty -
Mr. Weinberg: There is no reason. Those cars are not running in that service, so in order to operate that service they're running cars between Windsor and Bécancour loaded with salt and running them back empty. They're using them specifically for salt.
In the case of the marine -
Mr. Gouk: They would be running the train in any case; it's that car they've added onto it.
Mr. Weinberg: Not necessarily. We're talking about 400,000 tonnes of salt. These are trainloads.
I agree with you that on a carload on a branch line up in the boonies, we don't give a damn if they charge non-compensatory rates. But when they're going after large blocks of traffic that are handled by the marine mode at less than their cost, we take some exception.
Mr. Gouk: Perhaps there is some argument with CN because it's federally owned, but why would a private company run a cargo at a loss on an ongoing basis?
Mr. Weinberg: You asked VIA Rail that question the other day. I'm not going to get into the merits of it. I know a bit about it because I sat on VIA Rail.
You asked how it can expect to make money and then cut its costs when it's losing money. I asked the same question. How can a railway make money at below its cost? It can't unless it's looking for market share.
The difference is - and I'll give CN this credit - it's operating in a region of the country well under capacity. I would suggest to you that everything east of Thunder Bay is in that category. It's particularly that category in Atlantic Canada. It has become the situation in eastern Canada with the loss of traffic share to the truck mode.
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Mr. Gouk: So what you're saying is that the rail shouldn't be able to compete head to head with the marine and the marine shouldn't be able to compete head to head with the rail.
Mr. Weinberg: No. They should be able to compete, but on a level playing field, above their costs. Our members compete with rates that are above their costs.
Mr. Gouk: You used the analogy of VIA Rail. My concern with VIA is that they are using taxpayers' money to compete against the private sector by that cut. A private company has to answer to its shareholders.
Mr. Hall: CN is taxpayers' money as well, at least up to now. The problems that we've had with the railways have all been with CN. I refer to the grain case. That was a grain case where they cross-subsidized the WGTA subsidy to Thunder Bay, which is not supposed to happen.
The salt case to which Mr. Weinberg referred is also hundreds of thousands of tonnes. We're not talking about small stuff. In the case of potash I think it was a million tonnes that gradually disappeared over the years. We couldn't figure out why until suddenly it hit us that they were using the American railways.
Mr. Gouk: Do you think, then, that there's a distinction with the fact that this is a publicly owned or a government-run organization that's potentially, at least, subsidized versus a private corporation?
Mr. Hall: That would seem to be the indication, because we haven't had any trouble with CP.
Mr. Gouk: Would privatization then be an answer to that?
Mr. Hall: I would hope so.
Mr. Gouk: I'll be most interested to hear the questioning from the other side. Go ahead, Mr. Chairman.
The Chairman: I don't see any difference.
Mr. Hubbard.
Mr. Hubbard (Miramichi): You have about 12 companies that are listed here as being part of your association. They would have how many ships? Have you ever totalled it up?
Mr. Hall: One hundred and four.
Mr. Hubbard: Are they all Canadian-registered ships?
Mr. Hall: All Canadian registered, Canadian crewed - not necessarily Canadian built. However, if they weren't built in Canada, then we paid duty to bring them in.
Mr. Hubbard: So when you speak of the level playing field, most other factors are comparable in terms of the two modes of transportation.
Mr. Hall: What we're saying is that we had no subsidy. These are ships that we built and that we own. We are paying the full cost. No subsidy is coming to us for any operating service of any kind.
Mr. Hubbard: Would the present competition laws deal with this in terms of the future after Bill C-101?
Mr. Hall: As I understand it - and Mr. Weinberg may clarify - this gets rid of the NTA provision for non-compensatory rates, and then we'll have to go to the competition tribunal. I understand that's very difficult and maybe the expertise there isn't as good as the expertise that was available at the NTA.
Is that a fair statement?
Mr. Weinberg: Yes.
There's one additional item. Under the Competition Tribunal, the penalty is a criminal charge. Under the NTA, there's just a requirement that they raise it to compensatory levels. It's a quite serious matter when you show predation under the Competition Tribunal.
Mr. Hubbard: But in terms of your presentation, you would prefer the NTA rather than the Competition Tribunal?
Mr. Weinberg: That's correct. Normally under previous legislation, under the NTAs of 1967 and 1987, the matter was always referred to the transportation regulatory board and not the Competition Tribunal.
Mr. Hubbard: It's my understanding, though, that some of this has taken years to get answers to.
Mr. Weinberg: Indeed.
Mr. Hubbard: You prefer that method?
Mr. Weinberg: No. We'd like a strengthened one.
Let's go back. The Pickersgill Act of 1967 said that all rates must be compensatory. In the 1987 act it says that all rates must be compensatory but a rate may be less than compensatory as long as it's not predatory.
The Chairman: A lot of Tories will understand where that's coming from.
Mr. Weinberg: What has happened is that since the National Transportation Act Review Commission came out advocating the removal of the compensatory rate requirement, we've seen the examples that Mr. Hall has listed.
The Chairman: It's interesting that you talk about the level playing field, the Canadian-built, etc. Couldn't one argue though, Mr. Hall, that while the shipowners do pay their tolls, there's a lot of infrastructure there that is paid for the ships to run on and run through. The coast guard service is provided, etc. Trucks aren't paying for their pavement. The railways don't pay for their beds. You don't pay for the full costs of the seaway.
I guess it's a level playing field if nobody's paying their full costs.
Mr. Hall: I'm tempted to remind you of your own recommendations in your own report.
The Chairman: We're working on it. We'll hear all about that shortly too.
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Mr. Hall: There's no question. I think we indicated to you when we appeared before you on the NAFTA main strategy that we're quite ready to pay our fair share of some form of cost recovery, but before we do that, we want to be darn sure that the levels of service are something we need. It's not a Cadillac; we're inclined to feel that over the years it's gotten fat and sassy and it's time it was trimmed down.
I can tell you as part of the Marine Advisory Board that we're suddenly starting to run into problems with people in the Department of Transport because they're suddenly realizing that we're serious about reducing the levels of service and getting the costs down. So the wagons are circling and we're having a problem.
In the meantime, because the minister has this hard timetable, he wants the Department of Transport to move ahead very quickly. He has a timetable and he wants a decision by the end of December on the form of the poison pill we're supposed to swallow with respect to cost recovery so it can be tabled and put in the budget and he can start collecting in April.
We haven't done the rest of the homework yet. I don't have a clue what it costs to operate an ice-breaker per day. I don't want to waste time here unnecessarily, but this is just to give you an example of the frustration we have when we say we want to cooperate, but why won't you help us?
All I got when I asked for these things - and this is six months ago and it hasn't changed since - were available days for certain ice-breakers and the cost per available day. What does that mean? If you're operating, you have crew costs and fuel costs. If you're not operating, you have nothing. You just have capital costs and whatever it costs you to park there. They don't do accounting that way. They have no idea of the difference between fixed and variable costs, speaking of variable costs.
The Chairman: Thank you.
Mr. Nault.
Mr. Nault (Kenora - Rainy River): Thank you, Mr. Chairman.
I just want to go through two issues. One is the fact that there's an interest in going to the CTA, previously the NTA, and the agency on predatory pricing when in fact most places in the world go to the competition act they have within their country. My understanding is that in most cases it's much stronger than it is in this country.
Would you not prefer, as an industry, to take your complaints there and not have these clauses that really are dealing with competition stuck in an bill that's meant to make the industry move somewhat more smoothly? That predatory pricing doesn't belong in a national transportation act of any kind as far as I can tell.
Would you not prefer that we go to Manley and say clean up that Competition Act? It's so weak you could drive a truck or maybe a ship through it. That's really what the problem is all along and that's why we're asking for these band-aid solutions in a transportation act.
Mr. Hall: I have no experience going before the Competition Tribunal, but we do have experience going before the NTA on a number of situations. I have to accept what others have said; it's a very slow and expensive process to go through that.
I don't know the Competition Tribunal. I know nothing about it. Maybe Mr. Weinberg could give you the background.
Mr. Weinberg: What you're talking about is railway costing ability. I spent ten years doing it, so I know something about it.
The NTA has that because the NTA established WGTA rates, which were cost-based. It established uneconomic branch lines, which are cost-based. It established eastern subsidies, which were cost-based. It approved VIA operating agreements with CN, which are cost-based. In other words, it has an expertise that the Competition Tribunal doesn't have. That's the first thing.
Mr. Nault: Before we get past that, is that the only reason that all of sudden we only have one agency that has any expertise in this country?
Mr. Weinberg: No.
Mr. Nault: Then why can't we create some expertise over at the Competition Tribunal?
Mr. Weinberg: You can, and you can transfer the same people over. The problem is that the penalty is much more horrendous. It's a serious crime if you're caught under predatory pricing.
Mr. Nault: So it should be.
Mr. Weinberg: It's a criminal indictment.
Let's look at CN quite honestly, and let's look at it quite objectively. They have annual revenues of $3 billion to $4 billion. They don't make a lot of money but they have that kind of revenue. Are you going to take the president of CN and put him in jail because one of his traffic officers went after traffic because it was non-compensatory?
That's the kind of thing you have to evaluate. I'm not sure the shipowners want to do that, nor do they want to get involved in that type of litigation, which is quite extensive. However, they will if need be.
Mr. Nault: Okay.
I wanted to ask Mr. Weinberg this question because of his expertise. I know he's wearing a different hat now than he used to, but I also know that he has a very large knowledge base about the agency and how it works.
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The new subclause 27(2) - and I'm assuming to a certain extent that Ed wrote this particular paragraph here - will present a new obstacle, very different from what the shippers have said about subclause 27(2). That must mean you look at this much differently and have what I would classify as a different definition. I'd certainly like to hear your view on what this means as far as a new obstacle is concerned when you're going for possible regulatory relief. I'm very interested in your expertise on that particular clause.
Mr. Weinberg: You're going to be sorry you asked this one, because I could talk to you for a long time on that.
Mr. Nault: No, not necessarily.
Mr. Weinberg: I'm giving you the experience of the Canadian Transport Commission and the National Transportation Agency; I was employed by both. The CTC had 16 members and a staff; the NTA had 8. CTA is talking about three.
Mr. Nault: Plus part-time.
Mr. Weinberg: Plus part-time, agreed.
What I will tell you without telling you any secrets is that most of the people who are appointed to these boards don't have detailed knowledge of railway costing or railway rate-making. They're not transportation people. They're appointed for other reasons, from other areas. This is a very specific area of expertise.
I came out of the industry, although they won't admit it. I worked for Canadian Pacific for 12 years and went into the CTC and then into the NTA. I was a cost analyst for 8 of those 12 or 13 years. So I dealt with this on a day-to-day basis; I know what they're about. I'm not knocking present members or past members or anything else; they just don't have that knowledge.
What subclause 27(2) says is you must look at a rate to find out if there is otherwise available competition or it would be unduly prejudicial. How do you expect those who are basically patronage appointees and civil servants in Ottawa to better know what the situation of a shipper is in a competitive situation?
I assisted in the Wabush Lake final-offer arbitration just recently. I acted as an adviser to Wabush Lake. Let's just use Wabush Lake as an example. They're sitting up there in Labrador, they're producing 4.5 million tonnes of iron ore. There are no roads - well, there are roads, but trucking isn't a feasible facility. They went to final-offer arbitration. They're shipping their ore over a competitor's railway, which also ships on that railway.
Now, let's put that regime under the new act. You say it doesn't apply to final-offer arbitration - I have my own problem. Why does it say ``rate or service''? That's what final offers are about - they're about rates and service, and before you can go to final-offer arbitration you have to apply to the agency or the CTA. You can't just to final-offer arbitration; you have to go to the agency for permission to go to the next step.
Mr. Fontana: No.
Mr. Weinberg: No? And what about the rate that it comes up with? Does that rate not have to be enforced by the agency, and will not ``commercially fair and reasonable'' come into play then? How is this agency, which has that type of people on it...? I'm not knocking them; they're very well-meaning and very capable people. But they don't have the background and they certainly don't have the expertise of the people who are in the field and facing the situation, being the shipper and the railway involved.
You're going to say their judgement is better than those people's judgement? I have trouble with that, because I've seen and I know what happens on both sides of the situation.
I think subclause 27(2) provides a formal law obstacle. You'll have railway submissions on every one of these things; it'll go on endlessly. It was there under the CTC with the prima facie requirement. Before you got access to a public interest case, there were years of correspondence going back between the railways and the shipper as to whether, indeed, they were prejudiced. It's not a simple matter, I'm telling you. I was there.
Mr. Nault: All right, then. My understanding is that hardly anyone used the agency for this regulatory relief.
Mr. Weinberg: Yes.
Mr. Nault: In fact, it was used more as a bargaining chip. So you just gave me the perception that we have a lot of information as to how we would go to the agency to deal with an issue like subclause 27(2) or the present system as it is under the NTA, when in fact they never used it. So I'm a little bit at a loss here, because you gave me the sense that we've acquired so much information and knowledge because we've been using it since 1987, when in fact we haven't used it at all.
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Mr. Weinberg: Let me tell you this. It hasn't been used and it was never meant to be used.
I was the guy who wrote that section. I authored that section. I know what the intent was. I was in the minister's office and I wrote the competitive access part and I wrote the dispute resolution provisions. They were never meant to ship traffic to U.S. railroads. They were never meant to go to final-offer arbitration. What they were meant for was to give a shipper who had no other competition available to him the competitive lever in dealing with the railway. That's all they were meant for.
The truth of the matter is they've proven to work that way. There have only been two competitive line rates and two final offers. That's the way they were intended. Now, if you're going to put this other barrier in front of it, you're going to remove even that.
Let's remember one thing: under competitive line rates and final-offer arbitration, the first condition is whether the shipper is captive and whether he has competitive alternatives. That's the first test stated in the provision. Why are you going to have an additional provision that now asks whether he is otherwise prejudiced or whether he has any available alternatives? That's really what I'm asking.
Mr. Fontana: I have a point of order, Mr. Chairman. This is on the record, and I'm sure Ed would want to correct it if he got an opportunity. Clause 162 is not permissive in the sense that the agency sends it to FOA. It says ``shall refer the matter for the arbitration'', so there is a big difference there.
Mr. Weinberg: I hope you're right; I hope that is the correct interpretation. The legal interpretations that I've heard - and I've heard several from several respected law firms that have been involved - say that the wording of the provision is somewhat ambiguous and could be construed that way.
Mr. Fontana: Well, every lawyer says that. That's why they get paid so much.
Mr. Weinberg: I agree, but wouldn't it be easier to specifically preclude this?
Mr. Nault: This is why I asked you. We're very interested in whether the wording needs to be tightened up so that people feel assured that what they think they're getting is indeed what they're going to get.
Mr. Weinberg: I would suggest to you that what is required is perhaps three or four words. Final offer is not covered by this provision. You can leave it there the way it is. Just say final offer is not included in this provision. That's all you need.
Mr. Nault: Okay, thanks.
The Chairman: Gentlemen, unless there are some other pressing questions, I'd like to let these witnesses go so that we can go and vote and then return in about 20 minutes to hear from our last four witnesses today.
Are there any other questions for this group?
Thank you, Mr. Hall and Mr. Weinberg. I'm sorry you didn't get a chance to answer any of the questions today, Captain, but you were there just as back-up.
Captain Rejean Lanteigne (Manager, Canadian Shipowners Association): We'll be back here soon.
The Chairman: Probably.
Gentlemen, thank you very much for your submission to the committee. We appreciate the time you've taken.
Colleagues, we'll go for a vote and return immediately afterward; there are four witnesses yet to be heard. We should be back in about 20 minutes, ladies and gentlemen. We stand down for 20 minutes to half an hour.
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PAUSE
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The Chairman: Colleagues, we will begin by welcoming the president and chief executive officer of RailTex to the table.
Good day, sir, and welcome to the committee. We're looking forward to your submission. If you can give it to us in an executive summary within 15 minutes, we'll have time to ask some questions.
Mr. Bruce M. Flohr (President and Chief Executive Officer, RailTex Inc.): Thank you, and I thank members of the committee for coming and taking their time to debate this very important topic.
RailTex is the leading short-line operator in North America. We currently have 25 railroads. We operate about 3,400 miles of track. We operate in twenty states, two different provinces of Canada, and in Mexico. In 1994 we had $75 million in gross revenues with an after-tax profit of $6.9 million. This year we see a 50% increase in our revenues.
We currently operate a rail line in Ontario from Stratford to Goderich, and a rail line in Nova Scotia from Truro to Sydney. We also bought the old Central Vermont that was owned by Canadian National and picked up ownership of that on February 4, 1995.
On three of our railroads, the employees have decided they want to have a union represent them.
In each of our three Canadian National purchases, Canadian National received 100% cash on the date of acquisition. Our Canadian debt is with the National Bank of Canada. Canadian National does not guarantee any of our debt or any of our revenue stream.
We receive no federal or provincial loan guarantees in Canada. We have no tax abatements in Canada and we do not receive any government subsidies in Canada. The one little bit of subsidy we did receive was under your maritime equalization subsidies, and that's now all gone.
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We very much like doing business in Canada. However, the process of getting a rail line approved for acquisition in Canada has been a very tortuous process. House Bill C-101 definitely addresses our concerns there.
In the case of our line in Ontario, our Goderich-Exeter Railway, it took us nineteen months from the date we signed the agreement with Canadian National until we turned the first wheel. In our Nova Scotia acquisition, it took us twelve months from the time we signed the agreement until we started that rail line. Therefore Bill C-101 certainly removes a big part of that time delay, because it really takes the federal approval process away and relies strictly on the provincial approval process.
This is especially significant because two things can happen during the delay period.
First, the selling railroad may cut back on their track maintenance. Canadian National has not cut back on their track maintenance; I'm pleased to be able to tell you that. That has not always been the case with some of the other lines we have acquired. There is that possibility of a long time delay.
Secondly, and of even more concern, when the shippers know the line is for sale and then is sold but not yet with the new operator in place, they are left in doubt. They have to make decisions on running their own business, so when in doubt they'll usually expand their truckload-out operations. That business is then lost to the railroads. So we do need to cut back on this approval process, and Bill C-101 does that for us.
In my testimony I go into much detail as to why the big railroads are selling their lines. I'll just briefly hit the highlights of that. The main reason is to downsize for profitability because of the existing craft lines that are in the selling railroads situation.
On our Nova Scotia railroad, Canadian National operated that line with 110 people; we're operating the same line with 47 people, and we're actually handling 20% more business. When we acquired Central Vermont, it had 161 people; we're running it with 85 people. So we are able to run a more efficient operation, and it's because we don't have the work-to-rule jurisdictional disputes that create great inefficiency in the workplace.
The big railroads are also selling to improve their return on their invested dollar. They're trying to improve asset utilization. They want more frequent service of bringing cars from rural industries into their main-line system. In the case of our Ontario line, CN was operating it on a tri-weekly service; we're operating it on six-day-a-week service to interchange into Stratford with the CN.
You'll usually get an improvement in car supply. The selling railroads have a better way of utilizing their management away from branch line issues. We always seem to bring more business back to rail. And of course, finally, we avoid the agony of abandonment.
That gets me to my next point about here in Canada. Canadian Pacific is now saying 53% of their trackage handles only 5% of their business. That's something they're going to be shedding, primarily in the prairie provinces. Paul Tellier of CN has said that east of Winnipeg, 50% of their trackage should go, 20% should be short-lined, and 30% should be outright abandoned. So if Canada wants to save its rural rail structure, they have to do something to allow companies like RailTex to come in and acquire these branch lines.
Not only is it to continue to save them and feed traffic to the big system; it's also to allow short-haul movement to return to rail. An example is our Goderich railroad. We are now hauling grain an average of forty miles into the elevator at Goderich so it can go out through the steamshipping companies you just heard from. All we did was start charging half a cent a bushel less than what the trucker was charging.
Two summers ago we took over 900 trucks off the highway through downtown Goderich during August and September, which is part of their peak tourist season. The grain elevator there went from a two-car unloading spot to a 25-car unloading spot. They liked the short-haul movement by rail that much. That's a big difference from the big railroads.
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In the United States our Interstate Commerce Commission did a study after many of the short lines had been created. I think it's important for the committee to realize what the shippers said happened after the lines went to the short-line operators.
On service, 52% of the customers said that service improved and only 5% said that service got worse. As far as rates are concerned, 20% reported that rates went down and only 12% said that rates went up. I think it was especially significant that it was the small shippers who saw the greatest change for the better rather than the big shippers, because the big shippers were already being taken care of.
If the goal of the legislation is really to save rail service to rural Canada, however, two more things have to happen. One of them is the issue of successorship rights. Currently there are three provinces that have successorship rights: Ontario, Saskatchewan, and British Columbia. We're not against labour unions, but we are against the craft lines that come through in the contracts that succeed down to the buyer from the seller. It just doesn't work.
If we had had successorship rights in place when we bought the line in Ontario, we would have had to have eight different labour unions in on the property. We figured the best we could have done was to operate the railroad with a minimum of twelve people, and yet we're operating that railroad with only eight people. That would have been one per union if we'd been able to do it.
The employees have decided they want to be represented. The Brotherhood of Locomotive Engineers is one that they picked. That's fine. In all of our negotiations, there's no issue on craft lines, and that's the one thing we oppose because of the inefficiencies of work rule.
Right now successorship rights also apply on any route that has VIA operations because that's a federal undertaking, and they apply to lines across provincial boundaries. In the case of the prairie provinces, there are several branch lines that most logically should be converted to short lines where they cross provincial boundaries. Right now with the federal successorship rights laws, those lines will not be attractive, at least to us, for short-lining.
The other issue that has come up in the hearings to date has concerned running rights. This has been especially advocated by the Canadian Industrial Transportation League. First of all, I'm opposed to running rights because they're not needed.
There is an article out in Railway Age that says that RailTex will only buy railroads if they outlet to two big railroads. That's not true. In fact, two of the last three acquisitions we made, our Nova Scotia acquisition and our line in Oregon, which we started on December 31 of last year, outlet to only one carrier. We're perfectly happy to enter into deals like that because it's really a partnership.
The big railroad wants the traffic under a long-haul situation. They simply don't want the burden of having to gather the traffic up. That's our job. So we are acquiring railroads right now that have a single outlet. In fact, 10 of our 25 railroads are single-outlet railroads. If you talk to the shippers on those lines, they have no problem at all with the fact that we only outlet to one carrier.
Secondly, if running rights were ever granted by legislation, that would kill the short-line movement. At least, that's what the legislative chairman of the United Transportation Union in the United States has told me personally.
The reason it would kill it is that the labour unions in the United States know that the selling railroad would not want to lose that traffic base to a third railroad. They want to keep it themselves. They just don't want to gather it up. Rather than selling to a short line and then losing it to a third railroad, they will not bother to sell at all. They'll just continue to cause that branch line to die there on the vine.
Our labour unions in the United States are using that as a tactic right now to try to stop the sale of these branch lines. I cannot prove it in Canada but I can prove it in the United States.
In conclusion, Bill C-101 does solve our problem of the long-time delays in getting a rail line approved, but it does not solve all of the rural rail service issues in Canada. The committee needs to be aware that we have to eliminate successorship rights on VIA routes and on lines that cross provincial boundaries to solve those two line groups. Also, you should not grant trackage rights, or running rights, to reach a third railroad.
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If you want to find out more about how we railroad, I don't own any stock in Reader's Digest, but the just-out November Canadian issue has a five-page article about our Cape Breton and central Nova Scotia railway. It talks about how much the employees like working in this kind of environment. Also, in the submission I gave, there's a newspaper article published by Canadian National that quotes three of our employees on our Cape Breton railroad on how they very much enjoy this new type of short-line railroading.
With that, I'll be happy to answer any questions the committee has.
The Chairman: Mr. Flohr, thank you for a very articulate submission that also clarifies and summarizes. That's the way we like it on this committee.
Mr. Gouk: I agree with your submission. I do not support successor rights, for the very reasons you brought up. It certainly causes problems in my riding in British Columbia. I'm very hopeful that we'll soon have only one province that has successor rights, and then we'll work on that by example.
It's the first time I've heard the suggestion, however, of taking it out of the federal areas of jurisdiction, and I will take a very good look at that.
Your presentation wasn't unexpected and is certainly supportive of my position, so I have no questions for you. Thank you very much.
Mr. Flohr: I would like to comment on the successorship rights. Following the logic of that legislation, there is a lot of validity to it if it's a buy-sell arrangement where the character of the business is going to be relatively the same under the buyer as it was with the seller. But in the case where you come in with a whole new management structure, a work philosophy and all, the successorship rights just do not apply.
Mr. Gouk: Not only is your position the same as mine, but your arguments are the same as the ones I've been using. So to use your own analogy, we're right on track.
An hon. member: [Inaudible - Editor]
Mr. Gouk: With all these Liberals around, I'll take my friends where I can get them.
The Chairman: Mr. Fontana.
Mr. Fontana: Thank you, Mr. Flohr, for providing us with some great insight into a part of this bill and a government policy matter we're very excited about, and that's the creation of short lines. You've given us some insight into how it can be done and how we can even do it a lot better.
I was intrigued to hear about your employer-employee relationship, because I think that's key. I understand one of your employees, David Swales, has had a lot to say about that experience in very positive terms. We wouldn't mind hearing directly from him. It's not that I don't trust his boss, but he has a story to tell that perhaps, coming right from the horse's mouth, so to speak, can be helpful as we go through this transition.
Mr. Flohr: I've already talked to the committee organizers, and there will be a letter coming to you requesting that Mr. Swales give a presentation. We'll try to facilitate that. He's also heavily quoted in this Reader's Digest article.
Mr. Fontana: Thank you very much.
I want to ask you about your U.S. experience as it relates to Bill C-101. We want to create not only a viable main-line railroad industry but also a short-line industry. Hopefully the communities and shippers will benefit from more competition and better service, so this is all part and parcel.
Is there anywhere in Bill C-101 we can improve even more? We hear complaints about this or that particular section, but in light of the tremendous amount of experience you have in the U.S. and Mexican models, such as acquiring lines in the United States, is Bill C-101 and the regime we put in place going to be enough, not only for short lines to access the marketplace quicker, but also for communities and shippers to be able to take advantage of those opportunities as quickly as possible? In other words, are we going to be able to shorten this timeframe significantly?
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Mr. Flohr: The one thing I see that Bill C-101 doesn't do is that it throws it to the provinces, and each province is likely to have a different process. In the United States, it solely lies with the Interstate Commerce Commission, a federal group, and the states have no voice. That's the big difference.
Here in Canada, you've gone a lot more for provincial jurisdiction on issues. Unless you really want to back off from that - and I don't think you do for a lot of different reasons - it's going to be done on a case-by-case basis by each province. We are spending a lot of time meeting with the provinces where we see the greatest opportunities. In fact, I was just in Saskatchewan in June meeting with them concerning this because of the sucessorship rights legislation there.
The provinces are now beginning to learn and figure out what to do. Ontario is just now passing its own railway legislation, and we like what we see in that legislation.
So that's the one area that's different, but it's not, I don't think, such a big difference that I would suggest any major changes.
I personally do like the provisions of the significant prejudice finding that has been placed inthe bill and was criticized just prior to my testimony. The reason is because it throws the issues intoan agency that is to be staffed with experts. Regardless of what was said, that's the intent. If the agency is staffed with the experts, then the significant prejudice finding, I think, is a very responsible way to go.
You as a legislator cannot address every single issue in every way, just like the discussion earlier about what are compensatory rates. You shouldn't have to do that. I think it is a far more responsible approach to throw it to an agency that is to be staffed with experts. If they're not staffed with experts, then that's where you should come back in and demand the experts.
But I'm very comfortable with that. Other than the two other areas that I bring up, which are more labour issues than they are transportation issues, I say you have a good bill here.
Mr. Fontana: Let me ask you about subclause 27(2), because I think it would be germane to learn again what your mind-set is with respect to significant prejudice, on the basis of how you would see it working. Would it be a detriment to shippers and railroad companies coming together in terms of an agreement? We know that under NTA 1987 people didn't have to go to the agency much at all, even to the FOA. They were able to work these kinds of things out.
How would you see it work in a significant prejudice test for the remedy - not for the access, which I think people continue to confuse?
Mr. Flohr: For the remedy rather than the access? I think, first of all, you need something in place that is always there as the third party in case the two active parties can't agree. In the United States our Interstate Commerce Commission is still there as that group that can step in if the two parties cannot agree. It also forces the two parties to make every best effort to do that.
The penalties? I don't know. I'm not that familiar with it, and whether it would be more thrown back to the agency to establish the penalties.... I really can't help you on that part. But I think having that outside third-party agency is important to keep, but give it maximum flexibility.
The Chairman: Mr. Comuzzi please.
Mr. Comuzzi: As you were reading your credentials, Mr. Flohr, I was wondering if there was an opportunity for you to.... We have a railway here we're trying to sell. Perhaps they're looking for somebody who wants to run it. No government subsidies, being profitable, a whole bunch of things, so, you know, there may be some opportunity.
Mr. Chairman, I must confess that I didn't know that we had successor rights on federally.... Can we have the clerk get that legislation?
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Anyway, tell me, Mr. Flohr, do your railways own their own cars?
Mr. Flohr: Not in all cases. We own all of our own locomotives, all of our own track, and it's a mixture on the cars. We generally rely on the long-haul railroad to supply the cars, but if they do not for some reason, as with the short-haul grain moves, then we will get our own cars and apply them to the system. We have just under 1,000 rail cars right now.
Mr. Comuzzi: On that short Goderich run, you're moving Ontario grain, I would think - the white grain?
Mr. Flohr: Yes, and some corn.
Mr. Comuzzi: Do you have designated cars for that?
Mr. Flohr: We do have designated cars. What we'll do is put them into that service in August and September, and then we'll move them away from there. Some of them go down to Virginia to haul peanuts that are harvested in October and November and the others go over to Michigan where we haul edible beans. Then we move them down to haul poultry feed in Missouri in December, January, and February, and then we move them down to Texas when the spring wheat is starting to come in in May and June. So we move them all over North America, but we follow the crops.
Mr. Comuzzi: How do you keep track of one of your designated cars that you own yourself, once it gets onto a cross-country rail line?
Mr. Flohr: The status of all the railroad cars is reported to a centralized computer system, and we run a daily trace on our cars, so we do know where they are.
Mr. Comuzzi: And how do they return?
Mr. Flohr: Generally they return very well. We have a little trouble when they're being moved from one railroad to another railroad, because once in a while there'll be a local agent who has a need for, say, an empty grain car and he'll steal the car for one trip, but we catch it after one trip and usually can divert it. That's why we trace them on a daily basis, but it's not really a big problem.
Mr. Comuzzi: In the operation of all of the lines, the designation of cars, the availability of cars, and finding out where all of your cars are at a particular time are not a difficult problem?
Mr. Flohr: No.
Mr. Comuzzi: Thank you.
The Chairman: Mr. Hubbard - a quick question?
Mr. Hubbard: Just a quick one, and I can probably put two or three things together.
How old is your company?
Mr. Flohr: We started the company in 1977.
Mr. Hubbard: Are your percentages of maintenance of track and infrastructure as high as other companies such as CN and CP and some of the major ones in the States?
What is the speed of your track? Is it available for passenger travel as well as freight?
Mr. Flohr: On the majority of our track, we operate at no greater than 25 miles an hour. On several railroads that were operated at 40-mile-an-hour speeds we cut back to 25 miles an hour because you don't need to go that fast in most cases as you're stopping every five miles to switch more cars.
In the case of the Central Vermont Railway, which is now the New England Central Railroad, that is an Amtrak route from Palmer, Massachusetts up to St. Albans, and it used to come into Montreal. We are operating that railroad at passenger train speeds of 60 miles an hour.
As for the other part of your question - how much money we spend on track maintenance - we usually spend much less than the big railroads. First of all, we're not going the 60-mile-an-hour main line speed; instead we're going 25, and you don't have to spend as much money for the slower speeds. Secondly, we have very little railroad with more than one train a day each way on it, so the rail costs are minimal because we never wear out the rail.
The big railroads may have 20 or 30 trains a day so there is the potential of the rail wearing out fairly quickly, and rail is a very large expense item. That's where you see a maintenance cost significantly larger than ours. A big component of that cost is rail replacement, and we just don't replace much rail because it never wears out when you're only running one train a day.
Mr. Hubbard: From your annual budget, what do you commit to track maintenance and infrastructure improvement?
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Mr. Flohr: It will vary by railroad, but right now it's anywhere from $3,000 a mile to $7,000 a mile, depending on the density of the traffic on the line. Our New England Central is higher than that because we have the Amtrak. I don't have the exact number on that, but I do have on the other general groups.
Mr. Hubbard: I passed another question, Mr. Chairman, could I ask it, too?
The Chairman: Sure.
Mr. Hubbard: What's the average -
Mr. Comuzzi: How are the trains made up -
Mr. Hubbard: You ask it, Joe.
Mr. Comuzzi: How many cars do you usually have on your average train?
Mr. Flohr: On our average train we probably have no more than 30 cars. We're averaging about 65 cars on the New England Central train. We have some unit coal trains on our railroad in Missouri, and they're 110 cars. But for most of our railroads it's 20 to 30 cars on a train; they're not big trains.
The Chairman: Thanks, Mr. Comuzzi.
Mr. Hermanson, please.
Mr. Hermanson: Thank you, Mr. Chairman. It's good to be here. I'm sorry I missed your presentation, but I had to be away for a few minutes.
I have three very short questions. But in light of some of the questioning from my colleagues here, perhaps you should be putting in a bid for CN. You might be able to do wonders with it.
Mr. Fontana: [Inaudible - Editor]
Mr. Hermanson: Yes, that's the problem, and we told you that.
I have three things. First, what is your position on the freight rate cap? Do you support it or oppose it, and why? Secondly, why should shippers pay an extra 10¢ a tonne for shipping grain to cover the extra cost of short-line railroads? And thirdly, do the provisions in Bill C-101 encourage companies like CP and CN to abandon lines in good enough condition for short-line to be a profitable option? The basis for that is, being a prairie boy, I've seen CN and CP let these branch lines fall so badly in the ground that they're beyond repair and not attractive to any short-line operations whatsoever.
Mr. Flohr: Okay, the first question on the freight rate cap ties in a little bit with the second one, the 10¢ per tonne on grain. I have to admit I'm uninformed, in general, on the issues underlying those two things because we don't have any lines operating in the prairie provinces that involve that. So I'm going to have to pass on those two, because I just don't know enough about the issues to render a good opinion. My general opinion is that I'd rather see a free marketplace prevail - and free pricing is a part of the free marketplace - because that's what we're doing on all of our other railroads, and it is working.
Your third question addressed whether the legislation allows transfer to occur before the branch line gets in such a horrible condition that there's no interest in acquiring it. I believe the proposed legislation does provide for that. I mentioned in my testimony that for the Goderich line in Ontario it took us 19 months between signing the documents and the start of the railroad. We cut that back to 12 months in Nova Scotia, and 12 months is still too long. If the bill is approved, I could see a lot of activity very quickly in the next year or two so that there will be no further deterioration of those lines.
Mr. Hermanson: But you have no position on whether or not the 10¢ a tonne...because that's specifically there for the benefit of short lines.
Mr. Flohr: Yes, it's for the benefit of the short lines operating in the prairie provinces. We're not operating there, so I just don't know what other economics are at play there - whether it's necessary or not. So I'd rather not answer than give you an opinion that's not correct.
Mr. Hermanson: Fair enough. Thank you.
The Chairman: A short question from Mr. Althouse.
Mr. Althouse (Mackenzie): You mentioned that you had a long wait on the lines you bought in Canada after you'd signed on the dotted line. I'm wondering about the amount of time it takes you to make the decision to purchase a line. Is the very short period of time that exists in this legislation with the announcement to abandon, followed by a very short period of time after which the three governments have a go at it - is this enough time to assess whether you want to buy a line? How would it be if you were not already in the railway business? Would you be able to even get in on the assessment?
Mr. Flohr: The time that's allowed in the legislation is no problem to us. When we go out and analyse a line, what we do is talk to the major shippers on the line, because the worst thing that could happen to us would be to buy a railroad, thinking we have a certain business base, and then find the factory or the grain elevator shuts down - to spend good money and then not have the business there. We can do the analysis very rapidly, so that is not a problem to us.
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I really think, from what I've seen here in Canada, that although the timeframe is short, the real goal is to let everybody have a go at it. It's my belief that in dealing with CN and CP, if the little short-line companies don't find it attractive, they'll be patient to see if the province wants to step in and buy.
The problem is, is there any business on the line, anyway? If there isn't the business, then does the province want to spend the money really for economic development purposes?
You've got a situation right now in Ontario with the line up to Owen Sound - CN is out of there completely now and CP just announced that they're going to abandon out of there. It's a legitimate question for the folks in the Owen Sound area: do they want to buy the line just to keep it there for economic development purposes? I see really more of an agony working through on that decision than the time it would take for us to say yes or no on it.
Mr. Althouse: So communities not already in the business are going to have to really scramble, aren't they?
Mr. Flohr: They are. Do they want to keep railroads for economic development purposes?
Mr. Althouse: How many short lines are there in North America that have your kind of breadth and scope? There aren't very many, are there?
Mr. Flohr: Right now there are about 520 in North America, the majority of them in the United States. That has increased from roughly 250 back in 1981, so there has been a big growth in the United States. It's just been slower here in Canada, but the reasons for the growth are exactly the same in the United States as in Canada - the reasons I gave earlier.
The Chairman: Thanks, Vic.
Mr. Flohr, thank you very much. You are very well informed and articulate, as I said earlier, and we thank you for your submission to this committee.
Mr. Flohr: Well, we like doing business here in Canada and hopefully we can do more. Thank you, Mr. Chairman.
The Chairman: Wonderful. Thank you.
We invite to the table the Western Producer Car Group.
While they're making their way to the table to have a seat, colleagues, I've asked the clerk to speak to both the AZPAA Rural Development Corporation and Zenon Park Economic Development Committee. They will be doing a joint presentation following this presentation, so that we'll hear from both of them and then we'll be able to direct our questions to both of them when they come to the table.
Gentlemen, welcome to the committee. From the Western Producer Car Group we have the vice-chairman, Murray Christensen. Murray, I wonder if you could introduce those you brought with you today and give us your presentation in 15 minutes or less so that we can have some time to ask you and your organization some of the questions that will arise from your presentation.
Mr. Murray Christensen (Vice-Chairman, Alberta, Western Producer Car Group): Thank you, Mr. Chairman, for the opportunity to present our views to this committee. My name is Murray Christensen and with me today is Mr. Ralph Bowditch.
The Western Producer Car Group is a group of farmers from the four western provinces dedicated to the efficient movement of western grain to market. Through a mail-in survey that we conducted, the 1,060 producers listed three reasons that we load producer cars: one, to protect the right of the producers to load their grain directly into rail cars; two, to work towards the efficient use of our transportation system; and three, the larger economic return from direct-loaded cars.
The two of us have come today because the Western Producer Car Group feels that there are certain basic criteria that should be stressed when changing the way that grain is transported in western Canada. We also have the support of many other segments of the grain industry that want an efficient, deregulated handling and transportation system.
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Three points should be noted. First, competition has proven to help lower business costs. Second, efficiency is one of the benefits that is realized with strong competition. Third, there is a need for a market-driven industry. Clear market signals cannot be seen or used under a regulated system. Freedom of choice and unregulated markets are what is needed in today's world economy.
We feel that many groups that have appeared before this committee have missed a very important point because of their vested interests and short-sighted approach to changes in our industry. The most significant changes are those that affect the producer and the customer, because those are the ones that drive the supply and demand for grain. All other service groups fit somewhere in the middle, but those groups must always realize that their role is secondary to the 125,000 or so producers in western Canada and their customers.
Transportation costs are increasing this year by 80% to 125%. Transportation is a crop input, just like fertilizer, herbicides, machinery depreciation, and taxes. No one input of western grain production has risen faster than post-Crow rail freight. Therefore, freight deductions are the single biggest expense component per acre of grain production.
Mr. Ralph Bowditch will given you an example of how this has affected his farm in central Saskatchewan.
Mr. Ralph Bowditch (Vice-Chairman, Saskatchewan, Western Producer Car Group): Thank you, Murray.
I want to tell you firsthand what has happened on my grain farm this year. I'd refer you to page 2 of that handout. I hope most of you got it.
I produced 2,790 tonnes of grain in 1995. If I ship that grain to Vancouver, it would cost me a little more than $102,000 in freight. This is an increase of $55,000 this year, or 120%. My costs from Tisdale to Thunder Bay are up about 115%. This is due to the end of the Crow benefit.
On page 3, I've broken that down into each crop per tonne. In the case of oats, as of October 16, I was getting $137 per tonne. The provincial average of cash costs to produce a tonne of oats in the black soil zone was about $76.30 per tonne, a difference of $60.70 per tonne. My freight to Vancouver is $36.64, or 60% of my net cash returns. Barley was even worse at 124%.
If you go over to the next page, you will see that I've put flax, wheat and canola together there. They are a higher-priced commodity and therefore my rates are not as large a percentage: 20% in the case of flax, 35% for wheat, and 13% for canola. Those were the five crops I produced on my farm.
You can quickly see from this handout that my lower-priced commodities, oats and barley, can no longer be shipped to Vancouver or Thunder Bay. So why do I still grow them? I grow them because I've changed.
This year, 100% of my oats will be trucked to Portage la Prairie to be processed for U.S. markets. Last year they all went to the Lakehead. My barley will go to feedlots in western Canada if it does not go for malting, which you get paid more for. My canola will go to Thunder Bay instead of Vancouver. I want you to remember that Japan is still our largest customer and they pick up in Vancouver.
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Flax will also go to Thunder Bay because of freight rates. Another stumbling block I haven't solved yet is what happens to me in the winter months, when Thunder Bay closes down. I can't deliver grain - not at a profit, anyway.
As you can see, in the future I'm not going to market all my production through the port facilities because of freight. I'm adapting and finding new markets. To be of service to me, the railroads must be competitive, and to do this, they must be deregulated.
When the western farmer gave up the Crow, roughly $10 million every week of the year, we were told that was part of the bargain. The bargain was this: give up the Crow benefit and Ottawa will deregulate grain transportation to help offset the extra costs.
We did our part; we gave it up. It might have been forced on us, but we did it. On our farm we gave up $55,000 to $41,000 a year if I shipped it all to Vancouver or Thunder Bay. But the government has reneged on its part of the bargain. It broke our promise to us. We have no efficiencies to get back those extra costs, other than adapting on our own.
Wheat prices are good right now, and you see my percentage for cash costs on wheat. You can still make a buck shipping your wheat. What happens when wheat goes to $2? All of a sudden I have no option, because wheat is a board grain, so I have to deliver it to the board. I don't have the option I have with barley or oats.
In closing, I would like to say the producer has more invested per person in the grain industry than any other segment has. If we don't make a profit and stay in business, all the other people who provide the services of elevation, handling, marketing and transportation - a lot of the witnesses you've had before you - will be out of business also. The extra costs are always passed on to the customer or the producer.
Thank you. I'll turn it back to Murray.
Mr. Christensen: We need efficiencies in the transportation, handling and marketing systems so that we will be able to meet these added expenses. We have to have a cost-related tariff, not a distance-related tariff. By putting caps on freight rates, we are sending the wrong messages to the private sector, which is willing to invest in the inland terminals that would be able to see a financial payment for using incentives that were available before the review clause was added. All freight caps should be removed.
We have been under a regulated system for many years. We think the time for change is here. Let's try something that has never been tried in this industry. Let's deregulate and make all segments of the industry market-driven and responsive.
To gain efficiencies, we need the following. We need the options to market and deliver our grain to our choice of country elevator, inland terminal or producer-dealer car. Competition creates lower costs. Then we need transportation options. We must have the option of using any railway or trucking system in North America. Competition creates lower costs. That's the only way we can market the crop that we produce as efficiently as do producers anywhere in the world.
We ask the members of this committee to give producers a chance to compete in moving grain to market as successfully as we compete in production. When you do that for me and the other 125,000 producers, you're creating and encouraging an industry of entrepreneurs, and those entrepreneurs create wealth in every community in rural western Canada. The prairie economy is grain-driven, and everyone knows a farmer with money in his pocket will spend it. This is good for the economies of both the urban and the rural people.
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However, we have serious reservations about the wording of clause 155 referring to grain. We recommend specific changes to that clause to enable the legislation to work as it was initially planned.
Transportation regulations as proposed can kill the grain industry's future. Conversely, you can foster productivity, change, and the profits necessary to give grain producers a future. The direction is in your hands.
We've given you a number of specific recommendations on Bill C-101 in our brief and we would be pleased to discuss them with you. Thank you for the opportunity to present the view of the Western Producer Car Group.
The Chairman: Thank you, Mr. Christensen, for your report and summary to this committee, and we thank Mr. Bowditch for his frank and personal assessment that dovetailed your submission to the committee. Thank you very much, gentlemen.
I'm going to reverse the order of questioning now, for obvious reasons. Mr. Fontana.
Mr. Fontana: Thank you, Mr. Chairman, and let me thank Mr. Christensen and Mr. Bowditch for their insight and for being frank with this committee.
To tell you the truth, I agree with your philosophy totally. I think that's what the government is trying to do - create a competitive and efficient transportation system as Bill C-101 is related....
You obviously have brought certain other concerns into the equation that have absolutely nothing to do with the transport committee and have everything to do with the Canadian Wheat Board and the agricultural side of things, and I understand that. But as for the philosophy of wanting to be able to compete in an open marketplace.... The desire of this committee and this government obviously is to drive transportation costs for everyone down. That means, though, that railroads need to be profitable and your costs have to be lower so that we're competitive in the world marketplace.
But, Ralph, you know why we had to get rid of the WGTA. It had to go because of the world trade agreements and so on and so forth in terms of subsidies.
To be fair - and I appreciate the fact that you've given us some very good information with regards to your own personal business, and we appreciate that because sometimes these figures speak volumes, but the government did have a pay-out to you because of the WGTA. I don't know what that amounts to and whether or not you care to share that with us or not, but you didn't mention it here. Therefore, I think it would only be fair that...for the record, there is a lump-sum payment paid to producers for the loss of the WGTA subsidy.
Mr. Bowditch: I didn't mention it because we don't know what it is. We have never seen it.
Mr. Althouse: The cheque's in the mail, is it?
Mr. Bowditch: I can't speculate on that, because we've seen nothing and my understanding is that we won't see anything until January. It's not near what we lost; nowhere close to the figures I gave you.
Mr. Fontana: I don't know whether or not it's going to be enough, but obviously there's compensation there to bridge that gap.
At the end of the day, what you're saying is that you want a much more competitive and efficient system. Don't you think Bill C-101 is part of that commitment that was made by the government? Because that's what this is all about - deregulation.
Mr. Bowditch: Definitely.
Mr. Fontana: You've indicated that one of the ways to deregulate or become much more efficient and competitive is to get rid of CAP and to drive efficiencies and costs down. Do you think that the removal of the sunset provision and, if in fact this committee sought to recommend it, the removal of CAP - could you and other producers support that? The producers out there aren't obviously unanimous that the CAP ought to come off.
Mr. Bowditch: From my point of view, yes. However, I have to caution you here. I talk about other things in my statement. We can't just look at just transportation here, guys - and ladies, sorry. Everything's tied together.
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Mr. Fontana: Of course I would agree with you, but unfortunately this committee can't deal with agricultural issues. We may make recommendations and talk to our committee colleagues to look at the other part of the equation, but we can deal only with the issue of transportation costs with respect to this bill at this time.
What are some of the suggestions? Does Bill C-101 go far enough in terms of deregulation? You talk about total deregulation in order to drive the efficiencies.
Mr. Christensen: I would like to add my thoughts. We definitely agree with the abandonment part of the bill. By doing that we hope the railways will be able to see their way to transferring all the revenue and costs to the more efficient lines. In the western prairies a system of inland terminals has now been started, especially in Saskatchewan. A lot of those facilities are on hold because the freight rate incentives have been taken off. We envision seeing the transportation and the gathering of western grain in more central locations.
This afternoon Mr. Hehn of the Canadian Wheat Board said that approximately 80% of the wheat goes out of the prairies to export, but we don't have to do that from as many locations as we have today. If we cut the number of locations, the transportation system should be able to pass some efficiencies back to the producers.
Mr. Fontana: Of the railways' total traffic, 20% or 25% is related to grain. I've heard about market dominance, market power and everything else, but it would seem to me you have a lot of market power there. I know in some cases there are no alternatives, except you could move the stuff down south, at which point you might force the railroads, the trucking industry or anybody else to get into the game of competition, because I hear there is no competition and there's market abuse and so on and so forth.
It seems to me with the clout of your 120,000 producers, including the shippers - I agree with your efficiency statement with regard to shipments - you obviously must have market power yourself in terms of the railroads.
Mr. Bowditch: I agree with you. I can't see how anybody could say we wouldn't havemarket power.
The Chairman: That's why they want competition and their own cars.
Mrs. Terrana is next.
Mrs. Terrana (Vancouver East): I come from Vancouver and the port is in my riding, so what you said is like a stab. I've also been sitting on the task force on the rationalization of CN. My concern was always, if we cut the Crow, whether we would lose the grain.
In your organizations, your company, your society, are there other producers who are doing what Mr. Bowditch is doing?
Mr. Christensen: Some of the figures wouldn't be exactly the same, but yes, all of us are; all of us have to.
Mrs. Terrana: When you say ``all'', do you mean Saskatchewan and Manitoba?
Mr. Christensen: A lot of the barley in Saskatchewan and Manitoba is kept on the prairies, yes.
Mr. Bowditch: Will be.
Mr. Christensen: And more of it will be. But most of the exports that go out of Vancouver now are wheat and canola, which are actually rising at the same time. The lower-cost commodities cannot be shipped to export position because of the bill.
Mr. Bowditch: Don't forget, I'm in northern Saskatchewan. My freight rate is high into your port. His freight rate in Alberta is going to be the opposite. So we take Alberta grain and ship it to Vancouver, and we take my grain and ship it to Thunder Bay. That's fine, but all of a sudden this year we have a situation where Thunder Bay is plugged with rapeseed and Vancouver's crying for it.
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Mrs. Terrana: You talked about there being too many locations. Do you mean the locations where the grain is picked up to be taken to market?
Mr. Christensen: There are too many points on the prairies that the farmer can deliver his grain to so it can be gathered and put on rail cars. We'd like to consolidate them so some of this could be put there.
Mr. Hermanson: Thank you, gentlemen, for appearing before the committee. I appreciate your attitude. I think if more Canadians had that attitude we probably wouldn't be $560 billion in debt.
You represent a producer car group and talk about wanting an end to the freight cap and a totally deregulated transportation system. I will ask you a couple of, hopefully, tough questions.
If we were in a totally deregulated transportation system, would you not fear that those with the greater bargaining power, particularly the Saskatchewan Wheat Pool, Pioneer Grain, Cargill, etc., would get a stranglehold on the allocation of cars, and producer-car users would have no access to cars because they wouldn't have the 1,500 car spots the large companies have?
Mr. Christensen: A Senior Grain Transportation Committee study was done in 1992. It showed that 60% of all the cars that were spotted in the industry were under 10 cars. One of the efficiencies the railways always talk about is car numbers in spot. So over 50% of the rail business gathering in the prairies was under 10 cars, and the figures are pretty well true today, from what we gather.
We will change if the industry as a whole changes with it.
Mr. Hermanson: So you're not trying to preserve producer cars?
Mr. Christensen: No. We're here to drive some efficiencies into the transportation, handling and marketing system. I agree with the gentleman on the other side here when he says this was strictly transportation. But as the Canadian Wheat Board said before, grain is unique. That's because transportation, handling and marketing are regulated on our behalf.
Mr. Hermanson: Let's look at a scenario where there are no freight rate caps and freight rates go higher, particularly, Ralph, in your area. You and all of your neighbours are trying to truck your barley and oats to American buyers or domestic buyers on the prairies. Do you think there's a market for the sale of your products in a scenario where all the farmers in Saskatchewan and perhaps the prairies are trying to sell their product locally because they can't afford the higher freight costs?
Mr. Bowditch: I'd have to answer that there likely isn't. However, right now I have more opportunities for my off-board grains than I do for my board grains. We're aiming in the right direction. We're going through a transition period right now, and I think in time we're going to see more industry in the west. We're already seeing a lot more oil crushing plants moving into my area. Given time, it might happen; I'm hoping.
Mr. Hermanson: You're not concerned about the transition from where we are now to where -
Mr. Bowditch: Definitely, I am. I wouldn't be farming if I wasn't. I quoted you the figures for what it's costing me. Yes, I'm concerned. As I said, we're willing to do that, but you have to hold up your end too.
Mr. Hermanson: Several of the shippers - and you're producer-car shippers - are concerned about two or three clauses in the bill. There is ``significant prejudice'', ``frivolous and vexatious'' and ``burden''. We all know the clauses.
As the Western Producer Car Group and as shippers, do you share those concerns, or do you feel those clauses are not significant and you're happy to operate with that text in Bill C-101?
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Mr. Christensen: While the bill isn't perfect, as a group we feel there is adequate protection of the shippers' rights in the bill. Our main objection is still clause 155, the sunset clause.
Mr. Hermanson: That's the freight rate cap.
Mr. Christensen: Yes.
The Chairman: Gentlemen, thank you very much for coming before the committee and giving us your submission. We appreciate the time and the effort you took to be here with us today. Your submission is most valuable. Thank you.
Mr. Christensen: Thank you.
The Chairman: Colleagues, we're going to have a joint presentation now by AZPAA Rural Development Corporation and Zenon Park Economic Development Committee.
Colleagues, we welcome Peggy Reavie, from AZPAA Rural Development Corporation, and Céline Favreau, Economic Development Officer for the Zenon Park Economic Development Committee.
We look forward to your submission. Thank you for presenting your submissions jointly. Please proceed when you're ready.
Ms Peggy Reavie (AZPAA Rural Development Corporation): This brief has been submitted by AZPAA Rural Development Corporation on behalf of the residents, farmers and business people living within the area. Located in northeastern Saskatchewan, the AZPAA RDC represents the villages of Aylsham and Zenon Park, the town of Arborfield and the RM of Arborfield. The combined population is 1,500. All but the village of Aylsham are directly affected with the rail line abandonment issue.
One of the primary goals of the RDC has been to diversify the economy. The RDC is primarily in an agricultural area with some forestry. We're located next to the provincial forest reserve. The focus of our area has been to diversify and value-add as much as possible.
The most successful diversification in the area is the alfalfa dehydration, whereby the alfalfa is grown by the local farmer and contracted to the dehydration plants in the area. The alfalfa is processed into pellets at the dehydration plant and then the dehydrated product is exported, mostly to Japan. In 1990, the following statistics were compiled on the dehydration business within the AZPAA RDC area, which confirmed at that time that the alfalfa dehydration business was the largest employer in the area.
At that time we had the Parkland Dehy at Zenon Park, which was started in 1968 and created 17 full-time and 108 part-time jobs. They contracted 40,000 acres of alfalfa from the farmers and exported 82,000 tonnes.
Carlea Dehy in Aylsham started in 1984. They employed 10 full-time employees and 50 part-timers. They contracted 28,000 acres and export 50,000 tonnes of product.
The Arborfield Dehy at Arborfield was started in 1971. They employ 14 full-timers. In 1990 it was 50 part-timers and has since risen to 102 part-timers, a lot of whom are local farmers. They contracted 25,000 acres and exported 50,000 tonnes of product.
Since 1990, with the threat of the rail line abandonment, the Parkland Dehy has relocated from the Zenon Park area, which is on the Arborfield sub rail line, to another branch line outside of the AZPAA RDC area, which is served by two branch lines, both CP and CN. That has given it more long-term viability with more competitive rail line freight rates. Although the Parkland Dehy is still close enough for some employment, the direct benefits of having an industry of that size in our area have been lost.
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The town of Arborfield, RM of Arborfield and the village of Zenon Park are situated adjacent to the CNR line known as the Arborfield subdivision. The Arborfield subdivision is used to transport grain as well as alfalfa products from the dehy. Although the Arborfield sub remains a light-steel, light-density line, a partial upgrade has been done. It also remains a high-volume line.
The ten-year average delivery volume to the elevators and subsequent shipping was 48,100 metric tonnes. The length of the subdivision is 19.4 miles. The calculated ratio of tonnes per mile is approximately 2,500 tonnes per mile of grain and the same volume of dehy product.
Consequently, Arborfield subdivision appears to be relatively viable even if only grain shipments are taken into consideration. Until this year there was a federal moratorium on the rail line abandonment, that prohibition order that officially stopped all rail line abandonments on the prairie lines until the year 2000. However, with the removal of the prohibition order, the Arborfield sub line is in jeopardy of abandonment. The future of the Arborfield Dehy and the local economy are thereby in jeopardy.
Although abandonment seems to be a drastic measure to take on such a high-volume line, the AZPAA RDC conducted a pre-feasibility study in 1992 to look at the viability of a short-line rail operating on the Arborfield sub should abandonment ever occur.
The result of the study was that with such a high-volume line in combination with the existence of a partial upgraded track on the branch line, the branch line could be operated by a privately owned company should the line be abandoned by CN. However, with the introduction of Bill C-101, the possibility of taking these steps towards keeping our rail line via short-line rail seems limited.
Another issue of great concern is that if and when the rail line is abandoned and no provisions are in place for short-line rail, the impact of the grain and possibly the dehy product being transported on the highway system to the next closest facility will have a damaging impact on the highway system, which in turn is another cost via taxes for the local people.
If Bill C-101 is passed without some changes being made to it that would allow for the operation of a short-line rail, the Arborfield Dehy may also be faced with relocation or transporting its product by truck to another line or just closing the doors for good.
The second large impact the loss of the rail line would have on the area is the loss of the elevators in both Zenon Park and Arborfield. To date they are the Saskatchewan Wheat Pool in Zenon and Pioneer Grain and UGG in Arborfield. These companies have no choice but to relocate if Bill C-101 is passed without some amendments to allow for some alternatives if rail companies do abandon the rail line.
This is because of CN's monopoly position in northeastern Saskatchewan. Under the new set of regulations, the choice of whether to short-line or simply abandon will be CN's. If CN does not share the revenue with the short-line company, it could refuse to do this. The company would have no recourse to any form of arbitration. CN, because of its monopoly position, could still be reasonably sure of getting all the grain and dehy product.
As you can see, the issues involved are far-reaching and complex and strike at the very livelihood of the farmers, business people and employees in the RDC area. Bill C-101 as it now reads leaves them with no possible solutions they can implement to try to keep the infrastructure they require to continue to operate viably.
There are two changes to Bill C-101 that the AZPAA Rural Development Corporation feels are necessary to make the bill acceptable. One is arbitration. There is a need for a clause to enable federal and provincial railways to have access to dispute resolution.
The imbalance in size and power between federal and provincial railways makes arbitration necessary. This would apply to disputes over purchase price and operating agreements. Such a provision would prevent the rail lines from abandoning a line without having to sell, since the provisions already in the new bill require the rail line to offer the line for sale.
Running rights: This provision would allow the short-line rail to operate over the track of a federal railway to a point of interchange with another railway of its choice. In this way both the shipper on the short line and the short line itself would have access to competing railways to ensure the advantages of a competitive environment are available.
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In closing, the AZPAA Rural Development Corporation would add that economic development has been encouraged by all levels of government as a way to promote diversification and value-added processing in rural Saskatchewan. The ramifications of the transport bill stand greatly to undo all that has been to date and to limit what could be done in the future.
I have added an appendix that includes some numbers on the financial impact it would have on our communities. Do you have a few minutes to hear those?
The Chairman: We could probably adopt them as read, being the figures they are. We would like to leave time to hear from Ms Favreau.
Thank you, Ms Reavie, for your submission.
Ms Favreau.
Ms Céline Favreau (Economic Development Officer, Zenon Park Economic Development Committee): Mr. Chairman and members of the Standing Committee on Transport, this brief is being presented by the Zenon Park Economic Development Committee as representative of the village of Zenon Park and the surrounding farming community.
Zenon Park is located in northeastern Saskatchewan, an area dependent primarily on agriculture, an area rich in potential for agricultural diversification, as proven by the region for a number of years. In our area value-added processing has been a reality since the late 1960s. Zenon Park is historically known as the alfalfa dehydrating capital of the world. Alfalfa processing originates there. Today industries exist such as leaf-cutter bees for alfalfa seed production,the largest honey bee processor in Saskatchewan, organic grain and cattle producers, hardwood milling for export, and speciality crops such as peas, lentils, canary seed, herbs and spices, and sunflower seed.
As an economic development committee in a small rural community in Saskatchewan, we have just reason to have major concerns over some of the changes to the National Transportation Act, soon to be known as the Canada Transportation Act, not only in that it will have a direct impact on the livelihood of our community but in that it puts the fate of western Canada in the hands of the railways. We believe to understand truly the depth of the consequences of the implementation of the Canada Transportation Act as proposed you must first understand the impact of economic development in rural agricultural areas.
Our community of Zenon Park, located along the Canadian National Railway Arborfield sub rail line, became aware of our rail line being targeted for abandonment in the spring of 1995. Meetings with the neighbouring community of Arborfield took place immediately, because of the concerns of both communities over the future of the Arborfield alfalfa dehydrating plant, located at the end of the line, and our local grain elevators. After concerted efforts to make contact with CN in order to learn the reasoning behind listing our yet high-volume line for abandonment on a list that consisted of only low-volume lines, we were informed this fall that our line had been removed from the list for now.
Since then we have been holding meetings in cooperation with our area rural development corporation in order to assess the potential of the organization of a short-line in our region. The rural development corporation, as Peggy said, did a feasibility study in 1992 to look at the viability of a short line. The results showed that being the high-volume line that it was, used for shipment of alfalfa products as well as grain, it could be operated as a short line. All parties concerned saw the short line option as a sound eventuality within in our area, since the impact of the loss of the railway serving our region would most definitely be devastating to our communities, with the loss of jobs now in place at the Arborfield dehydration plant, as the largest employer in the area, the effects of the loss of the plant on the local farming community - an option of diversification that all area farmers benefit from - the loss of the tax base currently committed to the communities by the railway, and the loss of the tax base now committed to the communities by the elevators.
In our area alone, line abandonment would have a direct impact of extracting $2.6 million annually from the local economy. That's $2.6 million before you take into consideration the other levels of the impact from the loss of alfalfa dehydrating industries and the grain buyers. Other impact levels include the producers supplying the grains and raw product and the industries serving the needs of the plants and the elevators.
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The Village of Zenon Park has been participating in economic development in the region since 1988, realizing full well that the future of our communities is in our hands. When a bill passes through Parliament, like Bill C-101, that seems to contradict economic development efforts like agricultural diversification, we find our initiatives being brought to a grinding halt.
To help you understand the many levels of economic development at work in rural Canada today, our community of Zenon Park, with a population of 260, has an active economic development organization, as do many larger communities.
Zenon Park cooperates with three other municipalities in the AZPAA Rural Development Corporation. These cooperating municipalities also participate in regional economic development projects as facilitated by a federally funded community futures corporation. At this point we're talking about an area with a population base of 55,000, presently in the process of establishing a regional economic development authority and holding regular partnership meetings to share agendas to ensure cooperation at all possible levels.
The National Transportation Act of 1987 ensured the benefits of competition were available to all. It viewed railway infrastructure as an asset that should not be removed if it could perform a useful function under short-line operation.
As Bill C-101 reads, the Canada Transportation Act lets the railways decide the fate of rail infrastructure in Canada without taking into consideration the needs of the shippers and the community interests.
Our concern lies in two changes that must be made if the bill is to be acceptable within an economic development environment. The first is arbitration and the second is running rights.
Our region, the Village of Zenon Park, in cooperation with neighbouring municipalities and a rural development corporation is proud of its accomplishments in diversifying its economy in order to ensure its rural way of life. We understand the benefits of change in securing that future, but we've also become more aware of circumstances like this one that puts us at the mercy of the railways, and we are prepared to fight for our rights and our way of life.
The issue that concerns us most from the economic development point of view is that even as we make every effort in rural Canada to be less dependent on subsidies and to add value to our resources, the many levels of government, urban and agricultural industries and the media continue to assume that the movement of rural residents to large urban centres is an eventuality.
Rural people have no interest in joining the food bank line-ups in the cities of Canada. As quoted from the National Farmers Union submission to the committee:
- Rail line networks are more than capital owned by a company. It is part of the
infrastructure for the economy, and should not be discarded without thought to the impacts to
the communities involved, the larger transportation system or the economy in general.
Thank you.
The Chairman: Thank you very much, Ms Favreau, for a solid submission. Ms Reavie, thank you. I told my colleagues we were saving the best for last today and you have proved me right.
It sounds to me like this line you're speaking of to Zenon Park is just the kind of line that would look very interesting to an entrepreneurial individual or group of people who might want to take it over and run it. This bill would provide a greater opportunity for that individual to pick up that short line and run with it, wouldn't you think?
Ms Favreau: In a lot of ways it does. Our concern is with arbitration. Mostly it's difficult for the small guy to come face to face with the large organization, and in our area CN has a monopoly. So there are all kinds of possibilities happening there.
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For example, Arborfield Dehy approached CN, asking them exactly what they would like to see happen or what would need to happen in order to keep our line open. CN said it required upgrading. Dehy asked them how much it would cost to upgrade that line, because when they're considering relocating they're looking at a lot of money. If they can upgrade the line to sufficient levels and stay where they are, they're game to do that. CN said $600,000. The dehy said we'll pay, and CN backed away from the table.
The Chairman: With that kind of an offer, I wouldn't be surprised if some private entrepreneur would come along and buy that short line, take your offer and run with it. I'm surprised you wouldn't come along, take that offer and run with it. But I won't pursue it any further.
I'll go to questions from my colleagues.
Mr. Hermanson.
Mr. Hermanson: Thank you for your presentation.
Being from small-town, rural Saskatchewan myself, I understand the spirit in which you come to the committee and I appreciate it very much. I also sense your desire to keep your community viable, because you treasure it very much. Perhaps for those sitting around the table who haven't been in that environment it's a little difficult to understand. But it's akin to some of the concern we share right now with the fact that we may be losing a province. It's very disconcerting.
That same feeling, while it may seem trivial when you're talking about a few hundred or a few thousand people, if you happen to be in that situation is something that affects you very personally and very deeply because you've worked very hard to build the community and you treasure the community you live in. So I understand where you come from and I share some of those concerns, because I also appreciate the rural lifestyle.
I appreciate your presentation and I appreciate the chairman's comments about the viability of a short line in that area. Suppose the short line option falls through, doesn't come together. Is there potential to truck dehy? Is it commercially feasible to truck dehy to a line that would be open?
I know, coming from rural Saskatchewan myself, that there are certain times of the year when railways don't run. They just don't send cars down some of these branch lines for months, and life has to go on. When that happens right now with the dehy, do they store the material until a train comes or do they truck it out temporarily until they receive cars? I'm not familiar enough with the dehy industry to know how that is handled.
Ms Reavie: We've always been fortunate enough not to be placed in that position. Our rail line isn't such.... As I said previously, it's a low-density, high-volume line. But we've always been able to maintain moving cars through it at all times of the year unless something really unforeseen occurred - you know, strange circumstances. But otherwise, they have kept the movement going through rail line cars.
The dehy conducted a feasibility study themselves in just these past few months and they looked at three options. They looked at moving their commodity to another line via truck, at moving the actual structure of the dehy, and at just closing the doors and shutting it down.
The most viable option would be if they could have put the million dollars into upgrading the line and continued to operate the way they currently are. That's the most viable.
Trucking is a possibility, but we're talking about a lot of commodity here, and the line they would probably truck to is another 20 miles. The point they would truck to would probably be the same point that the Parkland Dehy moved to, which locates them in a spot central to both lines. It's something they may have to do, but short line would be a better route for them.
Mr. Hermanson: Have you talked to CN in light of Bill C-101? Did these discussions about the upgrading and the $600,000 take place prior to the introduction of Bill C-101? If Bill C-101 is passed, would CN reconsider your offer, and would they be prepared to upgrade or to allow a short line to function on your line?
Ms Reavie: They gave absolutely no indication that they would be willing to do that in the future. It seems to be that they -
Mr. Hermanson: Have you approached them again?
Ms Reavie: The dehy held constant conversations with them up until last week. I contacted the dehy again, and they had just talked to somebody from CN and again were told that currently we're off the abandonment list. Nothing would be done this year, and nothing would be done next year, they said. But probably the year after they would be looking at closing the line.
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So if it's a fair playing field, then why wouldn't they consider it if somebody is willing to pay the money to upgrade the line? If it's not going to cost them anything, why close a branch line that's making money?
Between grain shipments and dehy product, the commodity that's moved out of our community generates $4.5 million in revenue for CN. What reason would there be to close a viable branch line? We're not questioning closing branch lines that are not viable, that are costing money. But we are questioning closing branch lines that are still very viable, with industry dependent on them.
Mr. Hermanson: Thank you, Mr. Chair.
The Chairman: I think it would be incumbent upon me to introduce both you ladies to Tom Payne, who is president and chief engineer of Central Western Railway, who is sitting back here patiently. He's going to be reporting tomorrow. Maybe he's interested in buying this stretch of rail.
Mr. Hubbard, did you have a question?
Mr. Hubbard: For my own information, is this railway a dead end at your community? Is it that type of branch line that -
Ms Reavie: We're at the end of the branch line. The dehy in question here is at the very end of it.
Mr. Hubbard: So how many miles of line or track is actually involved with the operation that they talk about -
Ms Reavie: It is 19.4 miles.
Mr. Hubbard: That's about 20 miles of track. And we heard before that it costs about $7,000 a mile for RailTex to -
The Chairman: It is $3,000 to $7,000 to maintain their track.
Mr. Hubbard: It appears that you have about 4,000 cars a year taking commodities away from your communities to the main line. Is that -
Ms Reavie: Of total product? I haven't got the number of actual cars. I've got the volumes here.
Mr. Hubbard: So theoretically it is feasible that somebody like Mr. Payne could take over your track and operate it for you.
Ms Reavie: Yes, that is an option. If we can't keep the rail line the way it is, that is an option we hope will work if everything is in place with the arbitration clauses so we can negotiate fairly to do that. Will the arbitration clauses allow for fair negotiations to be able to purchase that line?
The Chairman: Thanks, Mr. Hubbard.
Mr. Althouse.
Mr. Althouse: You apparently have looked at the bill and think that the arbitration procedure doesn't cover the negotiations that go on for negotiating the price of the line. Did you have any proposals that might resolve that other than simply returning to an arbitration procedure for purchasing?
Ms Reavie: We're questioning whether clauses 27 and 34 will be a hindrance to that negotiation process.
Mr. Althouse: You felt that the old transportation act pretty much covered off that business of negotiating.
Ms Reavie: Yes. And we're feeling that way because under the previous act CN was allowed to abandon a certain amount of track per year and ours could have been one of them. They didn't do so - for what reasons we're not sure. But had they abandoned it and the negotiation process was there for negotiating fairly, we could have bought the branch line. I'm sure it would have happened. So for what reason they didn't sell then and are waiting until now....
Mr. Althouse: At least your community has a vested interested in the alfalfa dehydrating plant, with an ability to raise some money fairly quickly, so that the relatively short time period from abandonment to a decision to buy is not a problem for your particular community as such.
Ms Reavie: It's not, in that we do have certain measures in place and we've been looking at it for some time. But a lengthier process would probably make it easier. If the days were extended to what's in the old act, I think it would be easier to make that negotiation process fall into place.
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Mr. Althouse: Can we get some idea of how long it takes to raise money in that part of the world? How long did it take to raise the money to build the first alfalfa dehydrating plant? Did they just call a meeting and they had it, or did it take a while?
Ms Reavie: It took a while.
Mr. Althouse: Do you remember how long?
The Chairman: You know, it's all very progressive, as Mr. Hermanson said when he talked about rural Saskatchewan, etc., etc. This is the kind of progress that will hopefully be spawned by this bill.
Mr. Althouse: This is the kind of progress that's been going on in the northeast for thirty years, which was not recognized with -
The Chairman: Unfortunately, though, it never took off to the extent we would have liked, because there was no reason for it to take off. Now we would give them reason to start doing some value-added processing on site, in province, before the stuff goes into a rail car.
Mr. Althouse: When you look at the geography, you have to keep the population there. That's the problem. We're long way from population, and if you wipe out -
The Chairman: They've only had 260, with 55,000 people. That's not bad.
Ms Reavie and Ms Favreau, thanks very much for participating in this committee and for bringing your reports to us and answering our questions.
Is this your first time before a transport committee?
Ms Reavie: Yes.
The Chairman: Congratulations. You did very well and we appreciate it. Thank you.
Colleagues, we'll resume tomorrow morning at 9:30 in this room and we'll do it all over again. Thank you.
We're adjourned.