Submission on the Future of Transportation in Canada and the CTA Review Report

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National Farmers Union Submission to Transport Canada consultation on the Future of Transportation in Canada and the Canada Transportation Act Review Report

September 14, 2016

The National Farmers Union (NFU) would like to thank Minister Garneau and Transport Canada for the opportunity to provide input on the future of transportation in Canada. Our remarks focus on the directions, priorities and actions needed to ensure Canada’s railway system will be able to efficiently deliver agriculture products to domestic and export markets in a fair and equitable manner.

It is important to recognize that farmers do not have the status of shippers under the Canadian Transportation Act. When farmers deliver to a grain company’s elevator, their control over, and interest in the grain ends. The grain company – not the farmer — is the shipper for the purposes of the Act. Rights, benefits, penalties and obligations of shippers do not apply to individual farmers who sell to grain companies. However, companies are able to pass their transportation costs on to farmers by subtracting freight costs from the price offered for grain. Since farmers ultimately bear the cost of transportation, freight rate regulation is in the interest of farmers.

NFU Response to Report of the Canada Transportation Act Review

Several recommendations in the Report of the Canada Transportation Act Review (CTA Review) unduly reflect the business interests of CN and CP at the expense of shippers and others who depend on the railways for their livelihoods. If implemented, these recommendations would have serious negative effects on Canada’s economy, environment and social fabric. We hope that the present consultation process will lead to these deleterious recommendations being abandoned.

1. CTA Review Report recommendation 6 (a) – Amendment of Common Carrier Obligation

CTA Review Report recommends: the level of services provisions in the Canada Transportation Act, sections 113-116, be amended to recognize shippers and their collective needs, in the context of the optimal performance of the freight rail system.

Since 1909 Canada’s railways’ common carrier obligation has required them to move a duly loaded car from its origin to its destination in a timely fashion. The common carrier obligation recognizes the vital role that rail transportation plays in the economy, particularly for bulk commodity shippers that have no alternative (captive shippers). Railways owe their existence to the state, which provides them with the physical and regulatory environment in which to operate. In return, railways are required to provide service to all of the country’s shippers regardless of facility location or number of cars to be moved.

If adopted, CTA Review recommendation 6 (a) would introduce permission for railways to discriminate among shippers and locations, which they would justify by claiming it would promote faster service to their preferred customers. It appears that the CTA Review even recommends allowing the railway companies to deny some shippers service altogether by arguing that total costs of the system would thereby be reduced. This is tantamount to handing veto power to CN and CP.

If this recommendation were adopted, captive shippers, including grain, would be the first to suffer. Facilities in more remote locations and smaller shippers, such as producer car loading sites, would be most vulnerable to delays and uncertainty, and perhaps even complete abandonment. Both the farmers who deliver grain to these sites and the domestic customers supplied by these shippers, such as feed mills, crushing plants and flour mills, would also be harmed to the detriment of the local economies at both ends.

The logical conclusion of Recommendation 6 (a) would be physical reconfiguration of Canada’s railway system to serve the private interests of CN and CP. We have already seen significant contraction of the system and consolidation of delivery points under the current, regulated system. Without the rail service guaranteed by the existing common carrier obligation, agricultural regions with higher transportation costs may well lose service altogether, leading to farms being abandoned and rural communities depopulated. Such an outcome is not in the public interest, nor should the fate of rural areas be left in the hands of the railways.

2. CTA Review Report recommendation 1 that “the Maximum Revenue Entitlement Program be modernized, in anticipation of its total elimination within a seven-year time horizon …”

The primary function of theMaximum Revenue Entitlement Program (MRE) is to link freight rates to the railways’ actual costs, thereby limiting rate inflation. It is not a cap on total revenues nor on the total amount of grain hauled. The MRE rate formula builds in a profit for the railways, and is designed so that the rate will always go up, even if costs such as fuel or labour go down. Eliminating the MRE would result in freight rates rising to what the market can bear instead of being held to costs plus profit. Farmers are price-takers when selling grain, and grain companies are captive shippers. Any increase in freight rates would be borne by farmers, as grain companies (the shippers) would recover costs by reducing grain prices paid to farmers. Regulated freight rates are necessary to prevent grain companies and railways from using their monopoly powers to extract more than their fair share from the value of the grain.

The NFU recommends that the MRE be maintained, that a full costing review be undertaken, that the costing formula be revised to allow for rates to drop if/when costs (such as fuel) go down, and that small shippers have access to an alternative to the courts for dispute resolution. A full costing review is needed to increase transparency and restore fairness to the MRE in light of the significant restructuring of the railway system since the previous costing review. Costing review formulae need to be redesigned to permit downward rate adjustments in situations where prices of cost components go down. An arbitration mechanism is needed to deal with price and service level discrepancies. Smaller shippers must have an access to justice through a lower-cost alternative to the courts to effectively challenge unreasonable rate quotes that railroads use to unduly discriminate between locations and thereby reduce service for cost-cutting purposes.

3. CTA Review Report recommendation 1(b) Premium “bid car” fleet

CTA Review Report recommendation 1(b) would allow railways to “set aside up to one-third of their respective railcar fleets, for which shippers may pay “freight premiums” to guarantee railcar supply and service. These “premiums” would be excluded from the railways’ respective Maximum Revenue Entitlements and charged under specific programs or conditions (e.g. winter premiums from December to March, or an auction program whereby a pool of grain hopper cars are set-aside for auction to the highest bidder, etc.); such programs should be designed to include the less than unit-train shippers.”

This recommendation could quickly be used to force higher payment for any service, particularly for smaller captive shippers such as producer car shippers, and those in more remote locations. If combined with the CTA Review’s common carrier obligation recommendation the effects would be even more severe.

This recommendation would provide a strong incentive for the railways to refuse service to smaller loading sites unless they paid a premium. Higher freight rates could easily make these locations uneconomic, forcing closure. Consolidation of facilities into fewer, larger terminals will shift more grain traffic onto trucks, causing road damage and higher greenhouse gas emissions from the transportation system.

The USA has a bid car fleet system. Per-car freight rates do not reflect the railways’ costs, but rather the maximum amount that can be extracted per car based on the value of the product inside the car to be shipped. The rates charged on two identical cars on the same train may differ simply because the railway has the power to force captive shippers to bid up until they have allocated all potential returns from the shipment to freight. The captive shipper has no alternative. Grain companies offload the “extra” cost of bidding up freight rates by paying farmers less for their grain via basis discounts. Bidding high for a grain car does not necessarily guarantee service, as shippers of other products may be able to bid even higher. Lower value commodities must wait until the railway has exhausted its higher-value car bids. Non-captive shippers (such as intermodal, container traffic) will always be ahead of the lower value bid-car shipper, as the railway avoids losing container revenue by making the captive shipper wait.

The bid car fleet idea is based on the ideology that a “competitive” market efficiently allocates resources to those activities that return the highest profit. This ideology cannot be applied to Canada’s grain transportation system because we have two monopolistic railways that control access and movement of goods: most grain loading facilities are served by only one railway and bulk commodities are located in specific places that are distant from markets and have no transportation alternative.

4. Renewing the hopper car fleet

The CTA Review Report recommends increasing railway companies’ revenues by reducing taxes (accelerated capital depreciation) and ending the MRE (revenue cap) and hoping that in return, they will invest in replacement cars for the hopper car fleet.

The CTA Review Report authors’ belief that the problem of renewing the hopper car fleet can be solved by voluntary investment by the railways is misguided at best. That the railways would somehow honor a “gentleman’s agreement” to invest in hopper cars in return for regulatory changes that allow them to extract additional revenue and depreciate capital costs faster is naïve. Both CN and CP have a history of maximizing shareholder return by cutting both labour and capital costs. Indeed it is their duty as private corporations to act on behalf of shareholders with no obligation to put public interest first. Why would we expect them to act differently with the grain sector?

Other captive shippers, such as potash and oil, provide their own cars. These industries are centralized in terms of locations and control, which facilitates investment in and administration of their car fleets. In the absence of a single desk selling agency for grain, there is no central authority to oversee the renewal of the hopper car fleet. Grain loading facilities are widely dispersed and there are a large enough number of shippers to make coordination or fleet renewal problematic. The MRE program covers hopper car maintenance. It would make sense to continue the MRE for car maintenance and use public dollars, whether federal or provincial, to invest in fleet renewal. This would promote equity among shippers using the system and avoid wasteful competition and hoarding of cars by private owners. The cost of new cars would be reduced under public ownership because governments can obtain credit at the best rates. Lease payments for the use of publicly owned railcars would be returned to government and could be directed towards appropriate initiatives in the interests of producers. Investment in hopper car fleet renewal would be an appropriate investment in Canada’s infrastructure, which is a priority of the federal government.

5. Status of Producer Car Shippers

The NFU would like to comment on the CTA Review’s recommendation 2, “that the Canada Transportation Act explicitly define “producer-car shippers” as “shippers” and therefore eligible for all shipper protection provisions enshrined in the Act, including its level of service provisions.”

Bringing a level of service complaint is an extremely costly process involving expensive and time-consuming legal, accounting, and economic expertise. Even multinational grain companies are reluctant to take on such a fight with the railways. Furthermore, if successful, the remedy in a level of service complaint is effective for only one year. If the situation occurs again, a new complaint must be initiated. Producer car shippers would not have the means to bring a level of service complaint, so making them eligible to do so would be an empty right.

The CTA Review’s suggestion that producer car shippers’ problems could be solved if they had shipper status, is also illogical considering its recommendation that level of service provisions under common carrier obligations be assessed on a system-wide basis. The railways would argue that timely movement of producer cars would impair their efficiency in serving other, larger customers. If railways are allowed to make decisions regarding service according to what is most profitable for them, producer cars will always be last in line, served only at the end of the season or in poor crop years when there is low volumes of grain.

Timely allocation and spotting of railcars to producer car loading sites and the timely movement of producer cars to destination could be solved by reinstating the regulatory provision that producer cars are first in line for railcar allocation and levying progressively increasing fines to railways for failure to move cars to their destination in a timely fashion.

The right of producers to order and load railcars to ship grain to terminal or process elevators or other consignees was established as a necessary check on the power of grain companies and railways. Producer car shipping provisions ensure farmers have access to rail transportation and an alternative to delivering to grain elevators. This right must not only exist on paper, but must also be realized in practice. The railways’ authority to close producer car loading sites should be rescinded and the right often producers to petition to have a producer car loading site constructed should be reinstated to ensure that producers, not railways decide on the availability of this option.

There are many innovations that could lead to a return of producer cars fulfilling their intended disciplinary effect on grain companies and railways. For example, the NFU has proposed a new “Producer Car Receiver” be established under the authority of the Canadian Grain Commission. It would have the authority to negotiate producer car sales with the receiving terminal and ensure unloading and grading is done promptly. The body would be responsible for allocating the grain to the respective terminals, however ownership of the grain would not be transferred to the terminal until the producer car receiver was satisfied with all aspects of the transaction, including weights, grade, and payment.

6. Gaps created by the destruction of the single-desk Canadian Wheat Board

The text of the CTA Review acknowledges the positive role the single-desk Canadian Wheat Board (CWB) played in grain transportation logistics until it was dismantled on August 1, 2012. The CWB’s responsibility to sell all of Canada’s wheat and barley exports as well as domestic wheat for human consumption meant it had the necessary information to plan, schedule and coordinate shipments to domestic users and all export positions, use the whole railway system for maximum benefit to all grain growers, and call for grain in an orderly fashion to ensure all producers were served and the whole crop could be marketed, including those loaded as producer car shipments. The CWB’s one level of service complaint was successful and served to discipline the railways in subsequent years. The CWB’s effective logistics coordination for wheat and barley also had a positive influence on the shipping of canola, oats and other crops as well.

After the CWB was destroyed the competitive system promoted by market idealists proved to be chaotic, costly and unjust. Subsequent problems with bottlenecks at country elevators, lack of information about crop volume, under-use of the ports of Churchill and Thunder Bay, repeated docking and long waiting times for ocean vessels resulted in high costs which were borne by farmers, particularly those more distant from the West Coast. Re-establishing a farmer-directed single-desk selling agency for grain would not only improve the efficiency of the transportation system for grain farmers, it would improve the economic status of Canadian farmers by repatriating the economic returns from international grain sales and making them available for investment in our own farms and rural communities.

7. Need to Change the National Transportation Policy

The Canada Transportation Act’s mandatory review process mandate includes option to recommend amendments to Canada’s National Transportation Policy, which is expressed in Section 5 of the Act. The CTA Review suggested minor changes to wording to better define transportation access for persons with disabilities and to emphasize the importance of transportation to international trade.

The NFU recommends other changes to the National Transportation Policy. The current Policy unduly relies on “competition and market forces” and thereby abdicates the legitimate role of accountable, democratic governments to make critical decisions regarding the parameters in which the transportation system should operate to promote the greater public interest. As it is, the Policy promotes and facilitates the most profitable use of railway company assets for private gain. Instead, it should be designed to promote the economic interests of the whole Canadian economy, including agricultural producers.

The National Transportation Policy should also explicitly recognize the need to address climate change by reducing fossil fuel use in, and greenhouse gas emissions from the transportation system. Rail transportation should be prioritized to increase the energy efficiency of Canada’s economy. The trend to ever fewer, larger high-throughput loading sites needs to be reversed. More nodes, loading sites, branch lines, and short lines are required to promote the use of railways for both freight and passenger movement.

The railways should be actively governed and regulated as vital infrastructure to serve the larger interests of Canadian society. This approach would also benefit the railway companies, as a healthy, diverse, vibrant society will provide a wide range of economic activities in communities distributed across the country which will all need to be connected to and supported by the transportation system.

Respectfully submitted by

The National Farmers Union

September 14, 2016