[Recorded by Electronic Apparatus]
Tuesday, October 17, 1995
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[English]
The Vice-Chairman (Mr. Comuzzi): Order.
We'll reconvene the Standing Committee on Transport to consider Bill C-101.
On your behalf, I welcome Mr. Tellier, the president and chief executive officer of CN;Mr. Todd, the vice-president, government affairs, who is not yet with us; Mr. Davies; andMr. Cantin.
Welcome. It seems to me, gentlemen, that you're the people of the hour. We have an hour and a half of your time that's been allocated.
I suspect very much that you have a presentation to make, Mr. Tellier, and then there will be questions from each side of the table.
If that meets with your approval, please proceed.
Mr. Paul Tellier (President and Chief Executive Officer, Canadian National Railways): Thank you, Mr. Chairman. Let me make a couple of quick points, and then we'll be delighted to answer any questions you may have.
The bill that you have in front of you is a very important piece of legislation, and our understanding is that its primary purpose is to address rail problems.
We have had some very serious problems in the rail industry over a certain number of years, very low levels of net income. As you know, Mr. Chairman, since 1988 the rate of return on investment has been very low, below the cost of capital; I'll be glad to deal with this in questions. The operating ratio has been extremely high, and so on.
Not only is this the analysis done by us, the railroads, but this is an analysis of the problems that has been confirmed by a great many people; for instance, the National Transportation Act Review Commission in 1993, the Conference Board, and so on.
Over the last three years in CN, we have put in place a very aggressive business plan in order to turn the situation around and address some of the internal issues. You're very much aware that we have downsized. By the end of the year, we will have eliminated 11,000 jobs. You're very much aware that we have done a fair amount in terms of overhead. I have eliminated, for instance, more than half a dozen VP jobs. We have reduced the layers of management from the first-line supervisor to the CEO, from ten to five. We have reduced the number of regional offices and regional headquarters that we have, and so on. As you know, we have new collective agreements in place as a result of negotiation and arbitration, and so on. We have made some very important investments, such as the $200 million project in the Sarnia tunnel and what have you.
As a result, the situation has changed. Moving from a $100 million loss situation three years ago, we were pleased last year, in 1994, to report $245 million of profits. We think that 1995 is going to be as good, if not better.
These are some of the things that we can do internally.
In terms of the external environment and the regulatory reform - and this is what this bill is all about - we think that a very significant change is required.
The first point I want to make is that we are very disappointed by the bill. This is not what we had hoped for. In 1987 the first shoe was dropped toward deregulation. We were expecting the second shoe to be dropped at this point in time, but this is far short of the kind of deregulation that has existed in the U.S. since 1980 in the Staggers Act and that has created a major rail renewal there.
So the first point is that we are very disappointed because we think this is a modest reform.
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Also, I am surprised, not to say puzzled, by the reaction of the shippers. I've got to be very careful here because at CN we always believe the customer is right. These shippers are customers of ours. Let me say first that we appreciate every dollar of revenue they give us. But we are somewhat puzzled by their reaction.
For instance, I have read some of what they have said to you and your colleagues,Mr. Chairman. I have had extensive discussions with our major customers, especially in western Canada, about this bill. These people are in business the way we are. They expect a decent rate of return. It seems to me we are arguing on strong grounds when we are also asking for an adequate rate of return.
The shippers seem to be ignoring a certain number of facts. Let me table them and we can discuss them.
For instance, there is competition out there. There is sometimes a belief that there is no competition. There is competition internally within the rail mode. When we lose a contract - to CP, for instance - let me tell you that the next morning everybody at CN headquarters is very much aware that there is competition out there.
Let me give you one number. In our calculations roughly 70% of the traffic is subject to full competition. This is an important point. For instance, in terms of the shipper having access to two railroads, that's roughly the time for 50% of our traffic and the rest is basically intermodal competition, in the east with trucking and in the west rail to rail and so on. Or, again, it's competition in terms of the point of origin.
For instance, if we are moving GEO cars and if these cars start at the point of origin on the highway, then obviously they don't have to turn them over to us at one point in time. There is competition out there and there are some hard numbers to demonstrate it.
Second, for shippers, Mr. Chairman, the bill you and your colleagues are studying, the bill that is currently before Parliament, still contains the most significant protection of any transportation bill or act in North America for any mode. You know what these protections are, but let me summarize them.
First, there are common carrier obligations. We don't have the choice. Canadian National doesn't have the choice to carry or not to carry someone's goods.
Second, there are competitive line rates. If we cannot agree, a shipper can decide to use the competitive line rates provisions that were in the 1987 act and are confirmed in the 1995 piece of legislation.
Third, there is statutory interswitching. Within a certain limit we can be forced, using our own equipment, to move the traffic on our tracks to the first switching point so that our competitor or another railroad - in some cases it could be a U.S. railroad - moves that traffic.
Finally, there is final-offer arbitration. In the last analysis, if we, the carrier, and they, the shippers, cannot agree on a set of rates, there is that final-offer arbitration and the best offer on the table - theirs or ours - prevails. It's very extensive protection.
I also wanted to make this very critical point about our rates. You heard from the CEO of Luscar yesterday, a very good customer of ours. The CEO is a personal friend of mine. But we can't talk about the rates. Our overall rates over the last ten years have gone down by 30% in real terms. In real terms our rates have gone down on the average by 3% per year. Therefore, in response to any argument that rates have gone up as a result of the 1987 act and partial deregulation on the side of shippers, I point out these rates have gone down by in excess of 30% over the last ten years.
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I would like to make a couple of more points before we answer questions. One is on the question of partnership. We are somewhat puzzled by the line of reasoning of the shippers. Why would it be in our interests - we the railroads, either CN or CP - not to recognize that we are in a partnership situation and therefore if our partner, i.e., the shipper, does not compete, for instance, on the wool market....
I'll use the example of Luscar Coal, because Mr. Ulrich was here this morning, if I'm not mistaken. We're all aware that 92% of Canadian coal ends up on the Japanese market. If Luscar, Smoky River, Manalta or any of the big coal producers is not competitive on the Japanese market, then obviously he is not going to produce the coal, and as a direct result we are not going to haul that coal. For us this is very important. In August alone we moved 104 full trains of coal to the west coast.
Therefore this idea that suddenly, if there were not that protection for shippers in the act, we would just jack up the rates.... In doing so, we would be shooting ourselves in the foot, because it is a partnership.
I'm very much aware that if you combine the maritime transportation rates and rail rates on moving a tonne of coal to Japan, transportation is perhaps one of the key components, if not the key component, of the price of that tonne of coal delivered in Japan. So partnership is very important.
I'll make two other points before I stop. The first one is on a different subject; it has to do with running rights. Some shippers are asking you for an amendment to the bill that would give the short-line operators running rights over our tracks.
It's very interesting to note that the short-line operators are not - and I underline the word ``not'' - asking for these running rights. As a matter of fact, I had eight or ten members of the Railway Association of Canada in my boardroom last Friday, and I asked them very bluntly: what is your position and what are you going to say, if anything, before the parliamentary committee on that? Not a single short-line operator, to the best of my knowledge, is asking for running rights over our tracks to be in the legislation.
Secondly, if these running rights were granted, we at CN think this would be the end of CN's short-line policy. I think we would just move it to the back burner.
I'll give you an example. We created a short line by selling 225 miles of track between Truro and Sydney, Nova Scotia. We think this was a good deal for CN but more importantly a good deal for the community. What I hear from the Minister of Transport and the Premier of Nova Scotia is that they are satisfied with this, the shippers are satisfied and we at CN are satisfied.
What happens when we do something like this? We examine our costs and the revenues coming from that operation. If the profit is not there or is very marginal, we ask ourselves if it is possible to reduce the cost structure, reduce the expenses and retain some of the revenues. In that case, of course, the customers, the shippers, are better served because Railtex is able to do with about 50 to 53 employees what used to take in excess of 100 employees to do. The people of Nova Scotia benefit from this, the shippers benefit from this, and we benefit from this, because when the traffic arrives on the main line and comes to central Canada, we benefit from sharing the revenues with Railtex.
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If you force us, through legislation, to give Railtex running rights, for instance, we are going to ask ourselves very seriously whether we want to short-line at all. Therefore, I would plead with you not to put mandatory running rights in this bill, because in the final analysis it would be to the detriment of communities.
I can give you three or four examples in Ontario, as a result of Mr. Harris' government changing legislation, where we are about to create short lines, and if these short-line operators were given running rights on our tracks by law, these short lines would never see the light of day. As a result, those communities would risk losing rail facilities.
The last point I want to make is on subclause 27(2). I have spent a lot of time discussing it with the shippers, and so have Mr. Davies and Mr. Cantin.
We are not against the shippers coming forward to the Canadian Transportation Agency, as it is called in the bill, asking for relief or correction. But we think two tests should be applied when they do this. First of all, it should be a serious grievance or they should be asking for a serious redress. Therefore, we think the clause you now have in the bill before you that says they must demonstrate significant prejudice makes a lot of sense, and we would go a step further.
As you know, we have recommended in the brief we have tabled with you that there be a mandatory competition test. The shipper would have to demonstrate that he is a captive shipper, that he is becoming a hostage and what have you. Again, we think this is reasonable.
Mr. Chairman, I apologize for having taken 15 minutes, but this is very important to Canadian National. We would be delighted to answer any questions.
The Vice-Chairman (Mr. Comuzzi): Thank you very much, Mr. Tellier.
Do any of your colleagues want to add to the submission you've just made?
Mr. Tellier: Not at this point, thank you.
The Vice-Chairman (Mr. Comuzzi): As a point of clarification on the last example you gave, on the competitive test, they would have to prove the competitive issue before they moved into the substantive area. Is that what you mean by that?
Mr. Tellier: Yes.
The Vice-Chairman (Mr. Comuzzi): Mr. Caron.
[Translation]
Mr. Caron (Jonquière): Mr. Tellier, in the French version of your brief, on page 8, you refer to shortlines and say that if it were possible for shortlines to use CN and CP's lines, CN would be naturally reluctant to offer a line for sale if the shortlines so created were to become a commercial adversary rather than a partner. Nor would abandonment of marginally profitable lines be an option because Bill C-101 requires us to offer a line for sale before abandonment can be considered.
Some people talked to me about the shortlines situation and said that if we wanted CN to maintain certain lines, for instance, the Jonquière to Montreal line which I am quite familiar with, we would be forcing CN to compete with other operators and to maintain its railway operations.
Don't you think this argument would play in the hands of those people wanting isolated regions to be serviced by CN instead of a shortline?
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Mr. Tellier: In our opinion, the concept of shortlines is basically based on a partnership between the shortline and the main line.
We sold the shortline between Quebec and La Malbaie - 90 miles of tracks - to local interests, not far from the region you mentioned. These people basically see themselves as a shortline. I think they provide a better service than we could have. They are basically feeding our main line.
As I said a few minutes ago, if we hadn't been pressured into selling, we probably would not have sold the line to the people you know, Pierre Martin and others, and the line would probably have stayed in the hands of CN. But since it was barely profitable, service declined. That's basically what we said in our brief and what I'm trying to explain. In our eyes, shortlines are a bit like regional airlines which feed the larger air network but at a lesser cost.
Mr. Caron: Sure, I understand, but what kind of support are you giving shortlines? I don't suppose shortlines have the same kind of administrative expertise as CN. Would CN help shortlines so that their operations don't degenerate to the point where they have to be abandoned by CN and the shortlines?
Mr. Tellier: Yes, absolutely. You've raised a very important issue. It's very important that there be a good working relationship. When we transfer that kind of shortline, the arrangements involving personnel, rolling stock and so forth have to be carried out on friendly terms. Your question more or less supports what I've been saying: If we are forced to do something, it probably won't work. We have to work on the basis of mutually beneficial deals.
Mr. Caron: Thank you. I understand.
[English]
The Vice-Chairman (Mr. Comuzzi): Mr. Gouk.
Mr. Gouk (Kootenay West - Revelstoke): Good afternoon again, Mr. Tellier. I have a few questions to clarify some things. Some questions might be a little longer and may be in the second round.
With regard to subclause 27(2), do I understand correctly that you feel this significant prejudice should be a threshold in order to proceed with the application? In other words, there should be a hearing to decide if there's going to be a hearing type of approach. Is that your position?
Mr. Tellier: Yes. When a shipper comes forward and invokes subclause 27(2), he or she should be asked to demonstrate that there is a significant prejudice he or she would suffer if the relief or the correction being asking for were not granted.
Mr. Gouk: I just wanted to make sure I was clear on that.
Subclause 93(1) makes reference to the term ``adequate insurance''. From your rail company's point of view as it applies to that clause of this bill, can you tell me what adequate insurance refers to? How are we supposed to interpret this?
Mr. Serge Cantin (General Solicitor, Canadian National Railways): I'd like to offer a comment. First of all, I think the legislation calls for the new agency to determine what that amount is. This is driven by the facts of popular operations. It is my understanding that Transport Canada has set up a task force of resource people to advise the Department of Transport what it should be.
There are two issues here. One is adequate insurance coverage for the operation of a short line on its own territory, versus the case where we have running rights by way of agreement, or another railway is invited onto our own territory. The requirement would depend on the circumstances revealed there. It's very fact driven, sir.
Mr. Gouk: Clause 112 deals with interchange and definitions. In essence, it suggests that it is where two rail companies' tracks come together. If that were changed so that it read instead ``the tracks operated by two rail companies'', would this create a problem for you?
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Mr. Cantin: First of all, since time immemorial, I think since 1911 or 1912, it has been based on ownership of trackage. I think the underlying reason is because each owning railway has the common carrier obligation. That's where it starts.
What you're alluding to is a previous case that has been debated in front of the agency and some proposal by a shipper that whenever we invited a railway on our railway, by way of running rights - and there are many of these agreements when they are justified for a good commercial reason - there would be a similar interswitching.
This is a matter, in our estimation, that should be negotiated. There have been cases in front of the agency where in fact the contract has provided for such an interswitching privilege to an invited railway. In other situations these have not been granted and this has been negotiated at the table.
I think - and this is an extension of some of the remarks Mr. Tellier has made - if there were to be compulsory interswitching each time we invited a railway on our own, this would be a disincentive to enter into these running rights agreements.
Mr. Gouk: Section 115 deals with the requirement for railways to provide facilities to shippers. Basically, I would just ask if you are satisfied with that provision as it reads. I have not heard any objections, so I assume you are, but I would like you to clarify that.
Mr. Cantin: There are all kinds of comments we could offer on all of the provisions. First of all, the common carrier obligation or level of service provision has been in legislation since the beginning of this century and we have learned to live with it. This is number one.
Number two, we feel there was a great change in 1987, because when you enter into a confidential contract you can't model or carve your common carrier obligation. This is binding on the agency so someone cannot have a second shot at the target.
What we regret in many instances with respect to the level of service provision is that the powers of the agency are ``really exorbitant'', exorbitant in the sense that they can force you to lay down capital, spend a tremendous amount of money, and certainly you're going to have the question with our competitor, CP...a situation where they had to rebuild a bridge for $8 million just to learn the following year that the passenger service over that segment of the line, which required a bridge, had been discontinued. So I think it should be constrained.
Now, with the new test in subclause 27(2), that puts a net...in order to call for a reasonable approach in the interpretation of level of service provisions.
Mr. Gouk: Mr. Tellier, you brought up the idea that the railways are obviously not in business to drive their shippers' customers out of business and therefore we should have no fear about the need for protection for competition, because you're going to bring in the lowest price if it's in your best interests.
I would suggest that the railroads - and it works both ways - while they may not be out to drive their clients out of business...there's a pocket of profit. The question is, did the railways want to take 5¢ more of the profit away from the shippers to put into their pocket; and vice versa, do the shippers want to make 5¢ more profit at the cost of the railroad? It's not a question of whether one is going to try to drive the other out of business. The question is, who's going to take the portion of money that is in fact on the table?
Now for something slightly different - your rail line from Montreal to Halifax. Under this provision, there is a requirement to list a three-year plan, and obviously you would always be looking a little beyond that as well. From your point of view at this point in time, do you have any plans in the three-year plan or foreseeably beyond that to write into that clause the potential abandonment of that line from Montreal to Halifax?
Mr. Tellier: The answer is no, Mr. Chairman. Last Friday noon I was meeting with the Premier of Nova Scotia and his Minister of Transport to discuss that very issue and to reassure them that the Port of Halifax and Nova Scotia and Atlantic Canada very much constitutes a long-term commitment on our part for a certain number of reasons.
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First of all, not to say that we brag, but we are very proud about the fact that Canadian National is now the only transcontinental railroad in North America. We are the only one running from coast to coast. CP is no longer transcontinental.
Secondly, if you look at what is happening in the U.S. in terms of mergers and so on, they are trying one way or another to create a transcontinental railroad. So for us, we think this is a major strength.
Thirdly, this commitment is not empty. We have put our money where our mouth has been on this. You're aware, for instance, that we have built in eastern Canada an intermodal network, which has been very costly, but we think it has been a good investment. For instance, right on the docks in Halifax we have a new intermodal terminal. We have invested $17 million there. I was there in December, 1993, to open that new terminal. It is functioning very, very well.
We have created also a new terminal. We have new facilities throughout the Maritimes to move intermodal and what have you; and more importantly, Mr. Gouk, you are aware that we have invested $200 million in the Sarnia tunnel in order to be able to compete with the maritime traffic. You may be aware that as a result of that tunnel we have run some double-stacked trains from Halifax into Chicago in 44 hours. This means we can take a container in the Port of Halifax, put it on our flat cars and move it into Chicago and get into Chicago at about the same time that the same container, if it had stayed on that ship, would have reached not Chicago but New York.
Therefore, we think our commitment to Atlantic Canada is real and we see this as a big opportunity. To use the jargon, we think this land bridge to move goods into the U.S. midwest through Halifax is a very good opportunity.
Mr. Gouk: I'm happy to hear you say that. I've always thought that myself, but not all of my colleagues share that sense of commitment. So perhaps we can clarify that for many.
With regard to the annex to your submission, the section dealing with subclause 164(2), what you're suggesting there, I gather, is that if a shipper is unsatisfied with a price and submits it to final-offer arbitration, if there is an alternative to them - say, for example, another rail line they can use - no matter what price you charge, no matter what price the other railroad charges, they would not be entitled to final-offer arbitration.
I would point out to you that you probably notice as you drive down the street past this gas station, past another company's gas station and all the other gas stations, magically, without any collusion whatsoever, they all sell their gas for the same price. If one goes up, magically again with no collusion, all of the others go up. So where would that provide competitive access to shippers if there were no arbitration available to them?
Mr. Tellier: Gerry, do you want to comment on this?
Mr. Gerald Davies (Senior Vice-President, Marketing, Canadian National Railways): There are two points. First of all, if there is a violation of the Competition Act, we are still subject to the Competition Act. Secondly, we still have suggested that there could be a test put in front of the process whereby if there is an abuse of power the shipper could have access to the agency. We're not opposed to shippers having access to the agency if there's an apparent abuse of power.
What we are opposed to is this: under today's situation we could have a rate subjected to final-offer arbitration when it's virtually equal to our cost, and we could lose it and have a rate below cost. If you have a price that is above some maximum, reasonable level in appearance, then let the agency investigate and see if that price is found inappropriate. Put in some maximum screen - for example, what is used under the Staggers Act - prices that are greater than 180% or 200% of cost is prima facie evidence that there ought to be an investigation by the agency.
Mr. Gouk: Of course, until we have the investigation we don't know that that situation occurs, and according to the amendment you've proposed, we would never find out.
Mr. Davies: With the screen.
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Mr. Gouk: There's no screen in here. All I see is what you've submitted, and it says that if there is an alternative way to ship, then they don't get it, period.
Mr. Davies: There would be competition. In the presumption of a bid, there would be a competitive rate.
Mr. Gouk: Yes, but again, without going to the board in the first place, we'll never know if the rate is competitive or not. How are we going to know that?
Mr. Tellier: You're raising a very fundamental question there, and obviously there could be room for disagreement or separate points of view. We believe that if the market forces are good, generally speaking, to determine the value of our services, why do we want to bring in government intervention? That's basically what we are saying.
The situation that you are describing is basically one where there is competition. So why would we believe, because in a situation like this there is no access to the agency, that the two railroads would be in collusion basically to screw up the shippers?
So it's a question of philosophy. Either you believe or you don't believe in the market forces determining the value of this. The case we have been arguing is that there has been a lot of regulation, through either legislation or regulations, of the railways in Canada, and I think that the results have not been very spectacular. This is why we are arguing for the larger degree of deregulation.
Mr. Gouk: Do you want to go on? How are we doing?
The Vice-Chairman (Mr. Comuzzi): You're exhausted.
Mr. Gouk: I am. I feel that way, Joe. But I'll rest up.
The Vice-Chairman (Mr. Comuzzi): The last question sounded that way.
Mr. Fontana.
Mr. Fontana (London East): Thank you, Mr. Tellier and company, for your submission.
Let me just say, though, that unlike my colleague in the Reform Party, I don't think it's a question of trying to divide up the profits. That's not the fundamental question here at all. I think it's how you can control the costs.
From what I understand from both the rail companies and the shippers, the fact that we're an exporting country and therefore our customers need to buy our goods means that we have to compete in the world at the price delivered to those customers.
So the question is, how do we reduce the total costs in the system, and how do we become competitive so that everybody has customers and we have railroads to carry these things? Otherwise, nobody is going to do anything.
I want to talk about the competitive questions, because I think they are the key.
I know that CN, through its American subsidiary, deals in the United States. Obviously you have to look at how our transportation infrastructure, rail infrastructure, compares to that in the United States. Therefore you have a unique opportunity to tell us how it is to deal in the United States vis-à-vis how it is to deal in Canada. Some time ago they learned their lessons about how to put their railroads back on track. We are still lagging behind.
While we might have taken some steps in 1987 by giving a whole bunch of shippers some rights that have caused.... They admit that their rates have come down by 30%. Obviously, they want them to come down more, at the expense of the railroads.
In terms of the regulations that we have in Canada that don't exist in the United States, how much do those regulations, shippers' rights...? Call them what you will, the fact is that they're costing somebody a heck of a lot of money, and in this case I think they're costing the railroads, vis-à-vis what the American model is. Can you tell me what kinds of impediments those regulatory things in this bill still will cause you?
Mr. Tellier: Could I ask Mr. Davies to answer this? I would like to point out that Mr. Davies spent the last 25 years of his life in U.S. railroads. I recruited him from Burlington Northern out of Texas. Prior to that he was with CSX, and prior to that he was with Conrail. So I think he's very qualified to answer your question, Mr. Fontana.
Mr. Davies: At the outset let's talk about the competitive model, because the driving force in the marketplace we face is not necessarily head-to-head rail competition at the shippers' siding. In fact, seldom is that the drive. The drive is making sure that our customers' commodities are competitive at their customers' receiving dock. That's the only time we haul the freight, and that's the only time we make any money. So that's the driving force.
If you look at coal, as Mr. Tellier pointed out, our competitor is not CP at Luscar's mine; it's Australian coal landed in Kobe, Japan, in competition with ours. We have to be competitive in that marketplace, so we invest to reduce our prices to help keep that coal competitive in the world market. Keep Luscar there and keep them growing and healthy, because that's when we're healthy too.
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Now let me get to your point about how this specific bill hurts us. Let's look at what happens in an economic downturn. Our customers experience falling commodity prices, which tightens up their margins and makes life difficult. What do they do? They immediately turn to all of their suppliers, especially the railroads. They say, we need some help here to stay competitive in that marketplace, so take your price down and take some of this pain with us.
Do you know what we do? We do it. That's why our prices have dropped 30% in real terms since 1984. That's not the regulatory drive. Do you want to know why there have been few cases on CLRs and FOAs in this country? It's because market-competitive factors are what have driven our prices down. There hasn't been a need for them.
Now what happens when the commodity prices come back up; when the price of aluminum doubles in eighteen months; when the price of wood pulp triples in three years? Do the rail rates go up threefold? The answer is that the first time you talk about it, you get the threat of an FOA, so you can't negotiate them up. What this does is prevent you from following the price back up as their commodity price improves in the marketplace. We don't get a share. We constantly face the ceiling of an FOA threat or a CLR. So you can't share in it. It's been a constant drive down in the last ten years.
In the last two years, we've finally been able to stabilize the prices at CN, hold them level. We haven't gained any improvement, and look at what's happened to the commodity prices in our marketplace. Whether it's wheat or aluminum, copper or pulp, they've virtually all gone up very substantially during this relatively modest recovery in the economy on this continent. Ours haven't gone up at all.
When Mr. Tellier talked about the drive in our costs during his opening remarks, he asked how far down we can go. We're going to have to continue driving costs down. That's the only way we've been able to maintain any profitability in our company, so we need to be able to follow the prices up when they go up because we share the pain when they go down. FOA, for example, prevents us from doing that.
Mr. Fontana: Can I ask you how that is going to be possible if you in fact keep all those impediments in place in existing legislation?
Let me give you an example. What if we threw out CLR and we threw out interswitching and we threw all those things out and really got to deregulation? Everybody wants competition and market forces on both sides of the fence. You say the competition is there. We hear differently, but it's for us to think it out. So what if we threw everything out and left the FOA as the prime mechanism by which to arbitrate between a shipper and a carrier, and hence the customer? Do you need all that apparatus if you in fact have a mechanism such as FOA to deal with all of the confidential contracts with your customers?
Mr. Davies: If we were to throw everything else out and keep FOA, we'd keep it because it simplifies our life. But we would recommend keeping it with some screen on the top of access to FOA, requiring that there be some demonstration of abuse.
Mr. Fontana: Let me just follow this, then. With access to abuse, is that where you're talking about subclause 27(2)?
Mr. Davies: Yes, that kind of a screen.
Mr. Fontana: Well, subclause 27(2) is now drafted. As you know, it's not a two-step system, it is a one-step system. It is a screen at the remedy side, not at the access side.
Mr. Davies: That's right.
Mr. Fontana: What you're suggesting, and what Mr. Tellier suggested, is that we do in fact look at a two-tiered sort of system. One is a gatekeeper that governs the access, while the second deals with the remedy.
Mr. Davies: Yes. And, for example, the current provisions of subclause 27(2) really don't work on an FOA mechanism.
Mr. Fontana: No.
Mr. Davies: It's a screen saying that if there's some indication of abuse - and again going back to the measure I suggested, 180% of movement-variable costs - then you've got access to redress.
Mr. Fontana: Okay. I'll just ask one more question. I know my colleagues will probably follow up on a number of other questions. What's happened to the revenues of CN since 1987 and since that shipper's so-called changes in the NTA of 1987?
Mr. Tellier: Well, Mr. Chairman, Mr. Fontana, revenues of Canadian National, in real terms, have been going down. In 1987 the figures were $3.71 billion. In 1994, the last full year, they were $3.70 billion. This is not in constant dollars; this is in nominal dollars, so in real terms the revenues have been dropping.
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Mr. Davies: If I might add, those revenues in 1994 came at absolute record volumes. In terms of volumes, we were 8% above our previous all-time high at CN, but had just achieved 1988 revenue levels.
Mr. Fontana: So most of the profit you would have made obviously would have been in productivity gains, the ones Mr. Tellier....
I have just one final thing on the price side. I know your brief talks about reinserting the sunset provision as it relates to grain. Is that what you're suggesting - that we do in fact reintroduce the sunset provision on that upper price limit?
Mr. Tellier: Very much so. We think the deregulation of grain has started and that by the year 2000 this sunset clause should basically remove the ceiling. Then for this commodity, like others, market forces should determine the price of our services.
Mr. Fontana: Do you want me to continue?
The Vice-Chairman (Mr. Comuzzi): No. Are you all through, finally?
Mr. Fontana: Yes, I am. And I'm not exhausted.
The Vice-Chairman (Mr. Comuzzi): Thank you.
Mr. Benoit, please.
Mr. Benoit (Vegreville): Thank you, Mr. Chairman.
I'd like to start with a very general question. In your presentation and in your brief, you refer to the squeeze CN has found itself in. You talk about reduced revenue and say you've had to cut substantially on the cost side, and you're using that as a reason to keep protection, I'd say, in this act.
In New Zealand, when the crunch came when the economy collapsed, they reduced the number of employees in their rail system by about 75%. Those are the figures I've heard, and although I'm not expert on this, reports from some New Zealanders I've talked to say the system is working extremely well.
CN has made reductions in personnel, but nowhere near the levels seen in New Zealand. I'm wondering if there really isn't an awful lot that can be done yet on the cost side, and whether this is a legitimate argument for keeping in place some of the protective measures that you are putting back in place - some of the protective measures you talked about today.
Mr. Tellier: First of all, on your last point, we are not asking for protective measures. We are arguing in favour of market forces. In the exchange we've been having, then, we said at the outset that the bill, the new legislation, would maintain protective measures. This is protection for the shippers, however, and not for us. As Mr. Davies said, we would be perfectly happy to see all of this go.
To come back to New Zealand Rail, last week I was talking to people from Wisconsin Central Ltd. about it. I cannot either confirm or deny the 75% you talked about, so I'm not arguing the point with you. The only point I want to make is that it's a very different situation. Wisconsin Central, the U.S. railroad that bought New Zealand Rail, basically bought both the freight and passenger services, and there is still a very heavy element of subsidy in this. What I am therefore saying is that since we are no longer in passenger services, as you know, we are not being subsidized, thus the situation is quite different.
On your larger point, there is more to be done on the cost side. Believe it, there is a lot. This is why, in the prospectus for the privatization of CN, we say on the public record that in terms of downsizing, we should be able to continue to downsize by about a thousand positions per year. I'm convinced we have just touched the tip of the iceberg in terms of cutting costs. In terms of reducing our cost structures, I surely expect to do over the next three years as much as we have done over the last three years.
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Your point is very well taken.
Mr. Benoit: In your arguments in favour of deregulation you say there is competition. Of course I agree, as Reformers all agree, that if there is competition government should stay out of the way as much as possible. But it's arguable that the competition in the rail system isn't very effective and competition to the rail system is difficult, for some bulk commodities in particular.
Mr. Tellier: Well, I would respectfully disagree with you on that. It is just not the case. For instance, I hate to mention this, but in terms of fertilizers, not too long ago we lost a very significant contract. We lost a significant contract because there is competition there.
When we're talking about potash, it's head-to-head competition. When we're talking, for instance, about grain, very significant elevators such as the one in Camrose, Alberta, have a CN track on one side and a CP track on the other side, or else the line of the other railroad is within trucking distance. A very significant proportion of the grain in the middle of the prairies is basically within a 35-mile radius of the other guy's rail line.
A voice: It's 80%.
Mr. Tellier: This is why I said at the outset there is competition out there in rail. We are not trying to jack up the rates and what have you. The rates have been going down and there is tough competition between CP and CN.
Mr. Benoit: My colleague compared that competition to the competition we see or don't see at the gas pump. It's difficult to determine how extensive the competition is.
One thing that is very unfortunate is that in Canada we have very weak anti-combines and fair competition legislation. It's very weak. We've seen that in the past when fertilizer companies have been charged with price fixing and they keep it in court for ten years. It's proven to be totally ineffective.
To make a market system work well there is a legitimate role for government to have fair competition legislation that is effective. We don't have that in Canada. We have probably the weakest in the industrialized world. I just don't think we can count on the legislation we have in that area and on the courts to sort it out.
The Vice-Chairman (Mr. Comuzzi): Thank you, Mr. Benoit. There's no answer to that question.
Mr. Benoit: It was a comment.
The Vice-Chairman (Mr. Comuzzi): That's what I thought it was.
Mr. Benoit: You could tell? That's good.
The Vice-Chairman (Mr. Comuzzi): Mr. Davies, in the comments you just made to Mr. Fontana, you said in essence that when softwood lumber was selling for $192 a thousand and then reached $500 a thousand in about sixteen months, CN wasn't a beneficiary of any increase in the freight rates.
Mr. Davies: Virtually none.
The Vice-Chairman (Mr. Comuzzi): Grain was selling at $2.90 a bushel and now it's over $5. Is it the same situation?
Mr. Davies: In that example we went down. Remember that our rates on grain are regulated. In 1994 we lost $2 a tonne off our price due to the regulated mechanism. As the price of grain was going up dramatically, our price went down.
The Vice-Chairman (Mr. Comuzzi): Grain is a bad example. Wood is a better example of an open market where it's not regulated.
Mr. Davies: They're all the same. If you look at coal, the delivered price of coal has gone up. Our share of the delivered coal price, if you will, has gone down. If you look at aluminum, you can't even measure the change in the rail rate compared to the change in the price of aluminum. It's the same for copper and sulphur.
The Vice-Chairman (Mr. Comuzzi): Thank you. That clarifies that.
Mrs. Terrana.
Mrs. Terrana (Vancouver East): Good afternoon and welcome.
I hear from some people that actually we do not need this bill because we have the NTA of 1987, which has served us well. Do you think there is a need for this bill?
Mr. Tellier: Yes, very much so, for the simple reason that the most positive provision in this bill has to do with helping us to rationalize the network. Therefore the provisions in the bill that would enable us either to create short lines or to abandon lines are a big improvement over 1987.
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We are critical of the bill because we were hoping it would go further. But your point is well taken. This is not all bad. We do appreciate the much more rational and speedier process this bill will put in place to enable us to abandon lines and to short-line some.
Mrs. Terrana: Thank you for saying that. I don't know who's right or wrong any more.
Taking into consideration your comments and recommendations, do you think the bill goes far enough or as far as we can go at this point? Or would you want to see more?
Mr. Tellier: Well, I think the Minister of Transport said before this committee a few days ago that given the fact that we, the railroads, are very disappointed and given the fact that the shippers want much more, he must be middle-of-the-road.
I understand where he's coming from. But you will understand it is my responsibility as head of CN to argue for a much better regulatory framework. If you're asking me whether this bill is a compromise, I'm leaving it to Mr. Young to decide.
Mrs. Terrana: He can reply.
You also discussed partnership. I like partnership. I have seen it implemented in other modes of transportation and it works. Would you say that at this point the carriers and the shippers are partners?
Mr. Tellier: Yes, much more so than they used to be, because as you know, before that, we used to have tariffs and so on. Gerald Davies, who is here with me, spent the better part of his life doing just that, meeting with customers, understanding their markets, and basically adjusting rates and discussing with them how we can improve the situation.
Let's stick to coal, because you had somebody from Luscar in front of you recently. Mr. Gouk was saying it's a question of sharing the profits. It goes much beyond that.
We know that Luscar has to be competitive, so we asked ourselves how we could help them to be more competitive. Here are a couple of things we're doing. We are now loading our trains from 263,000 pounds to 286,000. That's roughly, in layperson's numbers, about an additional 15 tonnes.
Here's point number one. When you start loading these cars at that level, you've got to improve your bridges, your structures and so on and so forth.
Here's point number two. What are we doing? We are using more and more aluminum cars. How do we get more productivity out of aluminum cars? The car is lighter, so you can put more on the track. You put about 15% more in the car and because the car is shorter, instead of having a train of 100 cars you can have a train of about 115 cars. These aluminum car sets - Gerald could give you the price - require investment. We have invested.
That partnership, whether it's Luscar or Smoky River or what have you, takes place all the time. If, for instance, the Australian dollar goes down and the Australians become more competitive because their mines are much closer to ports, etc., we try to assist the Canadian producers.
I am not saying this is perfect, but I was at GM - to move to the east for a minute - about three or four weeks ago with Gerald. GM is one of our biggest customers in the country. We were examining again what can be done at the most senior level to make sure the way we move these cars or parts for GM makes them as competitive as possible. This is a constant preoccupation of ours.
Mrs. Terrana: My last question has to do with short lines. This morning we were told again that we have not gone far enough with the sale of short lines because this still gives the carrier or the railways a chance not to put the short lines on the market if you don't want to. If you don't want to sell them, then you don't sell them.
The question, of course, comes back to the fact that not enough short lines have been put on the market in the past when it was possible to do so.
What kind of experience do you have with short lines?
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Mr. Tellier: Let me answer the previous part of your question first.
There are several reasons that we have not short-lined more in the past. And you're perfectly right; for instance, in his task force report Mr. Nault did refer to this very specifically.
One reason is that the process was very cumbersome. By the time we shook hands on a deal with Railtex in Nova Scotia, it had taken us a full year. The two parties were in full agreement and it took a year to put this in place.
Two, in Ontario the succession rights legislation put a complete halt to any short-lining operations.
Three, in the prairies there was, until this past August 1, a complete freeze on the rationalization of the grain-related branch lines.
That is why we did not do as much, and hopefully that is going to change very quickly.
The second part of your question was on our experience. Our experience is very good. The Murray Bay subdivision, which I referred to when I was answering your colleague a few minutes ago, was basically a good experience. Railtex was a good experience. We have had two experiences with Railtex, one in Ontario, Goderich-Exeter, and one in Nova Scotia, and in both cases we were satisfied.
And of course we had the Central Vermont. You will recall that in the U.S. we used to have Central Vermont running through Vermont, New Hampshire and so on. We sold that less than a year ago, again to Railtex, and we're very happy with that short-line operation too.
Mrs. Terrana: I want to mention the Okanagan short line. How would you rate that experience?
Mr. Tellier: It has proven to be a good experience.
For the benefit of your colleagues, in the Okanagan division we put in place internal incentives, bonuses and what have you. It is run as a short line but as an internal short line. It's been a very good experience. In some parts of the country it may be better than selling it to an outside short-line operator.
We have also had a very good experience in Quebec. In Quebec we have roughly 2,600 miles of track. We were putting up for sale the track in the whole of northern Quebec, about 1,100 miles of track, and the unions came to us and said, ``Will you slow down the selling process if we're able to reach an agreement?'' We said yes, and we did negotiate a very good agreement with all of the unions in that district.
As a result, our cost has gone down significantly in that internal short-line territory, so we decided not to sell it but instead to create an internal division not too different from what we have in the Okanagan subdivision. That's a very good proposition for everybody.
Mrs. Terrana: So we have a good system in place with Bill C-101. Thank you.
Mr. Hubbard (Miramichi): With the change into short-lining and rail rationalization, we speak of employees who have had different unions in the past. I'm thinking particularly of CN Express, who really got ripped off with their employees. Would your company be able to provide protection to the various employees who would be affected by this short-line process?
Mr. Tellier: It depends on what you mean by protection.
Let me describe to you the system we now have. As a result of negotiations and arbitration following the strike last spring, we now have in place labour contracts that run until January 1, 1998. Under the security provisions the regime is one where, if we abolish a job, if the employee is ready to move to where there is another job, he or she is protected for up to 90% of his or her income or salary for up to six years.
Let's suppose that we abolish a job in Quebec and there is another job in Calgary or in Edmonton. If the employee is not ready to move, he or she falls under something called job security, and then it is up to 65% of the income that is protected for up to five years, depending on the number of years of service that person has.
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To answer your specific question, let's suppose that we sell a short line in British Columbia. The short-line operator is then going to say, for example, that it involves 100 employees in that territory. The short-line operator will decide how many of our employees they are interested in keeping. Let's say it is two-thirds. The other one-third either will accept to move to where there may be a job for them and where they will be covered under employment security or they won't be ready to move elsewhere. In that case they are protected under job security, which is 65% of their income up to five years.
We cannot fully protect everybody who may be affected, but that person is covered by the collective agreement that exists now as a result of the last labour contracts.
Mr. Hubbard: With the amount of rail that is underutilized, do you have a short list of lines in your company that would be up for short-line or sale consideration?
Mr. Tellier: Yes. We say in our prospectus that we will be rationalizing 4,000 miles of track over the next four years. These tracks will either be abandoned or turned into short lines, either internal short lines like the Okanagan subdivision and northern Quebec or short lines like those sold to Railtex.
Mr. Hubbard: I have one final question, Mr. Chairman.
We have a lot of public interest involved with the railways over the last hundred or more years. In terms of disposing of properties and short lines, do you feel the public interest, the interest of the Government of Canada, is protected under Bill C-101?
Mr. Tellier: Yes. And we think that this provision for the various steps one has to follow through....
As you know, we would announce that we would keep an up to date plan, which would describe everything, including all the lines we decide to abandon or to sell. If we decide to abandon, the unions, our employees, the municipalities, the province, etc., will be notified. If we don't have a buyer it will be for the federal government, the provincial government, the municipal government or an adjacent owner to decide whether or not they want to acquire that land.
I think the process currently in the bill does protect public interest and if there is any possibility of saving that line one way or the other I think it's going to materialize.
Mr. Hubbard: Mr. Chairman, with that, I know you're answering in terms of -
The Vice-Chairman (Mr. Comuzzi): You're worse than Fontana.
Some hon. members: Oh, oh!
Mr. Hubbard: Only once.
The experience in the past has been the disposition of the property, not necessarily of the line. I think of the previous company I alluded to. This is in fact what happened with that company and why the employees of that company are in such desperate straits today.
Does this bill protect the public, the employees, and Canadians generally in terms of that not happening again with this new bill?
Mr. Tellier: Yes. And let me say through you, Mr. Chairman, no doubt you're referring to the situation of CN Route. That happened long before my days, but like you, I deplore very strongly what happened in that situation.
Mr. Hubbard: Thank you.
The Vice-Chairman (Mr. Comuzzi): We have Mr. Gouk, then Mrs. Cowling and thenMr. Nault.
Mr. Gouk: I have one point I'd like clarified. You and the other major rail company have suggested the 1987 NTA was a very pro-shipper initiative that caused a lot of problems for the railroad. Perhaps you could explain why.
I have no accounting background. And according to the figures you passed out today, in 1986, the year before the 1987 NTA, you had a loss. Then when this pro-shipper bill came in you made a profit in 1987, in 1988 and in 1989. You made a profit in 1994. All those profits were made under this pro-shipper 1987 NTA, while the figures for U.S. rail showed essentially the same patterns but included a loss this year, and it doesn't have NTA 1987. Could you maybe explain how that happened and how that indicates that NTA 1987 is in fact a real problem for the railroad?
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Mr. Tellier: You have to look at a couple of things. First, our revenues have been going down. This is not a growing business. Second, the rates have been going down, and therefore any profitability that was produced in any one of those years has been the result of an increase in productivity.
I'm sure you have noticed that, for instance, our earnings last year were $245 million. This is on revenues close to $4 billion. This is not a rate of return that is adequate to buy the aluminum car sets, for instance, that I was describing a few minutes ago and so on. Therefore, every time we bring a capital expenditure item to the board, it's very difficult to justify because we don't earn our cost of capital. It will be even more difficult when we are privatized.
The National Transportation Agency, in calculating the rate base, is saying that our cost of capital is 13.6%, and our average rate of return on our investment is 6%. So I'm sure you would not invest your money in that kind of a position and neither would I. So that's what we're talking about. We're saying let's make sure the market forces determine the relationship that should take place between CN or CP and their shippers and what have you.
Mr. Gouk: I'm not suggesting you're a hugely profitable corporation. The figures obviously make it quite clear you're not. But I'm saying you had a loss the year before NTA 1987, and once this pro-shipper initiative came in, you made a profit for three years running and you made a profit in 1994, which U.S. rail didn't make. So the market is soft. We know that.
I have a lead/zinc smelter in my riding. It doesn't make any money either, but it isn't NTA 1987 that causes it to not make money. I'm just trying to come to terms with why, from the rail's point of view, the NTA 1987 regulation changes are so bad for the rail that it caused it to turn a previous loss into three years running of profit and where this bad problem is. They tell me they don't make money.
Mr. Davies: I wish we could share the data, because I think it would be easier. I'm not sure where the indication of a loss in the U.S. rail industry was in 1988 or since, because there hasn't been one.
Mr. Gouk: I'm going by the figures you've provided today.
Mr. Davies: That's our rail operation in the U.S., not U.S. railroads.
Mrs. Cowling (Dauphin - Swan River): My first question is with respect to the revenue side of Canadian National. You indicated it is going down. Is it true that the revenue side of CN has come from western Canada and from the grains end?
Mr. Tellier: I think around 60% of our revenues come from west of Winnipeg.
Mrs. Cowling: Then is it true that those revenues have been used to subsidize the eastern operations?
Mr. Tellier: No. One cannot talk about subsidization, because we are not charging more to the western shippers because we lost money in eastern Canada in the past. If we could charge lower rates in eastern Canada and higher rates in western Canada because we have more revenues in western Canada, then one could talk about subsidization. As I've been saying, our rates have been going down in western Canada a lot, therefore western Canada has not subsidized eastern Canada.
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If you're saying the situation in terms of the bottom line of CN would have been much worse if there had been no western Canada, I agree with you 200%.
Mrs. Cowling: My next question is with respect to rail line abandonment. When will this list be published? Do you have that information?
Mr. Tellier: I don't know if the bill mentions a specific timeframe, but our intent would be that within a matter of a couple of months after the bill has been given royal assent, we would make our intent public by having that information available in our offices and by informing MPs, MLAs, and the provinces on a province-by-province basis.
Mr. Davies: As we get ready to publish that list, we will want to make sure our customers, the MPs, and our own employees are aware of what the plans are before the list becomes public. We don't want to have this list published and have any of the core interested parties learn from the newspaper what our plans are. We will get it published expeditiously, but we want to make sure there are no surprises for the interested parties when that list comes out. So we want to take the time to be sure we prepare the people.
Mrs. Cowling: My other question is with respect to the various products. You mentioned that coal, potash and wood revenues are going up and you compared them to wheat. Do you think it's fair to compare wheat to products such as coal, wood and potash when in fact the people who will be picking up the costs of moving that grain out of the prairies will be individual farmers?
Mr. Davies: I may have a left the wrong perception. If I left the impression that the grain farmers on the prairies are the only ones who experienced a rate reduction in 1994 when everybody else saw the prices go up, I assure you I mis-spoke, because market competition still prevails out there. A large number of our prices continued to go down on a broad spectrum of commodities, and not just on grain. We had some go up, but there were very few.
Mr. Nault (Kenora - Rainy River): You mentioned that since 1987 the rates charged on average to the shippers have gone on at roughly 30%. Can you tell me whether in that same time period the same scenario took place in our North American marketplace, which is the U.S.?
Mr. Tellier: Yes, they have been going down at about the same rate in the U.S. Rates have been going down, so there has been an erosion of the yield or the margin throughout North America.
Mr. Davies: Remember that our primary market for products in Canada is the United States, so we have to be competitive with the rail carriers in that marketplace. When they're taking their prices down we're with them. That's the market competition we face.
Mr. Nault: It must be obvious to the shippers, the railroads and everyone in this room that the marketplace is the U.S. and that's where our competition lies.
There seems to be a perception, at least by the shippers we've talked to so far, that the NTA in 1987 was a good piece of legislation and they really question why we're here.
It is difficult, at least in my mind, to understand why the shippers have not bought into the belief that the railway industry is in big trouble, and if something isn't done about it we're all going to pay a price sooner later down the line.
Can you give me an explanation why there's a perception, at least from the people who have come to us so far, that what you're really asking for as a railway industry...and I question the partnership argument somewhat, Mr. Tellier. Based on what I've heard so far, they don't seem to be friends of yours.
Why do the shippers seem to think the railroads are in good shape? Do they think the government is going to bail the railways out, look after and continue to subsidize in mass amounts so the shippers will continue to benefit and not have to pay a fair market price?
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Where is this all coming from? I hear, read and listen to what I've heard so far in the last couple of days, and you seem to be miles apart in your attitudes and philosophies of what's going on in the country.
Mr. Tellier: If I was a shipper, I would say the 1987 piece of legislation was just fantastic and please, members of Parliament, don't touch it. They are basically trying to strike an even better deal.
I have a couple of charts. This, for instance, is a graph of tonnes of coal moving to Ontario Hydro, and this is what has happened to the rate. This is coal moving to the west coast, and this is what has happened to our rates there. So basically, these are not upward trends.
If I was not CEO of Canadian National but I was the CEO for a coal company, or if I was in the potash business or in the lumber business, I would tell you not to touch that piece of legislation because it's just fantastic. So don't be surprised.
When I say we're trying to establish a partnership and I look at these rates.... Obviously I cannot give you numbers, because these are confidential contracts and so on, and these shippers would be on the phone tomorrow morning asking me what the hell I did today. But let me tell you what they are doing when they get into difficulties in their markets.
Basically, they are calling us in and negotiating downward adjustments on rates. These people will come in and tell us to look at what is happening to the steel industry in Japan, for example. They'll say the Japanese are using fuel injection techniques, coal injection techniques, and so on, and don't need high-quality metallurgical coal the way they used to, so they will ask us to give them a break.
These charts, for instance, show just that. So I don't think members of Parliament should be surprised that on this one we and our customers disagree. They have been striking a hell of a good deal at our expense.
Mr. Nault: Okay, so based on that.... Of course the whole objective here is to have a system that's integrated and works effectively: shippers make money; railroads make money; the country is successful. I mean, that's the whole objective. We don't quite care whether the railroads or the shippers are unhappy as long as we make sure the system works. I don't know if we can make either of you happy with the way things are going.
What I'm interested in knowing about is this whole affair Mr. Davies touched on, and that's the agency itself. In his discussion, he mentioned the fact that they've been using the ability to go to the agency for the final-offer arbitration. It's been used and held over the railway's head in order to drive down the price.
I need some explanation - and we're going to have the agency come in to give us an explanation - as to what they're doing over there. If you're telling me that I, as a shipper, can go to the agency and make sure I can in fact have a rate lower than what the price is to haul a particular commodity, it seems to me something is obviously wrong over at the agency. Obviously they're supposed to come up with an agreement and acceptable arrangement so that both parties are successful, or so we would hope.
Are you telling me then, here in front of this committee, that there are times when you go to the agency and it will award contracts based on best-offer arbitration and that you will lose money in shipping that good across a particular line?
Mr. Davies: Remember that the arbitration doesn't occur before the agency. It's outside the agency.
Mr. Nault: That's a separate....
Mr. Davies: Yes, so you go into the arbitration process with your final offer, and the arbiter is bound by the legislation today to choose one or the other, period.
Mr. Nault: In this legislation as it's proposed - this subclause 27(2) that is on everybody's mind - can you explain to me how you see subclause 27(2) helping the railroads much differently than it did in the past? The perception among the shippers is that subclause 27(2) is the end of the ability to get those good deals you're talking about.
Mr. Tellier: Again, just to clarify what I was saying earlier, we basically have no problem whatsoever in terms of the shippers going before the agency and asking for a redress, a correction or anything like that. What we're suggesting is that when they do this, there should basically be two tests.
First, it should be in those situations where there is no competition. Second, it should be in those cases where they can demonstrate that if the redress they are seeking is not granted, they will suffer ``significant prejudice'', as it is termed in the bill now. That's our position, so we are not at all opposing the access by shippers to the agency.
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Again, just to clarify, the agency is not playing a role in final-offer arbitration. In those cases, basically the two parties come forward and put their best proposition on the table and it is one or the other which is taken by the arbitrator.
Mr. Davies: Subclause 27(2) doesn't apply to FOA under the legislation.
Mr. Nault: Yes, okay.
The Vice-Chairman (Mr. Comuzzi): Final question, Mr. Nault.
Mr. Nault: This last question is a little bit unrelated, but I need to bring it up anyway,Mr. Chairman. It deals with some of the aboriginal groups that are going to court over the lack of progress on land claims affected by CN going through reserve lands and, of course, becoming a private corporation.
Can you give us some explanation as to what you'll be doing about a particular scenario like that, what effect that will have, and what the government's role will be or won't be as it relates to CN going through reserve lands? Of course, that happens all across the country, so I'd like to know just how that is all starting to play, because I think it affects just about everybody in the room in one form or another - MPs, I mean.
Mr. Tellier: Through you, Mr. Chairman, and thank you, Mr. Nault, for raising the question.
As recently as 11 o'clock this morning, Mr. Todd and I met with the alliance of certain bands in British Columbia. The issue is first and foremost in British Columbia. A certain number of our rights-of-way in British Columbia go through in excess of 100 reserves, if my memory serves me well. I think it affects something like 36 bands. Their concern, which is well founded, is that the day we are no longer a crown corporation we become a third party to their land claims settlements and it may affect their rights.
I understand that these people with whom we met today will be appearing before you, so you could ask them. From my perspective it was a good meeting. We spent an hour and a half together. There were a couple of chiefs there and some of their people.
What we have agreed to is this: first, we have agreed that in terms of the lands that are under our tracks, if these lands are no longer required at one point in time for railway operations, they will revert to the bands. We don't have any problem with that. Of course, this is part of a land claims process and so on. This is for the Minister of Indian Affairs and the government to decide. But we, CN, would have no objection to confirming to them that basically these.... What matters to us is the protection, the integrity of our network. But if these lands were no longer required to run a railroad, we would have no problem if these lands under the rights-of-way were to revert to them. That's the first thing we have agreed to.
Second, they had a certain number of issues. I am sure the railroads in the past were not as sensitive as they should have been to the aboriginal people. We did some things in the past, no doubt, that were affecting their rights, and basically there is a certain number of issues that need to be addressed. The second thing we agreed to this morning is that I am going to designate our senior VP in western Canada, Rick Boyd, to attend at mutual convenience a meeting to set up a working group to examine some very down-to-earth, practical issues that need to be addressed.
Third, I have committed myself, at their request, to visit them some time before Christmas, and we have agreed tentatively on the first two weeks of December.
The Vice-Chairman (Mr. Comuzzi): Thank you, Mr. Tellier. We have a 15-minute vote, but I'm going to try to get this concluded before we go to vote.
I ask Mrs. Sheridan and then Mrs. Wayne to be short, please.
Mrs. Sheridan (Saskatoon - Humboldt): I'll just ask this very quickly, because Mr. Nault has already touched on it.
Pertaining to subclause 27(2), you made a couple of points. You felt the significant prejudice test was a helpful addition to the old legislation.
Mr. Tellier: Yes.
Mrs. Sheridan: However, what I would like to know is what your definition of ``significant prejudice'' is, because this term is undefined in the act. We've heard shippers here saying that's one of the big difficulties. What does that mean? Does it mean, in fact, that a company has to be on the verge of bankruptcy before it can satisfy that threshold and get the ear of the agency? You seem to favour it. What does it mean to you?
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Mr. Tellier: That's a very good question.
The first part of my answer would be that I am confident that the agency itself would be competent to determine that.
Secondly, some tests exist, for instance under the Staggers Act, the ICC and so on in the U.S., to determine what constitutes a significant situation. As Gerald has already referred to, it depends on the use, on what proportion of the costs is above the normal variable cost and what have you. There is a formula there.
I think such a formula could be developed by the agency in conjunction with the shippers and Transport, and I think it could be established quite clearly.
Mrs. Sheridan: But there's nothing in the act that does define it that way. Why do you not have the same uneasiness? Are you just a more trusting individual than some of the shippers and therefore you feel the agency will come up with a good definition? If I could be the devil's advocate here for the moment, who knows what it means?
Mr. Tellier: The concept that is in the bill and that we endorse, and the other concept we are proposing, is we think it is a somewhat exceptional or extraordinary recourse. Instead of leaving it to a shipper and a carrier to decide how much one is going to charge to the other to carry his or her goods, if the market forces are left aside and it comes before the agency, it is normal that it be not frivolous or vexatious. I know shippers don't like that.
Therefore right at the outset they should be able to establish prima facie when they get to the agency that there is no competition there and that if the recourse is not granted they are suffering significant prejudice. That's basically the line of reasoning.
Mrs. Sheridan: Okay. Thank you.
The Vice-Chairman (Mr. Comuzzi): Elsie, we have just a little time. We don't have time for the statement. All we have time for is your question.
Mrs. Wayne (Saint John): Okay, Joe. I have a short, two-part question.
Mr. Tellier, you mentioned in replying to one of the members of the board that the Port of Halifax has received a long-term commitment from CN. There's another port down east, and I want to know if they have a long-term commitment as well to get their product to market.
Some hon. members: Oh, oh!
Mrs. Wayne: The other part of the question is how do we guarantee national standards will remain in place when we are selling off portions of the railway to short-line operators?
The Vice-Chairman (Mr. Comuzzi): I think she's talking about Saint John.
Mr. Tellier: I am very much aware that the former mayor of Saint John is interested in the Port of Saint John, and I would like to assure her that, yes, it includes Saint John. I would also like to say that when CP decided to move out of Saint John and we were asked whether we would be ready to cover both sides of the port, we said yes. Therefore our commitment is very much there.
Mrs. Wayne: Thank you.
The Vice-Chairman (Mr. Comuzzi): Thank you, Elsie. That answers your question.
Mr. Tellier, Mr. Davies and Mr. Cantin, thank you very much.
There may be some feeling in the group here that Mr. Davies' only job is to go and negotiate prices that are down from the regulated price. Does he ever negotiate any prices that are up from the regulated price?
Mr. Tellier: Mr. Chairman, if that were the case, he would not remain in the job for long.
The Vice-Chairman (Mr. Comuzzi): Thank you very much.
This meeting is adjourned.