Thank you, Madam Chairperson, and good morning, everyone.
My name is Phil de Kemp. I'm the executive director of the Barley Council of Canada and I still hold the position of president of the Malting Industry Association.
The Barley Council was formed a couple of years ago when the windup of the Canadian Wheat Board occurred. The council is made up of all the barley producer commissions from coast to coast, the beer industry, the malting industry, researchers, breeders, and anyone who has anything to do with barley.
In the raison d'être of the council, there are three major functions. One is market development, obviously; the second is research and innovation, and the third, a big portion right now, is international trade. We generally stay out of domestic policy issues, but because this whole transportation issue significantly impacts our ability to export and our reputation around the world, it was felt by the council that they certainly would like to weigh in on this, as we have over the last couple of years.
I know we're here to talk about interswitching, but in the four or five minutes I still have left I think it's important for me to give you a little history on the grain side in terms of the evolution of the grain industry and the participation of Canadian farmers. I'm going to refer to it as “walking the talk”, basically, and putting in the capital and the resources involved in our end of the production chain.
I'll give you an example. Back in 1962, we had about 5,200 grain elevators in western Canada. At that time, we had about 25 million tonnes of crop production and about 10 million tonnes of storage capacity on those elevators across Canada. I'm sure you've seen the iconic pictures. They can hold maybe 800 tonnes or 1,500 tonnes in those old wood cribs. By 1980, that had drastically been reduced to about 3,300 elevators for a 35-million-tonne western crop, with about 8.75 million tonnes of storage in those grain elevators. By 2000 in western Canada, there were only 848 elevators on a 52-million-tonne crop production, with about 6.8 million tonnes of storage in the elevators. Just two years ago, we were down to 327 elevators in western Canada and facing a 70-million-tonne crop—we're probably looking at that again this year—and about 6.5 million tonnes of capacity.
What I'm trying to highlight here is simply what we have heard now over and over. I'm 58 years old, and I've seen this many times over the last couple of decades. We've had the Estey report, the Kroeger report, and the Emerson report, and we all keep continuing on the same line in terms of what is required as far as the grain handling industry in western Canada is concerned, both in terms of the shippers and, more importantly, in terms of the producers and the farmers. What I'm trying to highlight is the fact that during those original reports, the railways always said there were too many elevators and that we had to consolidate them because they needed higher efficiency throughput. Basically, the industry has done that. You've just seen that reflected in those figures. They're all basically 100-car spots right now. In many cases, a lot of those major terminals are inland terminals or large throughput facilities. They all have their own private locomotives just to move the cars to load the grain.
When you take a look at that, you see the reduction in the commercial elevator storage and you see the kinds of production numbers we have right now. The farmers have spent an awful lot of money, basically right off the combine, in storing that 70 million tonnes of grain. Over the course of the last two decades, they've walked the talk—I'll say it again—and really have brought in those efficiencies within the system.
Greg may be referring to this. I know he's part of the coalition as far as the reporting of the efficiencies of the railways goes. In last week's comments, he indicated that in the case of one particular railway, which will remain unnamed, just 75% of the railcars ordered were delivered.
I've just come back from China, and I have to tell you that in Quingdao, in the container port system there, I lost count at about 45 cranes. It's 17 million containers a year and 45,000 containers a day. It is highly efficient. It's incredible. The only reason I bring that up is that the shortage on the railway cars last week is equivalent to four Panamaxes. That's almost 100,000 tonnes. That's four ships at 25,000 tonnes each, and somebody has to pick up the phone, perhaps, and call their customer and say they may be a week or two late.
Canada's not the only country in the world exporting grains and oilseeds, and it is all about timely delivery, security of supply, and meeting your contract commitments. If you can't, then there are costs involved. Right now the costs are basically borne by the shippers and they're borne by the producers who can't deliver, and there are some cash flow impacts there.
Having said that, I'll segue into the issue of interswitching and the 160-kilometre range. You've probably already heard this from a number of people, but that basically incorporates about 92% of the grain-handling facilities in western Canada. I'll refer to that as a pseudo-competitive tool that at least allows the shippers to passively or actively try to negotiate better rates with the monopoly and turn it into a duopoly, meaning that if you're not getting the performance and you can't deal with one railway, then you can with the other.
Unfortunately, that's the only tool, if you want to call it that, in the tool box right now. I'm cautiously optimistic that we're going to see some significant recommendations and decisions by both the and the cabinet as we move forward with respect to Canada's long-term economic prosperity, which is primarily driven by exports. For the vast majority, whether it's 90% or 95%, the people at this end of the table depend on doing by rail.
I'll segue into the Emerson report. I won't spend much time on that, but I think there's a general recognition by everyone in the grains industry—the shippers, the processors, the producers—that there are some fundamental issues that need to be addressed. They have to be addressed quickly, because we've been taking too long to do that.
One is that the CTA has to be given the authority and the power to try to settle things as quickly as possible, as opposed to having to go through these long-drawn-out legal proceedings with respect to performance. I think there has to be commercial accountability and contracts cutting both ways with respect to financial penalties. I think that's going to clear up a lot of the issues, but we don't have that right now. We have a monopoly or we have an oligopoly.
Whenever there is a new piece of legislation, there's always a bit of a preamble as to what the legislation is all about and what it's trying to address. Right now, under the CTA, section 5 is a preamble, and it lays out a bit of the importance of trying to maintain competitiveness for the interests of everyone in Canada, etc.
I've been on this horse for a couple of years, and I think there are a few words that need to be changed in that to recognize it, and that is to understand that the wording that says it's in Canada's national economic security interest to ensure a competitive, viable...the words ”economic security interest” raises its importance up a couple of levels. With this government or the previous government or governments in the past, I think we all recognize that Canada's future success and prosperity are going to be driven by exports, and there's no sense having exploratory discussions with China or elsewhere unless we have the ability to walk the talk and be able to meet those commitments, whether they're in grain or any of the other commodities represented here around the table.
I'm going to leave it at that. I know that some of the other people have talked about definitions for “adequate” and “suitable”, or what have you, but I think the big one is the commercial contracts and the accountability on both sides of the issue. Our industry has been through this for decades now, with many reports produced. Even the Emerson report was two years ago this December, and we have to get moving, collectively, for all of the industries around the table.
My name is Dave Podruzny. I represent the Chemistry Industry Association of Canada and also Canada's chemical producers.
Industrial chemical producers move more than three-quarters of our products by rail. We do so because it's the safest way to do it and it's the most economical way to do it. It also produces the least amount of greenhouse gas emissions, and it's almost 17 times more efficient than moving the same volumes by truck.
Here we are talking about something that's dominated by a different sector, agriculture, but I will be emphasizing the importance of interswitching in rebalancing some of the market power that exists. We look at the Transportation Act, the regulations, and the agency as a way to rebalance what is otherwise a monopoly situation.
Chemical production in Canada exceeds $53 billion. Our exports are $38 billion. We're second in manufacturing in exports. We employ about 90,000 Canadians in communities right across the country and a significant portion—38%, second only to IT—are university graduates. These are good careers for communities right across the country.
Chemicals are more globally traded than any other product of commerce, so moving it efficiently and effectively is very important. Our members are very committed to working with government, with transportation partners, and with communities in areas of safety. Making sure we have the best standards in place is something we fully support. Safety is a top priority in our business. Perhaps one of the reasons we have such a high proportion of university graduates is that we deal with dangerous chemicals. We deal with things that need to be properly treated. We believe that many of our products should not be moving by truck; we believe they should be moving by rail to minimize the risk. Risk management is important.
We are responsible for and we own or lease all of the railcars that the railways move. That's an important aspect. We believe that we look after the risk associated with our product to the point of hand-off. We are concerned that railways maintain liability when they take the goods from us and then deliver them to another point. We are strong proponents of maintaining the common carrier obligation. We believe that Canada requires a commercially based and market-driven rail freight system, and we believe that the Transportation Act, the regulations, and the agency provide that.
The chemistry industry is a responsible one. Our responsible care ethic, which was developed in Canada, is now recognized by the United Nations and is in over 64 countries around the world. We believe that the expanded interswitching that exists in western Canada has provided a number of our members with important leverage in negotiating competitive rates, and we would like to see that maintained.
Keeping the transportation agency's dispute resolution on a strong footing is equally important. We are concerned about rebalancing, about market power, and, as was mentioned earlier, about reciprocity. I can tell you right now that among the hundreds of penalties for doing something wrong, there are none that we can apply against the railways; they all are the other way around.
If you look at our sites, you see that a third of our sites are covered in railway sidings, because we move a lot of product. Fully 12.5% of the volume of the railways is chemicals, fertilizers, things that you can relate to, things that need to get to the farm communities. The dangerous chemicals I mentioned are things that need to get to communities so they can have proper water treatment. They're an integral part of the Canadian economy. We take Canada's raw resources and convert them into valuable stuff, all kinds of products that are used in many of the manufacturing industries in the country.
I'll stop there. I want to give maximum time for asking questions.
Thank you very much.
Ms. Chair, esteemed members, committee clerk, and fellow attendees, I'm Brendan Marshall, vice-president, economic and northern affairs, Mining Association of Canada. MAC is the national voice of Canada's mining and mineral processing industry, and we're pleased to appear and to discuss this important matter with you.
The Canadian mining industry is a major economic driver, contributing over $55 billion in GDP in 2015, employing approximately 374,000 people, and accounting for $92 billion, or one-fifth, of Canada's overall total export value. As a consequence of this international reach, the mining industry is one of the largest users of Canada's transportation sector. From a rail perspective, the industry represents the single largest industrial customer group of Canadian railways. In 2015, for example, crude minerals and processed mineral products accounted for 51.4% of total rail freight revenue.
Having recently polled our membership, I can report that the response on rail service is mixed. While some members have seen improvements, others have said it's gotten worse. For example, one member stated that they have only been getting 50% to 80% of their weekly empty-car orders since last spring, and typically at the lower end of that range. This challenge spreads through their business, as the timely movement of concentrate is critical to managing rising inventory levels at mine sites. It's also problematic for keeping the flow of raw materials to smelters going at levels that support their feed stream requirements.
Another example is CP's refusal to ship a member's products under contract unless that member contractually conceded their recourse to the shipper remedies in the act in the event of poor rail service. Perhaps the worst example is both class I railways persisting in their refusal to transport uranium, a decision that defies the common carrier obligation and could adversely affect investment in Canada's world-class uranium resources.
There's a cost to the Canadian economy resulting from poor rail service. Railways do not produce the goods for export that allow trade to grow, our economy to expand, and employment to increase. Rather, they are an essential conduit for Canadian industry to receive crucial inputs and get its goods to market. In this light, the railways are a significant and essential domestic component of market access for Canada's exports as well as its domestic deliveries. Trade begins at home, and without a healthy and reliable railway network, Canada's reputation and success as a trading nation and as a destination for investment, generally speaking, are seriously hampered.
Building on this, and with respect to the extension of Bill , MAC has three areas of concern.
The first is grain volume commitments. Maintaining grain sector-specific volume commitments will exacerbate existing rail capacity constraints to the detriment of all other shipping sectors, including ours. As testified to this committee by the former president and CEO of CN Rail during the first study of Bill , strongarming railways to redirect rail capacity to grain shippers will present a cost to other customer groups on the network. Further, the volume commitment provision operates in conjunction with the rail rate cap that farmers already enjoy. Grain is the only commodity that has a rail rate cap. By paying higher rail rates than those set by the grain cap, miners and all other shipping industries effectively subsidize rail service for the movement of grain. As a result, grain farmers now have the potential for preferential service, with volume commitments at a preferential rate with the grain cap, meaning all other shipping sectors pay more for less.
Mining companies are also concerned that enacting grain sector volume commitments will undermine the legal remedies available to shippers in the act. If mandatory minimums are put in place, how can mining companies forced to operate outside the provisions of Bill make a service case against a railway that is legally obligated, through pain of penalty, to serve grain companies? A railway's unwillingness to break the law requiring it to move grain presents a viable defence against the legal remedies available to other rail customers seeking to address their service challenges.
The second issue that we'd like to discuss is regulating improvements to the service level agreement mechanism. Bill enabled the Canadian Transportation Agency to regulate prescribed elements in arbitrated service level agreements, the details of which were determined through a consultation process soon after the legislation was enacted. While this consultation provided some increased clarity in defining operational terms, the service level agreement provisions persist in requiring that an arbitrator take a rail company's service obligations to other shippers into account before rendering a decision. In the context of Bill C-30, an arbitrator in a service level agreement process will be bound to consider the railway's legal obligation to transport grain against the elements of service that a non-grain shipper is seeking. A railway's volume commitment obligations under the law will supersede regulations designed to enhance a non-grain shipper's position in an arbitrated service level agreement.
In MAC's view, these provisions are instructive in understanding why so few companies have pursued service level agreements.
With respect to interswitching, many MAC members are concerned that the interswitching provisions have resulted in railways being forced to do more short hauls, which are operationally more expensive than longer ones. A consequence of this reduction in rail freight revenue due to the interswitching rate being federally regulated will lead the railways to make up for lost revenue by reducing service to other sectors to better optimize their assets and regain those profits.
MAC is not opposed to interswitching regulations in principle. However, many miners are captive shippers, and there is concern this measure has adversely affected them. We also have members who have benefited from the extension. In this sense, MAC doesn't take a position one way or the other, but would strongly support data disclosure to enable a thorough assessment of the implications of this policy on all shippers reliant on rail freight services.
Finally, the largest obstacle for shippers and public policy-makers in addressing rail freight challenges is the inability to adequately assess the nature of rail service capacity challenges due to a lack of transparency and disclosure of railway data. Because a railway company has control over its data, the shipper is at a significant disadvantage when considering whether to initiate one of the remedies under the act. This is because railways are able to fashion submissions for the adjudicator to which a shipper either cannot respond adequately or respond at all.
The same challenge is faced by decision-makers when attempting to assess the merit of the claims that railways and shippers make in respect of their service, either the service that they're delivering or the service that they're receiving. Needless to say, it's challenging to develop balanced public policy with a data deficit, and recent legislative attempts to do this are a testament to that challenge.
With the goal of enabling balanced commercial relationships in the rail freight market that render better service delivery and avoid costly quasi-judicial hearings, while simultaneously enabling the railways to remain profitable, MAC recommends government take a phased approach.
The first phase would require railway companies to publicly share sector performance and capacity data on a monthly basis, or periodically, and confidentially share company-specific data at a shipper's request.
The second phase would be for decision-makers such as yourselves to collect and analyze this performance and capacity data with the aim of identifying where the specific issues are in the network.
The third phase would be to undertake an agenda of legislative and regulatory changes as needed, only after the causes of rail freight service challenges have been isolated and fit-for-purpose solutions have been identified and informed by data.
MAC supports this approach because collecting and publishing railway data would not only enhance transparency in the transportation system but would also improve railway-shipper relations by minimizing the need for disputes and provide government with the tools necessary to identify, assess, and resolve challenges. It is also consistent with the government's commitment to data transparency and evidence-based policy.
Thank you, Madam Chair and members of the committee, for the opportunity to be here this morning.
Pulse Canada is a national industry association that represents over 35,000 growers and 132 processors or exporters of peas, lentils, beans, and chickpeas, as well as specialty crops such as canary, sunflower, and mustard seeds.
Since 1996, Canadian pulse and special crop production has quadrupled, and Canada is now the world's largest producer and exporter of peas and lentils, accounting for over one third of all global pulse trade.
The market for pulses and special crops is highly competitive, and maintaining and growing Canada's market share is, of course, a top priority for the industry. Competitiveness in global markets depends on a range of factors, and without question one of the most critical factors is the ability to supply in a consistent fashion.
The World Bank, in its “Connecting to Compete” report, noted that “Predictability is central to the overall costs that companies incur in logistics and thus to their competitiveness in global supply chains.”
We were pleased to see that the recent report of the Canada Transportation Act review also acknowledged that “Today’s transportation decisions underpin tomorrow’s economic structure...and, ultimately, the competitiveness of the Canadian economy.”
Pulse and special crops utilize integrated supply chains and are the most multi-modal grain crop in western Canada, with product moving in boxcars, hopper cars, intermodal vans, and marine containers. Even with the product moving in multiple modes through multiple corridors, rail is central to every move.
Rail is central, and Canada's railways hold a great deal of market power, particularly in the grain industry. Of the primary elevators and process facilities in western Canada that serve the grain industry, only four are dual-served by CN and CP. The grain industry is highly captive to one or the other railway, and this market power has given the railways the ability to optimize their networks for their economic benefit, to the detriment of the needs of the users of the rail system.
Canada has always recognized this market power imbalance and prescribed and adjusted the legislative and regulatory framework to address it, the latest example being the act we are speaking about today.
The forces that created the need for the Fair Rail for Grain Farmers Act are the same forces that will fuel the development of a broader strategy to improve the legislative and regulatory environment to offset railway market power, and to create the conditions that result in behaviour, capacity, and service that would be available to shippers in a normal competitive environment.
We view this strategy as needing to focus on two priority areas.
The first is to improve the service level agreement provisions so that shippers can negotiate an effective contractual arrangement for service with the railways.
Second, because not all shippers nor all traffic will be covered by an SLA, we must enhance the provisions of the act that encourage adequate and suitable service and enhance the role of the regulator, the Canadian Transportation Agency.
I will speak first, briefly, on the need for enhancing the service level agreement provisions of the act.
The Fair Rail for Grain Farmers Act gave power to the agency through the new subsection 169.31(1.1) to develop regulations specifying what constitutes “operational terms” in service level agreements. This provision and the subsequent regulation should be made permanent.
SLA should also be strengthened by including financial consequences for railway non-performance as a matter that may be submitted for arbitration. This right should be enshrined in legislation under section 169.31 of the Canada Transportation Act. Financial consequences are critical to the effort of establishing balanced accountability between railways and their customers.
Again, because not every interaction between railways and their customers will be governed by the terms of a confidential contract, it is critical that we also create the broader conditions that will ensure adequate and suitable service for all shippers and all movements.
As a critical first step, Pulse Canada recommends that government restore the Canadian Transportation Agency's power to act on its own to investigate service issues, including systemic issues; to issue general orders; and to issue ex parte orders.
To ensure the agency can fulfill this enhanced regulatory oversight mandate and to aid commercial activities and public policy evaluation and development, a comprehensive integrated data platform, administered by the agency, that supports and delivers information regarding the capacity, demand, and performance of the rail logistics system should be created.
I'll move on to interswitching, because it is a popular topic.
The power given to the agency through the Fair Rail for Grain Farmers Act to extend rail interswitching limits has strengthened an important pro-competitive measure and shipper protection feature of the act. The extended interswitching provisions introduced in the Fair Rail for Grain Farmers Act have given shippers access to another carrier that is willing to compete for business.
Seventy-six per cent of the extended interswitching movement to date has been to the U.S.A., with the largest interswitching move being 125 kilometres and the average being 76 kilometres.
Our members who have used the provision report freight rate savings of between $500 and $1,500 per car, which are significant cost savings over current rate offerings and significant savings for the small and medium-sized shippers we represent. However, we must keep in mind that the purpose of interswitching provisions is to encourage competitive behaviour—namely, to ensure railways are offering competitive rates and service.
When interswitching provisions are working, customers won't have to activate the provision. Therefore, we cannot rely solely on the number of times interswitching has been used to assess its value. The extended interswitching provision should remain in place, as it is now achieving what a pro-competitive measure is meant to achieve.
I'll conclude there, and we can move to questions. Thanks.
Thanks so much. I'll jump in there. My name is Lauren van den Berg and I'm with the Chemistry Industry Association of Canada. Dave and I are sort of tag-teaming here.
I think you raised an excellent point. In fact, the wording of Bill was designed by its very nature to include all commodities and not just grain. Technically it does that, but the catch—because there's always a catch—is that you have to be within the right distance. You have to be within that 160-kilometre zone, zone 5. The problem that a lot of our members have—and I'm sure it's a problem shared around this table and it's a problem you've heard echoed in other witness testimonies—is that it's not enough. It helps only those who are lucky enough to have facilities or plants or mines within that zone. The extension of the interswitching provision last year without a doubt resulted in material cost savings, as we heard from several of our members, but again, only for those lucky few with facilities in the right zone.
The Chemistry Industry Association and several of the other associations we work with are advocating, as shippers, to expand interswitching beyond the 160-kilometre zone. We want it expanded throughout Canada, across all the provinces, and frankly, we want it made permanent.
I will pick up on a theme you've heard before, the idea of captive shippers and the power imbalance those represent. Seventy-eight per cent of our members alone are captive to a single class 1 railway, which represents a significant power imbalance that, if you'll pardon the pun, rails against the very principle of a competitive market economy. When we talk about economic security interests—which, I think, is a very valuable phrase that we could do well to echo every so often—and we're looking to encourage investments over the long term in Canada, we have to be able to make the case that transportation is not just safe and reliable but also competitive, and that's going to benefit the country from economic and security perspectives.
If I may offer a comment, I'll speak in English, because it's better than my French.
Is it sufficient? I have to say no. We need to have some discipline in the process. Right now, we are, number one, captive to all the information supplied by the railways and all the data that comes from the railways. No, in our sector we are looking for some rebalancing.
As for going before the agency, a number of our members said that the cost involved is prohibitive. If they only have a few cars a week, they can't afford to take a million-dollar case to the agency, a case that may take months to get resolved. There needs to be a way.... I think the offer to have a group go forward has been a very significant one, but we need a way to streamline the process.
Bear in mind that the two class I railways have standing legal departments. It's almost like a cost centre or a profit centre for them. That's what a smaller company is up against.
The agency is crucial and important in rebalancing, but it is very daunting to take a case before the agency. You've got to have a lot of problems before you'll do that. It can't be frivolous. It's expensive. It's time-consuming.
This is something we take very seriously.
What we have started to do for the last 40 years, under a responsible care ethic, is engage in training exercises for first respondents. We do what we can to have a safe vessel that goes to the railways, but in addition, we regularly, and across Canada, host first respondents training programs. They are held in communities right across the country.
A month ago we were in Lac-Mégantic for a training session, where first respondents—police and fire respondents—could be trained in how to handle the products and the right and wrong things to do. This is part and parcel of our ethic in managing our goods from the beginning to the end. There are courses that we are giving—we have one coming up in Hinton shortly—right across the country.
We believe that safety is paramount. That's why we move by rail in the first place. We know that trucking has many more incidents, because you need four trucks per railcar. There are many more instances of risk on the highways than there are on the railway. Training and preparing the emergency responders is important in the event of an emergency.
I always say every spill ends up being a chemical spill, because that's how it gets interpreted in the media. We take it beyond our own products to any hazardous products being moved.
As far as the grain industry is concerned, as mentioned in a lot of the comments here today, the hallmark of any modern commercial relationship is that parties are held accountable to each other for their respective performance. If the railways are saying they'll give you the service, but they need more money....
Twenty years ago, the issue was to close some of the elevators, get the efficiencies in the system, and get 100-car spots. The grain industry, whether it's the shippers or the producers, walked the talk and did that. Now it's like a bait and switch; they're saying they'll give the service, but at a higher price.
We wouldn't have this issue if.... The mining and the chemical and the grain industry, and what have you. They don't have an MRE, but they can get a car, supposedly, if they want a car. The issue is service. All of a sudden they're saying, “We'll get you the service, but it's going to cost you a lot more.” That's what the railway is saying.
We're constraining our P and Ls right now to match what we think we need to get for shareholders. We have a huge system to move everything for all of us, east and west, to the ports. As far as a balancing act is concerned, and interswitching with the U.S., we wouldn't have these discussions on interswitching or what have you if the service were there, if the power were there, if the cars were there. We wouldn't have to go through this time and time again.
Thank you very much, and thank you for a great deal of information in your comments and answers to questions.
I want to drill down a little bit because, as you know, over the past number of sessions a number of witnesses have come forward, and their recommendations cover a broad spectrum.
I want to go back to the rail line. It struck me as very interesting, because I heard you say that the interswitching zone should be expanded. The rail lines have said that putting the 160-kilometre capacity in was totally unnecessary, that it should be removed permanently, that it should only be 30 kilometres, and that basically we didn't know what we were doing when we put that in. That's one piece.
The second piece, when I asked about competition, was with BNSF. They were saying that our requirements are not parallel to the U.S. requirements, so if we did away with the legislation, that basically would take BNSF out of the game.
I have one more thing to say, then I'd like your comments on it.
The last piece is that 785 additional railcars are basically simply sitting there, by leaving the 160-kilometre interswitching limit in place.
Can you guys comment on any of that?