Canadian Shipper


Right-sizing the system

A government bill designed to address a backlog of grain in Canada’s Prairies this spring has led to a great deal of debate and dissent among shippers, rail and supply chain stakeholders.

The Minister of Agriculture and Agri-food tabled Bill C-30, the Fair Rail for Grain Farmers Act, in the House of Commons March 26. This followed an order on March 7 by the federal government, under emergency powers within the Canada Transportation Act issued to the railways to improve their performance.

The federal government said the bill would address a backlog of grain resulting from a 100-year harvest and would also assist other rail shippers in obtaining a reasonable definition of service from their rail carriers.

Bill C-30 builds, to some extent, on the Fair Rail Service Act passed in June 2013, said the Freight Management Association of Canada.

Bill C-52’s amendments to the Canada Transportation Act were in some ways seen as a belated response to deficiencies in the system in terms of rail carriage.

That new law was supposed to give every shipper the legal right to have an effective service level agreement with the railways, either negotiated commercially or imposed by an arbitrator.

But on the terms the agreement needed to contain the law was vague and as yet no service level agreements have been signed.

“C-30 provides for the Canadian Transportation Agency to give more specificity to the operational terms that should be included in Service Level Agreements (SLAs). The Fair Rail Service Act gives shippers the right, for the first time in Canadian law, to some reasonable definition of service, and provides that if this cannot be successfully negotiated directly with the railway, the shipper can obtain a SLA through arbitration. The proposed regulations may assist shippers in that process,” said Bob Ballantyne, FMAC’s president.

In addition, Bill C-30 provides for a major change to the “regulated interswitching” provisions of the Canada Transportation Act.

This provision is a surrogate for competition by giving shippers served by only one railway access to a competing railway where there is an interchange between two federally regulated railways within 30 km of the origin (or destination) point. Bill C-30 will, if passed, give the Canadian Transportation Agency the right to increase the distance to which interswitching may apply.

The government has signaled its policy will be to extend the regulated interswitching limit to 160 km in the Prairie Provinces for all shippers.

Wade Sobkowich, executive director of the Western Grain Elevator Association, provided an update on the grain handling situation as Canadian Shipper was going to press in mid April.

At the time, he noted the railcar shortfall to the grain industry stood at 70,000 rail cars.

“Lots of grain that has been ordered to be moved has not yet been moved, resulting in some serious vessel demurrage costs. The industry has paid in the neighbourhood of 50 million dollars on this. There have been contract extension costs to overseas customers and customers in the US,” he said.

“We’ve had a bad year. We started out with a crop that was a third larger than the previous year, but we got grain shipping that was slightly less than last year and there are about 40 million tonnes that have not yet shipped. The country elevators are full and our terminal facilities are at about 40 % of capacity for the majority of the year since the order was passed March 7,” Sobkowich added.

He said there could eventually be an issue if capacity is not apportioned appropriately in all of the rail corridors.

“So far facilities are keeping up as long as the railways step up their programs to the US and to Eastern Canada,” he said.

Part of Bill C-30 includes an oversight provision to give the Canadian Grain Commission to look at disputes between grain companies and producers on contracts.

“We think that would happen anyway. We don’t object to the disciplines in place but we need reciprocity in terms of accountability and compensation from the railways. If a grain company can’t take in a farmer’s grain because of rail capacity we need to be able to get financial compensation, then we can pass on compensation for (the farmers),” said Sobkowich.

Provisions for service level agreements are also not clear, he said.

“Bill C-30 aims to identify what can be arbitrated and ruled on and we need that to include financial penalties,” Sobkowich said.

The Wheat Growers are calling on the federal government to bring about more competition in the western Canadian rail sector, in light of what they are calling “chronic performance failures of CN and CP”, and “their cavalier attitude toward the resulting losses suffered by prairie grain farmers.”

Reacting to comments made by CN CEO Claude Mongeau in a speech in Winnipeg April 9, when Mongeau spoke out strongly against a provision in Bill C-30 that would give shippers modest improved access to US railways, referring to it as “poaching”, Levi Wood, President of the Wheat Growers, said “What Mr. Mongeau calls poaching, we call competition. Sadly, Mr. Mongeau seems to think no one else should have the opportunity to haul our grain, no matter how badly his company performs.”

The Wheat Growers note that CN and CP effectively operate side-by-side monopolies in Western Canada. Only seven of the 342 grain elevators on the prairies have direct access to both CN and CP. The expanded interswitching provision, now contemplated in Bill C-30, the Fair Rail for Grain Farmers Act, would give about 40 of those elevators improved ability to access the shipping services of BNSF Railway, the association said.

It added that the shipping backlog has resulted in artificially depressed prices to farmers that some market analysts are saying will last into 2015.

The association has recommended several measures that it said would bring about more competition and more shipping capacity in the western rail network.

One is to give the Canadian Transportation Agency authorization to call out for more shipping capacity (locomotives, crews, cars or trains) whenever the backlog in grain shipping orders reaches a predetermined level.

This provision would be a means to ensure there is ample “reserve capacity” in the network whenever there is a large crop or heavy customer demand, the association said.

They have also recommended the running rights provisions of the Canada Transportation Act be amended to give other railway operators the right to solicit business from shippers in a running rights application.

Amendments to Bill C-30 that would give the shippers the ability to obtain reciprocal penalties as part of a contractual service agreement with the railways are also part of the recommendations.

“Currently the legislation does not explicitly state that penalty provisions are among the terms that can be arbitrated in shipper arbitration applications to the Agency,” said the association.

Federal Transport Minister Lisa Raitt has commented that “forward planning” is a major part of C-30 in terms of the review of the grain handling system it will afford.

The interswitching provisions will be in place for a period of 24 months while the government analyzes the rates and how well the system works.

Raitt also noted that discussions with other commodities may also emerge.

The federal government will also review what’s been going on since the Fair Rail Service Act passed and its review of the Canada Transportation Act will be pushed up to late 2014 rather than 2015.

Raitt has said that the government’s involvement is “not always about regulations” but about “economic imperatives”, “free trade agreements”, and “future investment.&rdq

Rail carriers insisted the legislation amounted to increased regulatory intrusion and oversight.

“The legislation does not address the root cause of the current grain situation and will do little to move more grain, now or in the future,” said Claude Mongeau, CN president and chief executive officer.

In a speech to the Winnipeg Chamber of Commerce on grain transportation April 9, broadcast live, Mongeau set out to establish CN’s position on the government’s emergency order and accusations that the railway did not adequately respond to shipper demands for the grain harvest.

Mongeau stressed that carriage of crude oil constitutes only 1.5 % of the railway’s overall volume. He also noted the challenges the grain supply is facing stem from extreme circumstances – a huge, 100-year crop and “the winter of a lifetime.”

“Railroaders know what winter does-it’s not just grain-every one of the commodities we move got impacted. We did better for grain than we did for potash. Fundamentally the grain situation is about a record crop that produced 22 million more tonnes than in an average year, and 50% more grain that we have to export,” said Mongeau.

CN’s share of that harvest is about 10 million tonnes, and “nobody can expect any supply chain in the world to move this surplus of grain without adequate notice. In late August the CEOs of grain companies were talking about whether the grain would suffer from frost. It’s only fair to ask if the grain elevators should maybe ship earlier in the year to make room for crops,” he said in his address.

Mongeau also suggested that grain companies have a history of “over ordering” with 30,000 orders placed over their historical best.

“The lack of coordination is exemplified by the grain elevator companies’ handling of the current crop,” Mongeau said. “They got off to a very slow start in August 2013 while the huge crop was maturing in their own backyard. They unfortunately failed to take advantage of at least 10,000 carloads of rail capacity that was available on CN at the time. Then, as the enormity of the harvest struck home for all stakeholders, the grain elevator companies began, and continue, to flood the railways with far more orders than what the system is capable of handling, based on even best historical performance benchmarks. With these inflated orders, the grain elevator companies are setting unrealistic expectations, yet they have been vocally trying to single out railways for criticism, as if we were the only party that needs to step up its performance to meet the challenge of this harvest.”

Mongeau said that once the crop has been cleared, “We have a tough issue. We need to have an ‘adult’ discussion on ‘surge’ crop capacity. We need alignment and accountability for results. I believe in commercial agreements. We’re going to have to level the playing field and regulate ‘all the sectors’. I will make the case we should regulate the grain elevators-and we’ll try the regulated approach,” he said.

But Mongeau warned that the railways “have to protect ourselves against regulatory leverage against us.”

CP Rail president and COO Keith Creel, in his address to the Ottawa agriculture standing committee hearing on Bill C-30 April 1, encouraged the Committee to consider the serious capacity constraints within the current grain supply chain and highlighted that interswitching would worsen the situation for the movement of Canadian grain to markets.

“The reality is the current grain supply chain, of which rail is only one component, cannot move these extraordinary volumes over this short period of time,” said Creel.

“We need solutions that will increase throughput of grain from farm to ship.”

Creel noted that with the improved weather, the railway has “regained momentum”, moving 15% more Western Canadian grain in February and 20% more in March than the previous year, he said.

With respect to the proposed extended interswitching, Creel expressed concerns with its potentially damaging unintended consequences and how it would slow down the grain supply chain due to increased handlings, further constraining capacity. He noted that allowing grain to be interswitched to US railroads could also potentially lead to a negative impact on the Canadian economy.

“I am proud of the railroaders who continue to work tirelessly 24-7 to move this record Canadian crop for the farming community,” added Creel. “Despite this fact, our efforts need to be matched by other partners in the supply chain. We should not allow railcars to sit, waiting to be loaded or unloaded, when they should be cycling back to the prairies or to the ports.”

A group representing the shippers of more than 60 per cent of the goods moved on Canada’s rail system also commented on the situation a week after the federal government introduced its Fair Rail for Grain Growers Act. Five national trade associations – including the Canadian Fertilizer Institute, the Canadian Steel Producers Association, the Chemistry Industry Association of Canada, the Forest Products Association of Canada, and the Mining Association of Canada stated their concern that a sector-by-sector approach would not address broader issues faced across the system.

“Shippers, railways and the government need to take a holistic look at the challenges facing Canada’s transportation system, and develop sustainable commercial solutions that are good for all sectors, the railways, and the Canadian economy,” said Roger Larson, President of the Canadian Fertilizer Institute. “Canada’s prosperity depends on exports and we will all benefit if we enhance shipping capacity, said David Lindsay, President and CEO of the Forest Products Association of Canada.”Our long-term goal is to work with our partners to right-size the transportation system,” he said.

Larson said that this winter’s backlog of grain and other rail shipments “does not represent a blip. Canada’s commodity export pipeline is hitting the limits of capacity.”

He said that Canada stands ready to reap economic benefits from massive investments in key commodity industries and from the new wave of free trade agreements being signed by the federal government, “but only if our commodity export pipeline is up to the task.”

FMAC’s Ballantyne said that a statutory review of the Canada Transportation Act, if it were started earlier than the June 2015 date originally proposed, “would be good as it governs the business side of the industries. It would be very useful it be moved ahead,” he said.

“Our hope would be that they would take another look at the amendments we suggested under Bill C-52 that would spell out in more detail what would be included in rail service agreements,” he said.

“I don’t know anybody within the shipper community that has a really good handle on what they anticipate the Canada Transportation Agency would do in that respect. The Rail Service Review panel did come out with recommendations so it’s possible the CTA would take something out of those,” he added.

Section 7 of C-30 provides authority for the Agency to extend interswitching limits “for the regions or goods that it specifies”.

The interswitching regulations have been useful to shippers over many decades and are an effective surrogate for real competition. Given the current backlog of grain, this temporary provision may give grain shippers more flexibility in arranging service, Ballantyne noted.

“From a national policy point of view you like to see the arrangements between two countries are reciprocal and in the US they don’t have anywhere close to the reg
ulated interswitching rates-they are trying to get some improvement they won’t be as good for shippers as the Canadian regulations,” said Ballantyne.

The other significant provision of C-30 relevant to all shippers is Section 8, which authorizes the Agency to make regulations specifying what constitutes operational terms” to be included in a SLA achieved through arbitration. While it is unclear how the Agency and the government will use this provision, it could be a vehicle for achieving some of the shipper amendments that were rejected by the government during the C-52 debates. FMAC will engage with the Agency as the regulations evolve, FMAC stated.

“Two basic issues that the statutory review should address are the need to provide appropriate rail capacity for the needs of Canadian industry over the coming decades, and the need to improve the relationship and trust between the railways and significantly large segments of their customers.

With regard to shipper-railway relationships, it will be difficult to overcome the distrust and acrimony that currently exists,” Ballantyne said.

FMAC has noted there are informal discussions under way, under the academic umbrella of the Carlton University School of Public Policy and Administration. They run a process called ‘Critical Conversation’ that involves direct and confidential discussions among stakeholders to start a dialogue to overcome the distrust. While arrangements have not yet been confirmed for Critical Conversations to commence between railways and shippers, the planning discussions with stakeholders continue, FMAC said.

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