I thank all the members of the committee for inviting the Federation of Canadian Municipalities to participate in the review of the Canadian transportation safety regime.
I am the mayor of the City of Bromont, Quebec, and president of the Quebec caucus of the Federation of Canadian Municipalities, FCM. I am very happy to be here today to represent FCM as the co-chair of the National Municipal Rail Safety Working Group of the Federation of Canadian Municipalities.
Unfortunately, Claude Dauphin, the president of the FCM, was unable to join us today. As a result, he asked me to pass on his regrets to you.
Accompanying me this morning is Daniel Rubinstein, senior policy advisor at the FCM on rail safety and transportation of dangerous goods. He is FCM's representative on the Transportation of Dangerous Goods General Policy Advisory Council and on the Advisory Council on Railway Safety. Also accompanying me is Stéphane Émard-Chabot, our external legal advisor, who spearheaded our third party liability commitment.
While my remarks are focused on third party liability, according to the agenda of today’s meeting, we would be very happy to take this opportunity to answer the questions of the members of the committee on other aspects of rail safety in Canada, including information sharing, emergency response plans, tank cars standards and the need for sound risk assessments by railway companies and companies that ship dangerous goods. We have worked closely with and Transport Canada officials on all those issues.
As you may know, the Federation of Canadian Municipalities represents 90% of Canada’s population, or about 2,000 municipalities from across the country. Our mission is to promote and protect the interests of all communities, small or big, urban or rural, central or remote, on all issues related to policies and programs that fall under federal jurisdiction.
The Federation of Canadian Municipalities has been raising various issues related to rail safety for decades. It has participated actively in a number of rail safety initiatives, particularly on the Transportation of Dangerous Goods General Policy Advisory Council and on the Advisory Council on Railway Safety. More recently, the FCM has played a key role in helping Transport Canada review regulations on level crossings.
FCM members are in a unique position to discuss this issue. Local leaders in Canada are not only deeply committed to ensuring the safety of the constituents they represent, but they are also very aware of the importance of rail transportation to the economy of their communities.
In the wake of the rail disaster that devastated the city of Lac-Mégantic, FCM's president formed a national rail safety working group with municipal leaders from across Canada. The working group has set a number of priorities, which, in FCM's view, need to be addressed in order to improve rail safety and to restore the public’s trust in Canada’s rail system, particularly in terms of the shipping of dangerous goods through our communities.
One of the priorities set by the working group is to ensure that the costs of rail accidents are borne by the industry and, in the broadest sense of the word, are not downloaded onto taxpayers, at the municipal level in particular.
Earlier this year, FCM participated in two consultations on the liability issue: the Canadian Transportation Agency's review of Railway Third Party Liability Insurance Coverage Regulations, and Transport Canada's comprehensive review of the third party liability and compensation regime for rail.
FCM's position on the need for changes to the current compensation regime for accidents involving railways is based on several principles.
First, the regime must provide comprehensive coverage and full compensation to anyone incurring costs or suffering damages as a result of a railway incident. This includes individuals, businesses, and public bodies such as municipalities and all levels of government.
Second, the regime must provide comprehensive coverage and full compensation for all types of losses, including environmental damages.
Third, the regime must provide compensation regardless of the cause of the incident, whether it be the result of an intentional act of negligence or even if it is purely accidental in nature.
Fourth, the regime must be based on the polluter pay principle, meaning that those members of the shipping continuum who use rail or benefit from the transportation of goods must contribute to the costs of the regime.
Fifth, while any insurance regime will generate costs to the railway industry and those who rely on it for their commercial activities, the regime must also recognize the essential role of railways in supporting economic activity throughout our country. The regime must, therefore, be structured in such a way as to avoid harming the viability of railway companies, especially short line operators whose resources are more limited than those of class I railways. It must also be structured in such a way as to avoid harming the competitiveness of the countless businesses that rely on rail transportation.
Lastly, access to compensation must not be contingent on the solvency or continued existence of the railway involved in the accident giving rise to claims for compensation.
Given these parameters, FCM recommends a two-tiered regime. The first tier, designed to address more frequent incidents arising generally from the day-to-day operation of the railway network, should be market-based, essentially building on the existing regulations enforced by the Canadian Transportation Agency. The second tier, designed to address catastrophic incidents, should be similar to the model currently in place for marine transportation that is funded not only by the carriers but by the entire continuum in the distribution chain, especially those involved in the importation, manufacture, distribution, and use of dangerous goods.
In terms of the first tier, we recommended that the Canadian Transportation Agency expand the list of factors currently used to determine whether the coverage is appropriate by including the geography, topography and environmental risks specific to a place where a railway company operates.
The Canadian Transportation Agency should also strengthen its transparency process to determine the adequacy and the disclosure of insurance amounts considered sufficient for each railway company.
The Federation of Canadian Municipalities also recommends that contractual deficiencies be eliminated so that innocent third parties can recover the damages from the insurance companies in the event of insolvency or bankruptcy.
An option would be for all insurance contracts to name the Crown in a subrogation clause. Railway companies should also be required to have policies that cover the late reporting.
Finally, we hope that mandatory minimum requirements will be implemented, but we also think that railway companies should be required to buy as much insurance as the private market will reasonably allow them to buy. In both cases, it is essential that insurance requirements reflect the scope of the carrier's operations, because it would not make sense to impose the same requirements on short line operators as on class 1 railways.
Even with these improvements to the day-to-day insurance regime, the fact remains that the public purse would act as the de facto insurer in the event of a catastrophic incident. Should a disaster strike in a densely populated area, it is not at all inconceivable that damages would exceed even the class I railways current coverage, understood to be well in excess of $1 billion for both CN and CP.
Given these limitations, a new second-tier mechanism should be established to cover the costs and losses resulting from catastrophic railway accidents. While the exact structure and scope of this mechanism requires further consultation and financial modelling, FCM recommends the mechanism include the following characteristics.
First, the mechanism, whether it is a fee or cost-recovery levy, should be financed through contributions from the entire continuum involved in transportation of dangerous goods by rail—importers, exporters, brokers, producers, industrial purchasers, carriers.
Second, the mechanism should be accessible to anyone who has suffered a loss as a result of a railway accident—individuals, corporations, public bodies, and the various levels of government.
Third, indemnities paid through this process, per incident or per claimant, should not be capped.
Fourth and finally, the mechanism should include an emergency account that can be accessed immediately by authorities responding to an accident or an incident.
The Federation of Canadian Municipalities was happy to see that last year's throne speech included the commitment to require shippers and railways to carry additional insurance in order to be held accountable.
We hope that this clear commitment will result in a two-tiered third party liability approach that will make it possible to meet the challenges of providing coverage for disasters while ensuring the viability of short lines, which are essential to regional economies across Canada.
I thank the committee once again for allowing the Federation of Canadian Municipalities to share its point of view on this extremely important issue. As I mentioned at the beginning of my speech, we will be happy to answer any questions you may have about any aspects of the committee's study on the rail transportation of dangerous goods.
Thank you very much, Mr. Chair and members of the committee.
My name is Nina Frid and I am the director general responsible for dispute resolution at the Canadian Transportation Agency.
With me here today is the agency's general counsel, Ms. Liz Barker. Thank you very much for the invitation to speak about the agency's role and how it relates to your study on rail safety.
I'd like to start by offering a few words about the agency and its role and its mandate. The agency is an independent administrative tribunal and economic regulator at the federal level with jurisdiction over rail, air, and marine modes of transportation as well as accessibility for persons with disabilities for all of these modes, including extra-provincial bus transportation.
I brought the Canada Transportation Act of 1996 here with me, the agency's enabling legislation. It outlines the extent of the agency's jurisdiction and its role in administering the act. Section 5 of the act sets out Canada's national transportation policy, highlighting a vision of an economic, efficient, and accessible national transportation system that meets safety and security standards and contributes to the sustainable environment. The objective of the policy is to allow competition and market forces to be the prime agents in providing viable transportation services while using regulation and strategic public intervention to achieve the outcomes that cannot be achieved by market forces alone.
In rail transportation, the agency's authority applies only to railway companies under federal jurisdiction. Currently there are 31 operating federal railway companies. The full list is available on the agency's website and anybody can view it. Among those companies are some of the largest railway companies in North America such as CN and CP, our passenger rail VIA Rail, and there are also some smaller railways that would be considered short lines.
What makes a railway operation a federal undertaking? For example, if the lines of that railway company cross a provincial, territorial, or international boundary, it is deemed federal. So Canadian National and Canadian Pacific are classic examples. They cross the Canada-U.S. border, so they're federal. If you ever visit the agency's website to see the list of the federal railways, you will see another example of a company called the White Pass and Yukon Route Railroad company. That one operates across the B.C.-Yukon border, which is why it is deemed federal.
Another instance is the railway that is an integral part of an existing federal undertaking. For example, we have on our list the CSX intermodal terminals railway. It was deemed federal because it is an integral part of CSX Transportation, a large North American railway company.
With respect to federal railway companies, the agency performs a number of functions. It resolves disputes between railways and shippers regarding rail level of service, disputes between railways and citizens regarding railway noise and vibration, and other matters. The agency uses a range of dispute resolution mechanisms from facilitation and mediation to arbitration and adjudication.
As well—which is probably what you're mostly interested in—the agency issues certificates of fitness allowing railways to operate. The agency approves railway line construction, establishes inter-switching rates and determines maximum revenue entitlement for the movement of western grain and carries out a number of other functions.
The agency has no authority over railway safety or the transportation of dangerous goods. These matters are under the purview of Transport Canada.
As an economic regulator, the agency issues certificates of fitness for the proposed construction or operation of a railway. This is where we have a connection to the third party liability insurance coverage for a federal railway. Please allow me to explain in a few words.
Subsection 90.(1) of the Canada Transportation Act says, “ No person can construct or operate a railway under federal jurisdiction without a certificate of fitness.“
Subsection 92.(1) of the act states that:
The Agency shall issue a certificate of fitness for the proposed construction or operation of a railway if the Agency is satisfied that there will be adequate liability insurance coverage...
Subsection 92.(3) gives the agency the authority to make regulations related to certificates of fitness and railway third party liability insurance.
Subsection 94.(1) says that the holder of the certificate of fitness shall notify the agency in writing without delay if the liability insurance coverage has been cancelled or altered or if there has been a significant change in the operations of that railway that would mean that the agency has to revisit the liability insurance coverage.
It is very important to underline the fact that the legislation places the onus on the railway company and the holder of the certificate of fitness to inform the agency on a timely basis. The act also allows the agency to suspend or cancel a certificate of fitness if the agency determines that the liability insurance coverage is no longer adequate. How do we define adequacy? The agency issue of railway third party liability insurance coverage regulations, as the act allows...and I brought a copy with me. The regulations are available on the agency website, if somebody is interested. In those regulations, the agency determines the adequacy coverage on application by a railway in each case. You would hear an expression sometimes “on a case-by-case basis“.
Given the variety of railway undertakings at the federal level, as I mentioned earlier—and including on the one hand North American-wide railway companies like CN and CP, and on the other hand, seasonal tourist-operating undertakings—it was most reasonable to look at the adequacy in each individual case and application.
The regulations do not specify the minimum or the maximum amounts. Rather, the regulations outline a set of factors that the agency considers and applies consistently in reviewing each application and in determining the adequacy of third party liability insurance. These factors are all listed in the regulations but, to give you an idea, they include such things as the volume of traffic, the scope of the network—so we look at the freight miles or the passenger miles—the types of commodities carried, the types of population areas served, and the overall safety record of the applicant.
A typical third party liability insurance policy consists of two parts, essentially, the self-insured retention amount and an amount of coverage per occurrence and in the aggregate. The self-insured retention amount is what a railway must first pay, before the insurance company issues a payment to cover a claim. We think of it as a sort of deductible. The agency ensures, through its examination, that the applicant railway has the financial capability to pay the self-insured retention amount. The regulations require the railways to provide to the agency a written confirmation that they have fully disclosed to the insurer the nature and the extent of the proposed construction or operation and any associated third party liability risks. The regulations also require the railway to fully disclose all relevant information to the agency.
In the examination of an application for the certificate of fitness the agency verifies not only the financial strength of a railway company to pay its self-insurance portion, but also the financial strength of the insurance company to pay the contractual coverage obligation. The agency ensures that the proposed coverage is not out of line with similar railway undertakings. The specific amounts of third party liability insurance coverage for each federal railway are confidential, as well as the financial information that the railways provide to the agency for the examination. By the way, the railways make a claim for confidentiality for that information for competitive and commercial reasons.
The rail insurance market is highly specialized and it involves approximately 30 to 40 worldwide companies that are willing and able to offer railway liability insurance. And given their underwriters' risk tolerance there are practical limits to what railways can obtain in the market for third party liability insurance. Rail insurers manage their exposure to risks by requiring detailed disclosure of risk factors by the railway at the moment of establishing the insurance policy. And according to rail insurers the most significant they consider is the railway safety record.
I understand that the Minister of Transport and the Department of Transport have made significant improvements and continue to work on improving rail safety, but as I said this is outside of the agency's jurisdiction.
The tragic derailment of the MMA train in Lac-Mégantic in July 2013 was the worst rail disaster in Canadian history. Prior to this, based on information that has been filed with the agency, to date in the past 10 years no federal railway company's claims ever exceeded the limits of their third party liability insurance coverage.
That said, the tragic derailment raised very important questions at every level including at the level of adequacy of third party liability insurance to deal with catastrophic events like in Lac-Mégantic and especially for smaller railways. This is why the agency announced public consultation and review. It was launched this fall. Comments were received from 23 various groups of stakeholders including the FCM as you heard. We heard from shippers, railways small and large, as well as insurers. The agency produced a summary report and opened another round of consultations to allow for comments and we received an additional eight submissions. That second round closed on May 9. And the agency is at the point right now of analyzing all of this information and preparing recommendations. We're working very closely with our colleagues Transport Canada on their review. Our review is limited to the review of the regulations and the agency processes and procedures, whereas Transport Canada's review could be much broader.