Thank you, Mr. Chair and members of the committee.
My name is Fred Gaspar and I am the chief compliance officer for the Canadian Transportation Agency and with me today is Randall Meades, who is our chief strategy officer.
We are pleased to appear before you again and to answer any questions you may have concerning your study.
I'd like to start by offering a brief reminder about our organization and its mandate. The Canadian Transportation Agency is an independent body. As a federal quasi-judicial tribunal and regulator, we have jurisdiction over a broad range of air, rail, and marine matters. The agency essentially has three core mandates. The first is to help smooth the national transportation system, keeping it running efficiently. The second is to protect the human rights of travellers with disabilities by ensuring that the transportation system is fully accessible. The third is consumer protection for air travellers.
The Canada Transportation Act is the agency's enabling statute. It outlines the extent of the agency's authority and jurisdiction as well as the agency's role in administering the act.
The agency also shares responsibility for certain provisions of the Railway Relocation and Crossing Act and the Railway Safety Act. These provisions are focused mainly on resolving disputes and cost recovery.
When it comes to rail transportation, the agency's mandate applies to railway companies under federal jurisdiction, of which there are currently 21 active railways, including class 1s and short lines. Briefly, the agency is responsible for a number of regulatory functions that range from ensuring that federal railways carry the required third party liability insurance requirements to establishing the annual maximum revenue entitlement for CN and CP in moving western grains.
The agency also plays an important role in helping to resolve rail transport disputes. In addition to our formal adjudicative function, we also have expertise in alternative dispute resolution services, including facilitation, mediation, and arbitration services. In our experience, these methods can be faster and less expensive, producing a resolution that benefits all sides.
Of relevance today, I'd like to highlight that the alternative dispute resolution process administered or provided by the agency now includes three forms of arbitration: rail level of service arbitration, rail arbitration, and final offer arbitration.
Since 2013, under the new rail level of service arbitration framework, the agency has had the authority to impose administrative monetary penalties for the contravention of any requirement imposed on a railway company, up to a maximum of $100,000 for each violation. In addition to this, the 2014 amendments gave the agency the power to order railway companies to pay compensation as part of its level of service complaint mechanism.
Although the agency has a number of rail-related responsibilities, today I'd like to focus exclusively on Bill . It was first passed on August 1, 2014 and further extended by this Parliament on June 15, 2016.
Bill was aimed at getting grain crops to market quickly and at increasing predictability and transparency in the supply chain. As you will, recall it was introduced as an urgent response to a unique set of circumstances: an unprecedented crop year and a polar vortex.
The key new provisions that were set out in that bill empowered the agency in three new ways: to specify by regulation what constitutes operational terms for the purpose of rail level of service arbitration; to provide confidential advice to the Minister of Transport in establishing minimum grain volume requirements for the movement of schedule II grains; and, to set out an interswitching rate for areas of commodities that the agency specifies.
When the was enacted in June 2013, it introduced arbitration for rail level of service where parties are unable to negotiate the terms of a level of service agreement confidentially.
This arbitration is limited to matters within subsection 169.31(1) of the Canada Transportation Act, and specifically, “the operational terms that the railway company must comply with” for the “receiving, loading, carrying, unloading and delivering” of “traffic, including performance standards and communication protocols”, as well as any other “operational terms” that the shipper must comply with that are related to the company's own operational terms; any “incidental” service provided by the railway company; or “the question of whether the railway company may apply a charge with respect to an operational term” or for an incidental service provided by the company.
The level of service arbitration provisions do not define operational terms themselves. At the time, the agency had no power to define them by way of regulation. The further amended the CTA to provide the agency with the authority to then make regulations specifying what constitutes “operational terms”.
In order to establish the regulations, the agency consulted broadly. We conducted targeted and focused consultations both with the shippers and the railways and with other stakeholders. Now in force, those regulations bring clarity to shippers and railways as to what might be the subject of a level of service arbitration.
Today, the regulations and operational terms for arbitration on the level of service of railways support efficient arbitration within a statutory deadline of 45 to 65 calendar days, and they've reduced the need for parallel adjudication by the agency as to the eligibility of certain matters that may be submitted for arbitration.
To clarify, an operational term refers to railway and shipper obligations in receiving, loading, carrying, unloading and delivering of traffic, including performance standards and communication protocols. They are an extensive but non-exhaustive list of terms that are eligible for arbitration.
Bill also amended the act, and requires the agency, after consulting with CN and CP and the owners and/or operators of grain handling undertakings, to provide advice to the minister on the minimum amount of grain that CN and CP should be required to move during each month of the crop year, on or before July 1 of each year preceding that crop year.
Third, and probably most important to this committee, Bill introduced provisions that enable the agency to expand interswitching to 160 kilometres for Manitoba, Alberta, and Saskatchewan. Interswitching, as you will know, is an operation performed by railway companies whereby one carrier performs the pickup of cars from a customer and hands off these cars to another carrier that then performs the “line haul”, or the majority of the carriage. The interswitching arrangement is made in cases where a shipper has physical access to a single carrier but is within a defined distance to one or more competing carriers.
To ensure fair and reasonable access to the entire railway system, interswitching has been regulated in Canada since 1904 and is a commercial agreement between railway companies whereby one railway company will carry traffic for the other railway company and vice versa, to ensure that shippers captive to the rail system have access at a regulated rate. Railway companies reconcile these costs between themselves on a yearly basis. Interswitching allows shippers to negotiate, through normal commercial processes, suitable terms and conditions of carriage with competing carriers for the line haul portion of the overall car movement.
The Railway Interswitching Regulations set the rates to be charged for interswitching services provided by the terminal carrier, thereby establishing a predictable and fair pricing regime that is applied equally to all terminal carriers providing interswitching services.
Under the Canada Transportation Act, the agency may make regulations prescribing terms and conditions for the interswitching of traffic, as well as determine the rate per car to be charged for performing this operation and establish distance zones for that purpose. The interswitching provisions of the act are considered to be competitive access provisions, allowing the shipper to choose their carrier despite having physical access to only one carrier.
Please note that the agency reviews the railway interswitching costs annually and revises the rates as required or as part of the five-year statutory review of the regulations, which was last done in 2013.
The new interswitching rate regulations now establish five interswitching zones: 6.4 kilometres, 10 kilometres, 20 kilometres, 30 kilometres, and on a temporary basis for Manitoba, Saskatchewan, and Alberta 160 kilometres from an interchange. The amendment created this new interswitching zone 5 that is applicable to movements for all commodities in those prairie provinces.
The rate for zone 5 follows the pattern established in the current rates, namely that the zone rate will apply to the first 40 kilometres of track distance travelled within the zone, and then a per kilometre rate will apply for each kilometre of track travelled beyond the 40 kilometres within the distance.
After this brief overview, we would like to thank you for your attention. We will be pleased to answer all your questions.
Thank you very much for giving me the opportunity to come this morning to speak to the committee about Bill . My name is Humphrey Banack. I'm vice-president of the Canadian Federation of Agriculture. I'm a grains and oilseeds farmer in central Alberta. Transportation is critical to our family operation there. We farm 7,000 acres of grains and oilseeds. Today it's very difficult for me to leave the farm. We're harvesting wheat. Yesterday afternoon I got the combines running and left them in my wife's and my brother's hands and away I went. So for me to leave the farm at this time of year is a challenge, but transportation is key to our moving forward.
As I said, our organization represents farmers right across Canada, and I think it's very important to have the farmer's view here today. Bill has several key objectives. This act amends the Canada Grain Act to permit the regulation of the contracts relating to the arbitration of grain disputes, respecting the provision of those contracts. It also requires CN and CP to move minimum amounts of grain specified under the Canada Transportation Act by the order of the Governor in Council.
I hope by the time I'm finished here today you will recognize the importance to farmers of achieving these objectives of transportation of our product and fully appreciate that when we talk of shippers we're talking of grain companies. But it's ultimately farmers who will pay these bills. All of these objectives are covered and closely related to the Emerson report, which is soon going to be coming before the House and to the minister's table.
Before I go into specific reasons why Bill needs to be maintained, let me briefly explain our position in the industry. Farmers in western Canada sell or export 70% of the wheat we produce, 50% of the canola, and 25% of the coarse grains because of a small Canadian marketplace for our product. Western Canadian grain on average has to be transported 1,500 kilometres while most of our major competing countries around the world have a much shorter haul in the range of 300 to 400 kilometres. At least 94% of those exports are moved by rail to Canadian port positions and to final destinations in the U.S. and Mexico, unlike our competing farmers in the U.S. who in contrast use trucks and barges to transport 50% of the grain they export. This provides viable transportation competition to railways. Canadian farmers have no other viable transportation opportunities.
Consequently, between 35 million and 40 million metric tonnes of western Canadian grain is captive to rail monopoly annually. In the 2014-15 year, Canadian farmers paid $1.4 billion in freight charges to export their grain. This was not paid by the shippers. The shippers are sent the bill but the freight is paid by farmers who have no way to recoup these charges outside of markets. In this equation, grain companies are little more than service providers with farmers paying the entire bill. Farmers pay for the lack of grain movement. They pay all the freight for moving the grain. They pay for disruptions. They pay for delays. They even pay the penalties charged by shipping companies when their vessels have to wait in port, for demurrage.
This is acknowledged in the Emerson report that says that if service is unreliable or unpredictable contract penalties, lost sales, and lost premiums ensue. Shippers bear these costs, which are significant, and pass them back to farmers. Our livelihood and even our monthly cash flow depends on the timely, dedicated, and concentrated efforts of the two railway companies that basically have a monopoly. Farmers' ability to manage their grain movement—and by extension their cash flow and their ability to pay their bills on time—is captive to a transportation system that is a monopoly focused solely on cutting costs and maximizing returns.
On managing the volume of grain moved by the railways, the minister must maintain the legislative authority to mandate the volumes of grain needed to be moved at any given time. The success of the Canadian grains and oilseeds industry is contingent on finding international markets, providing a competitive price for those markets and getting the product to the market in a timely fashion. All those conditions cannot be left to the vagaries of the railways that are focused on high return commodities and cutting costs and increasing returns. Because farmers have no alternatives for access to export markets and because farmers need competitive freight rates, volumes of grain need to be moved in a timely manner, especially during times of bumper crop conditions and high demand in the international markets.
In my opening remarks I said we are in the midst of harvesting our wheat crop today. It is the largest wheat crop I've ever grown on our farm, and across western Canada we're hearing huge numbers.
We're going to have another very big crop in western Canada, very similar to the one in 2013. The government needs to maintain the authority to regulate volumes through an order in council by a request to the to ensure the railway system does not neglect the grain industry. We cannot afford to let down our international markets. When well-established markets to customers are lost because product is delivered late or not at all, it is very difficult to get those markets back. Financial success and even the survival of our farms is contingent on our being able to sell our grain to pay hundreds of thousands of dollars in production costs.
It is important to note that if volumes are regulated, it needs to be done in a way to prevent unintended negative consequences. In 2014, when the volumes were regulated, the railways, in order to increase the volumes to meet the demand, left areas with longer haul distances and logistic challenges plugged with grain. Northeastern Saskatchewan is one point to take in.
The regulated volumes imposed only applied to export grain. That is where the largest issue was and is. The railways moved the necessary infrastructure and met most of those targets.
The domestic markets, both for human consumption and for animal feed, were put in peril, as both were well below accepted input storage levels for an extended period of time. From reports received, a flour mill in eastern Canada was hours away from being unable to supply flour to Tim Hortons, and feed mills in the Lower Mainland of B.C. had feeding operations on restricted deliveries. While a shortage of our daily Tim Hortons' order may be devastating personally, a barn full of birds without feed would be an industry nightmare.
As we have learned from past experience, every action has a reaction. Steps should be taken to ensure that when grain movement volume is regulated, it is done in a balanced fashion, in order to ensure that problems solved in one area do not create problems in another.
Interswitching has been a huge topic around the table this morning. It gives shippers the opportunity to shop for lower freight rates and is extremely important, and expanded distance should be maintained. It is critical that railways work within the rules and the spirit of interswitching objectives. Interswitching is a simple mechanism facing competition in what is otherwise a monopoly. People even say that interswitching isn't working. We've seen some smaller numbers; Jean-Marc showed me some numbers, such as 4,500 cars moving here. It may not be a lot, but it's important to make sure it's always there. Pulse Canada has said that where expanded interswitching is available, the freight rate has been cut by about 20%.
Thank you very much for your time this morning. I'm getting a signal from the front, so we'll leave the last couple of pages to put in at the end.
Thank you. I hope my time off the combine is well spent.
Voices: Oh, oh!
Thank you, Mr. Chair and members of the committee.
My name is Jean-Marc Ruest and I am the vice-chair of the board of directors of Cereals Canada.
Cereals Canada is a value chain organization that includes representation from farmers, crop development and seed companies, and shippers, exporters, and processors. The brief that has been circulated to members includes additional background on the organization.
On behalf of Cereals Canada, I want to thank the standing committee for the invitation to appear before you today. Reform to legislation governing rail transportation for grain is critical if Canada is to meet growing demand and maintain a reputation as a reliable supplier. Failure to reform our regulatory framework will negatively impact the entire value chain, including farmers, grain handlers, and exporters.
In order to properly speak to the provisions of the Fair Rail for Grain Farmers Act, I would like to start by saying a few words about the review of the Canada Transportation Act itself. The review of the act was accelerated because of the 2013-14 grain transportation crisis. This crisis impacted the entire value chain, and damaged Canada's brand and reputation as a reliable supplier of agricultural products. The crisis cost farmers, grain-handling farms, exporters, Canadian value-added processors, and the Canadian economy as a whole. Canadian agriculture and the Canadian economy cannot afford for this to happen again in future.
The CTA review report, referred to as the Emerson report, did not fully address the fundamental problem of railway market power and the impact it has on the availability of rail service to meet the needs of Canadian grain shippers. The report is built on a basic assumption that there is a competitive transportation environment in Canada. This assumption does not apply to western Canadian grain sectors. Virtually all shippers are served by one carrier, and are subject to monopolistic pricing and service strategies. Therefore, the government has a critical role to play in establishing a regulatory structure that mimics a competitive environment.
Cereals Canada has recommendations for immediate action and long-term requirements that will help accomplish our common goals for a successful grain transportation system. Looking first at the provisions of the Fair Rail for Grain Farmers Act and specifically to extended interswitching provisions, the current extended interswitching distance of 160 kilometres should be extended indefinitely. This provision is proving to be an effective tool to provide additional competition between the two Canadian class I railways as well as with at least one other North American carrier. Its very existence provides eligible grain shippers an extremely useful competitive tool to access in negotiations with rail service providers. This competitive provision is of benefit, is being used, and it must be retained.
Turning now to the minimum volume requirements, the Fair Rail for Grain Farmers Act allows the government to set minimum required grain volumes that must be moved by the railways. Cereals Canada is recommending that these provisions of the act be retained beyond 2017. These provisions should be extended until legislation is enacted that will introduce true commercial accountability to all system participants. The 2016 crop will be of similar size to the crop of 2013 that preceded the transportation crisis. These levels are not an anomaly but the new normal.
Our production is diverse, and is destined to between 100 and 200 countries around the world. If we do not meet our contractual commitments in each of these markets, our reputation as a reliable supplier will suffer irreparable harm. Retention of the minimum volume provisions will allow for rapid and decisive response from Canada if past transportation failures begin to recur.
With respect to longer-term requirements, Cereals Canada believes the issue of commercial accountability must be addressed. A hallmark of modern commercial relationships is that parties are held accountable to each other for their respective performances. Grain shippers have long been bound to performance standards with financial penalty through tariffs unilaterally set by the railways. However, there is no mechanism for shippers to hold railways commercially accountable for their level of service to the shippers they serve.
In practice, because of the imbalance in negotiating power between railways and captive shippers, railway penalties for non-performance cannot be commercially negotiated. Railway accountability requires a legislative backstop. Without this, little can be done to systematically address service failures, and there's almost no way for shippers to hold the railways accountable for inadequate service. Accountability for service commitments is a prerequisite to preventing another grain transportation crisis.
Secondly, we also need to better define what constitutes adequate and suitable rail service under the transportation act. The railway service obligations are set out in the Canada Transportation Act as “adequate and suitable accommodation” of traffic. This term is not well defined and has been the point of dispute between railways and shippers for many years.
The CTA review report or Emerson report recommends changes to the definition that we believe would dilute the current definition of obligation and negatively affect grain sector shippers and those in other sectors from accessing the competitive provisions within the Canada Transportation Act. Instead, Cereals Canada recommends enshrining in law the principle that rail service provision be demand-driven as opposed to supply-driven. The nation's economy cannot be expected to fully capitalize on global marketing opportunities when the ability to provide the goods to international customers is governed by one's domestic rail service provider.
Thirdly, we must review the powers of the Canadian Transportation Agency. The Emerson report recommends that the CTA be given the authority to act on its own motion to investigate railway service issues and that it be given the power to issue ex parte orders in situations requiring urgent attention. This power would relieve shippers of carrying the sole burden for challenging railways in circumstances in which service is inadequate, by empowering the agency to investigate systemic issues and to take action where necessary. This is one recommendation from the Emerson report that is supported by Cereals Canada.
My thanks to the members of the committee for the opportunity to appear today and to comment on certain provisions of Bill , the Fair Rail for Grain Farmers Act.
My name is Fiona Cook and I'm executive director for the Grain Growers of Canada. The Grain Growers of Canada acts as a national voice for over 50,000 farmers across Canada, who actively grow and care for a variety of crops, including wheat, durum, barley, canola, oats, corn, soybeans, peas, and lentils.
We welcome the government's decision earlier this year to extend certain provisions of Bill for an additional year, effective until the end of July 2017. Today I would like to focus on the extended interswitching distance of 160 kilometres for the prairie provinces. I am here to tell you why this measure is so important for individual farmers and why we believe it should be made permanent.
On an annual basis, roughly 50% of Canada's grain crop is exported, with 94% of it moving by rail. Of these exports, 77% are exported by rail to port; 17% are direct rail, for example into the U.S. and Mexico; and approximately 5% are by road. Close to 70% of our wheat is exported, and some commodities are even more dependent on export. Over 90% of Canadian canola, including seed, meal, and oil, is exported annually. Over 90% of Canadian oats is exported to the U.S. Canadian pulses are a big success story—they're exported to over 150 countries. In fact, we are the world's largest exporter of lentils and peas.
It's not just about the exports. We have value-added domestic processors that also need access to reliable and consistent rail service: wheat millers, canola crush plants, oat millers, and barley malters are critically reliant on domestic shipments of raw product via the rail system. In many cases, they also depend on rail to transport the finished product to Canadian as well as export markets. Many of these facilities operate very lean production lines, employing just-in-time delivery, with smaller amounts of raw and finished product moving in and out on a timely basis. Most of these operations, like the grain elevators, are captive to one railway. They are therefore essentially operating in a monopoly-like environment.
Interswitching is an effective regulatory tool that can address captive situations and encourage behaviours in the rail industry that market forces would normally drive in a competitive environment. The extension of interswitching rights to a 160-kilometre radius was put in place in August 2014. It commits a rail carrier to pick up cars from a shipper and move product to a junction with another railway. Increased access to the lines of competing railways is good for farmers. It provides new options for grain handlers and processing operations in routing, as well as a new tool in negotiating with the railways better service, rates, and terms and conditions.
Extending the radius to 160 kilometres better reflects the large expanse of the prairies and the nature of grain transportation in western Canada. The original 30-kilometre radius was intended for urban centres and moving product at port. It encompassed very few grain-loading facilities: 6% had access at 30 kilometres. Now at 160 km, 92% have access.
When grain handlers and processors experience rail service issues, this directly affects the farmer's ability to sell grain and generate cash flow for their operations. It also negatively affects the price grain handlers pay for Canada's grain, oilseed, and specialty crops.
Every order for grain hopper counts. In a complex supply chain spanning an average of 1,520 kilometres, the ability of the railways to get agricultural products to an export position is crucial to every player in the value chain, especially the farmer. When the grain handlers or processors can't move product, the result is reduced orders and lower prices to farmers, to act as a signal to reduce the amount of grain they put up for offer. This means lost revenue to farmers when they have to sell grain outside peak periods. It can also affect future sales through a loss of confidence in Canadian shippers and their ability to deliver on time.
Rail interswitching provides grain producers with alternative options for rail services. The rule has already made for more competitive freight rates and service, and has directly benefited farmers. Not only have farmers noted reduced costs, they have also gained more leverage in getting rail capacity where needed.
In fact, the greatest use of interswitching has been a passive one. Some elevators operationalize the right to interchange by applying for an interswitching rate, while others use it as a leverage in negotiations with the railways. The mere existence of the option can provide shippers with the necessary leverage to obtain better terms and conditions. Shippers report that after using interswitching and the alternate line to move shipments, the originating carrier has often come forward to offer better rates and terms of service.
According to the grain monitoring program, for the crop year up to May 20, 2016, interswitching resulted in savings of almost $4 million and almost 1,300 additional railcars put into service.
Canadian grain production has seen steady growth of about 3% per year for more than a decade, a trend we expect to continue. It's been confirmed by my colleagues here this morning. Future production is not only contingent on a farmer's ability to access and utilize new technology, but also our ability to capitalize on growing opportunities and established and new export markets, many supported by Canada's active trade agenda. The 2015-16 crop year is expected to be another big one, with estimates ranging from 70 million to 75 million tonnes. Canada's 2013-14 crop year was recording-breaking, with over 90 million tonnes harvested. We expect these trends to continue.
In conclusion, the new interswitching provision has proven itself to be an effective tool, and for this reason we believe that it should become permanent.
Thank you very much.