national
farmers union
National Farmers Union Submission
to the
Senate Committee on Transportation and Communications
on
Bill C-14,
the Canada Transportation Act
Ottawa, Ontario
April 25, 1996
Introduction
The National Farmers Union welcomes the opportunity to put forward our views on Bill C-14, the Canadian Transportation Act. The National Farmers Union is the only direct membership national farm organization in Canada. We represent producers from across the country, including many western Canadian grain producers.
The Canadian Transportation Act is a sweeping bill meant to replace the National Transportation Act of 1987 (NTA '87), and the Western Grain Transportation Act (WGTA). Until August 1 of this year, grain transportation has been regulated under the WGTA, and so grain producers have had little direct experience with the NTA '87. Yet we are rapidly progressing to a further deregulated system under the new Canadian Transportation Act.
In the following, the National Farmers Union will illustrate that producers are captive to a duopoly to provide a service needed for their livelihood. Therefore, producers have a specific interest in retaining a degree of regulation in the system.
Background
First, the NFU notes that transportation, rail transport in particular, is a vital component of the western agricultural sector. Canadian grain producers are much further from tide-water than any of our global competitors. We exported a record 37 million tonnes of grain last year by rail. Those rail transportation costs are a significant portion of producers' gross income. As an example, at $40 per tonne, they will cost up to 20% of the producers' revenue on wheat.
Currently neither trucking nor U.S. rail routes are cost competitive to the Canadian rail system. Therefore grain farmers are dependent upon Canadian rail carriers to get their product to export, and have a direct interest in any changes to the rail system.
The CTA proposes a number of changes, which, although relatively minor in appearance, shift power from shippers to the railways. The National Farmers Union does not see this as a positive move for producers or the Canadian economy in general.
Canada's rail system is a duopoly. At present, U.S. rates are high, and trucking is not a viable option over the longer distances from the prairies to port. Western Canadian producers are captive shippers. There is good reason to expect that freight rates will increase when the maximum tariffs are removed. Now with the productivity formula proposed in the federal budget, some of those cost savings will be passed to producers as long as there is some regulation of freight rates.
A privately owned CN and CP will, logically, try to maximize their profit. As a duopoly, they will raise rats to the maximum producers can bear. This is likely to occur at the point where they face competition. This is standard monopoly practice. They have no incentive to lower rates in order you serve public purpose. Thus there is a clear need for regulation here.
It is more expensive to ship wheat from Billings, Montana to Portland, Oregon, than it is to ship wheat from Alliance, Nebraska to Portland, -- even though both are major points, on the same line, and Billings in almost 500 miles closer to port.
"Some years ago, the U.S. Interstate Commerce Commission ruled that Montana grain producers are captives of Burlington Northern because it is essentially the only railroad available for hauling heavy commodity loads such as grain. The BN doesn't have any competition to speak of [in Montana], so it charges significantly higher rates here than in Nebraska, where it does have competition from other railroads," said George Paul of the Montana Farmers Union.
Montana farmers pay US$31 million more per year than Nebraska producers to ship grain to port, or US$278 more per grain car.[1]
Canada currently has a low-cost, efficient transportation system.. The NFU submits that these changes will, in fact, lead to higher (overall) cost and a less efficient system.
When looking at grain transportation, one must consider not only the cost of rail movement, but the full cost of getting grain from the farm to export position. Thus, when trying to increase the system's efficiency, the government should be careful not just to download costs from one sector to another. As an example, branchline abandonment may decrease rail costs, but it increases producers' costs as they have to truck the grain further.
WGTA to NTA '87
With the loss of the WGTA, producers are already losing a number of checks and balances which modified railway power in the shipment of grain.
Costing Reviews
The WGTA included four-year costing reviews, which forced the railways to pass along cost savings to producers. Currently, there is a proposal for sharing of efficiency gains as of 1998, but it would only be viable while the rail freight rate caps are in place. This is uncertain after 1999. As well, the efficiency gains made since the last review started in 1992 will be lost to producers and shippers.
Because the railways operate in a duopoly, the lack of competition means that they are not likely to pass along any 'efficiency' gains to producers without regulation.
The government's ability to get costing figures from the railroads seem to be lessened under the CTA.
Performance Guarantees
The WGTA has functioned as a direct 'regulatory hammer' to control the railways' provision of service for grain trade. Under the WGTA there are performance guarantees for the railroads. The GTA reviewed the railways' movement of grain quarterly, with the ability to fine the railways then percent of the Crow benefit if they were not meeting standards. Without the Crow and without the WGTA, there are no such guarantees.
Rail Car Allocation
Under the GTA, Canada had a third-part rail car allocation system. It accommodated our ship to sales system, it coordinated rail capacity and sales and allowed for efficiencies through the single coordination of a system that contains many variables. As well, the system acted to mitigate the power of the railroads, but that system was ended with the loss of the WGTA.
There is currently discussion about turning car allocation over to the railroads. As many commodities can garner greater returns per car, would it not be in the railroads' best interests to allocate cars away from grain? This tendency would be amplified by a general car shortage or the continuation of the freight rate cap on grain traffic.
Producer Input
The WGTA included forums, such as the Senior Grains Transportation Advisory Committee for producers to have input through representatives of their choice. Neither the NTA, nor the CTA includes such a mechanism. As noted below, producers are different from shippers. They do not have the same bargaining power as the railroads held by shippers, and therefore cannot reap the incentive rates and other service options available to other bulk shipper/producers
Therefore there is a continued need for producers to have a method for direct input into the decisions shaping their transportation system.
Producers and Shippers are not the same
As an organization comprised of producers, the NFU must note the difference between producers and shippers. Grain in one of the few commodities where the producers of the commodity are not the shippers of the commodity.
In a class action suit filed by the NFU against CN and CP rail on May 11, 1979, it was ruled that farmers did not have a claim for poor performance against the railway companies because the Canadian Wheat Board was the shipper of the grain involved.
This fact is further recognized by CN in its application for variable rates under the WGTA in 1987. A submission by CN to the Saskatchewan Urban Municipalities states:
"Specifically, whether the $1.50 per tonne reduction will be split between the grain companies and the producers is something beyond CN's control and most likely is something that will be determined by market conditions and the competitive position of the various shipper proponents of the rate reduction."
Thus producers do not always reap the benefits gained by shippers.
Yet producers will certainly feel the impact of increased freight rates which will occur in an unchecked monopoly.
One of the arguments made by the government was that freight rates would be checked by competition. Yet we see competition being stifled under the CTA.
NTA '87 to CTA
Rate and Service Provisions
The CTA adds barriers to shippers trying to access rate and service provisions.
Subsection 27(2) institutes a test of 'substantial commercial harm' before a shipper can access rate or service provisions.
"... in making its decision the Agency must be satisfied, after considering the circumstances of the particular case, that the applicant would suffer substantial commercial harm if the relief were not granted.." (our emphasis)
The National Farmers Union recommends that subsection 27(2) be removed from the bill.
The National Farmers Union notes with pleasure that subsection 34(1) which provided for penalties to be levied against 'frivolous or vexations' complaints, was removed from the bill.
Section 113 of the Act provides that a rate or condition of service established by the Agency must be 'commercially fair and reasonable';
The term 'commercially fair and reasonable' is sufficiently vague to allow for railways to use this clause as a stalling tactic against granting shipper rate relief. This section adds another layer of complexity giving the railways another avenue to go back to the Agency and stonewall the shippers.
Although not as blatant as subsection 27(2), this section against gives that carriers an arsenal of red tape to block shipper access to rate or service provisions.
The NFU recommends that Section 113 be removed from the bill.
Branchline abandonment
The CTA removes several key sections of the NTA with regards to branchline abandonment, making it easier for railways to abandon lines, and more difficult to keep those lines operational.
Railways do not have to give advance notice before advertising a branchline for sale. Even though they are asked to indicate their plans for branchlines in a three year plan, there is nothing holding the railways to that plan.
The NFU recommends that railways not be allowed to initiate abandonment unless the three year plan has the line listed as to be discontinued.
After a railway has decided to abandon a line, it is no longer forced to sell abandoned lines to a party (other than government) wanting to operate that rail line. If a railway felt that if another operator took over operation of the line, the railway might lose traffic to the competitor, it would be in the railways interest to ensure that the line was not sold. Therefore the NFU notes that there is a need for a clause in the CTA to ensure that railways sell to interested parties who will keep the track in operation.
The NTA '87, subsection 174(3)
"Where an offer has been made under subsection (1) in respect of a branch line or a segment thereof, the Agency shall, ... make an offer directing the company that operates the line to transfer the line or segment to the company making the offer..."
Neither this provision, nor any equivalent, exists in the CTA.
If the railway does not come to agreement with the non-government buyer, each level of government (federal, provincial and municipal) has 30 days in which to declare their interest in the branchline.
The NFU recommends that the CTA include subsection 174(3) of the NTA '87.
There is not longer a mechanism for community input into branchline abandonment.
The only existing method left for community interests is the government buyout possibility. If a community decided that it wanted to retain a branchline, it would have only 30 days to lobby each level of government in order to obtain an agreement to purchase. Not only is this a cumbersome, indirect process, it is one that the time frame also makes futile.
From the NTA '87, the NTA could disallow abandonment if operation of the branchline was found to be in the public interest.
Section 166 of the NTA '87 states:
"... the Agency shall ... order that the operation of the branchline segment be abandoned unless it determines that the operation of the branchline or segment is required in the public interest.
Section 167"In determining whether the operation of a branchline or a segment thereof is required in the public interest, the Agency shall consider ...
None of this is in the CTA
The National Farmers Union recommends that the CTA include sections 166 and 167 of the NTA '87.
A transportation system is more than capital owned by a company. It is part of the infrastructure for the economy, and should not be discarded without thought to the impacts to the communities involved, the greater transportation system or the economy in general. Yet the CTA hands this power over to the railways.
Railways are not a charity. They will base their decisions on whether or not to abandon on accounting. Imagine the road structure in Canada if decisions regarding the building of roads were made the same way. The federal government is segmenting the railroad structure, and removing our ability to monitor the whole system. This leads to a very narrow, and therefore false, view of what should be an integral piece of Canada's infrastructure.
As an example of what could happen under the government's proposed system, Transport Concepts looks at North Dakota, and what is left of its branchline network. If the prairies experience the same level of abandonment as our southern neighbour, 2500 kilometers, or 25% of the rail network would be abandoned. That number could be even higher. "To achieve the economies of density experienced in North Dakota, about 50% of the Canadian prairie rail network could be abandoned."[2]
This would not be possibility under the NTA '87 as it has a section noting capping the railways at abandoning a maximum of 4% of their network.
NTA '87 subsection 159 (4) notes:
"Notwithstanding anything in this Part, no railways company shall abandon more than four percent of its total mileage in the first five years after this section comes into force."
This will be possible under the CTA.
The mainline carriers do not only have abandonment in their arsenal, they also can demarket branchlines. That is, the mainline carriers can limit service, or maintenance, deterring multi-point shippers from using that stretch of track.
The NFU recommends that the CTA include a clause to prevent the demarketing of a rail line.
This could be done by allowing other carriers access to that line, as well as allowing conveyance procedures to be initiated by a possible buyer when it seems that demarketing is occurring.
Over $900 million federal funds have gone to rehabilitate grain-dependent branch lines. The CTA shows that there is no attempt to either recoup any of this tax money, nor minimally, ensure that the infrastructure it helped to build remains in the system.
Short Line Railroads
If, as indicated by quotes from the past Minister of Transport and current Minister of Agriculture, it is the federal government's intent to make short lines an alternative to main line carriers, both to keep infrastructure in the system, and act as competition to keep rail down, the NFU notes that short line railroads will have a limited future under this legislation.
Short lines, like shippers, need leverage for dealing with the main line carrier, and this legislation removes much of that leverage. From purchasing lines to negotiating revenue splitting, to accessing rate provisions, short lines need regulation. If the main line carrier is abandoning a line on which it fears competition, there are no provisions to force that carrier to sell the line to an interested short line.
The NTA '87 states:
"(3) Where an offer has been made under subsection (1) in respect of a branch line or a segment thereof, the Agency shall,...
make an order directing the company that operates the line to transfer the line or segment to the company making the offer..."
Even if a short line can purchase the rail line, there is no provision to ensure they receive a fair deal on revenue division, or a satisfactory operating agreement with the mainline carrier.
The National Farmers Union suggests that for short lines to be able to keep infrastructure operational, the following changes to Bill C-14 need to be made:
(1) The NFU recommends that the CTA include running rights for short lines to allow them access to both main line carriers.
The inclusion of Running Rights in the CTA has the support of the three prairie provinces as well as the majority of shippers. Like competitive line rates for shippers, it give short lines access to some benefits of competition, as opposed to being captive to one railway.
(2) The NFU recommends that the CTA include final offer arbitration that could cover rail line purchase and operating and interchange agreements.
This provision could include a mechanism to force a line they are abandoning to a carrier who will keep it operational.
Current rail system versus the U.S.
Canada's current railway system is efficient, and is competitive with U.S. railways in cost and turnaround time.
Car turnaround times:
Burlington Northern (BN), the most efficient U.S. railroad, Average turnaround time 18 days to West Coast
Canadian Average to West Coast 19.2 days (CWB grains 17.9)
Port Storage Capacity:
Western Posts services by BN are operating at 50% of capacity,
Canadian Ports are operating at maximum capacity.
As a Transport Concepts report for the British Columbia government notes "... the playing field is not level in North America. Rates of taxation are higher in Canada, and the U.S. continues to subsidize grain exports through support to inland waterways, a type of subsidy that can be maintained under GATT."[3]
Freight Rates:[4]| Sask to Vancouver $U.S. per tonne | Minot, ND to Portland $U.S. per tonne single car rate | Minot, ND to Portland, $U.S. per tonne, block train rate | |
|---|---|---|---|
| Farm to Elevator | 2.58 | 2.75 | 2.75 |
| Prarie Elevator | 12.91 | 4.45 | 6.06 |
| Rail Freight | 27.44 | 46.54 | 37.90 |
| Marketing | 2.66 | 4.04 | 3.00 |
| Export Elevator | 6.01 | 3.67 | 2.57 |
| Total | 51.60 | 61.45 | 52.28 |
The U.S. is also spending significant funds on rail infrastructure. As examples, they are spending $1.4 billion upgrading West Coast port facilities, helping build an intermodal rail corridor also at a west coast port, as well as funding dredging at a number of ports.
With this in mind, if the Canadian government truly wants to ' make our railways competitive' with the U.S., the government would, like the U.S., help fund increased infrastructure, not laden Canadian shippers with higher freight rates, fewer service provision mechanisms, and a declining rail infrastructure.
Conclusion
Canada's current rail system is a duopoly. Companies in a duopoly inherently wield a large degree of market power. That market power needs to be checked by regulation.
Moving to a completely deregulated system does not lead to a least cost system overall. In fact, it leads to the downloading of costs to shippers and producers, many of whom cannot afford the sudden drop in net income this implies. The impact to the Canadian economy would be significant.
This bill removes some of the checks and balances of the current regulatory regime as well as blocking access to provisions meant to enhance competition in the rail transportation system.
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