Rail Freight Services: Make them Fair, Reliable and Affordable

NDP Transport Critic Olivia Chow Pushes for Improved Bill C-52 to Protect Rail Customers

February 4, 2013

OTTAWA – Canada’s economy is losing jobs and exports are hurting because of bad rail freight services. From rotting crops in the Prairies and Ontario to idled mining operations and paper mills in BC and Quebec. When rail companies don’t pick up and deliver on time, the consequences are serious. Shippers need a federal law to make rail freight services reliable and affordable.

The federal government has finally tabled a bill, C-52. While it gives rail customers the right to get a service agreement with rail companies, much more needs to be done. Rail customers deserve compensation when rail cars don’t show up on time or in insufficient numbers. To resolve conflicts, shippers need access to an inexpensive, neutral resolution process.

In her speech on Bill C-52, the NDP Transport Critic shows what’s wrong with Canada’s rail freight sector and why farmers, manufacturing and natural resource companies deserve protection from monopoly power.

Transcript:

Ms. Olivia Chow (Trinity—Spadina, NDP):

Mr. Speaker, every day Canadian shippers suffer from the consequences of getting unreliable freight services.

Farmers cannot get their grain, soybeans and canola delivered to the port on time, resulting in missed ships, upset overseas customers and rotting crops. Lumber and paper companies in more than 500 forestry-dependent communities cannot get their products shipped or supplies delivered because of patchy rail freight services, affecting the livelihoods of hundreds of thousands of Canadians. Mining operations, the largest employer for aboriginal people, have to idle productions because they cannot get their coal and other minerals picked up on time.

The effects are real: hundreds of millions of dollars in lost productivity, countless lost jobs and lower competitiveness for Canadian businesses in the global marketplace. Canada’s farming, natural resources and manufacturing companies are innovative and hard-working, but they lose out against global competitors when they cannot connect with their export partners and disrupted supply chains.

Why is this? Why are our farmers frustrated about delayed pickups of their crops? Why are mining companies frustrated about promised rail cars that are never delivered? Why are paper factories frustrated about damaged rail cars they cannot put their products on?

It is because we have a classic case of market power abuse. The small lentil farmer in Manitoba simply cannot get reliable and affordable freight services from a rail company like CN, even though CN made an annual profit last year of $2.7 billion. Those lucky enough to get a contract with CN and CP have to put up with service disruptions, while many smaller companies cannot even get a contract in the first place.

Eight out of 10 rail customers are unhappy with the freight services they get from the big rail companies. Around 80% of rail commitments between the rail companies and farmers and grain elevators are not fulfilled. The future picture is even more dramatic. Forty-five percent of shippers say that their rail freight services have gotten worse over the past three years.

Why is the situation so bad? Healthy competition in a marketplace brings prices down and creates a balance between supply and demand. However that is not the case with rail freight services. Rail freight customers are faced with the entrenched dual monopoly. Together CN and CP dominate with a market share of close to 95%. CN alone accounts for 57% of the market based on revenues, and CP accounts for 38%. The remaining 5% is 49 short-line operators that haul freight to the 2 main lines.

Around 80% of rural shippers are captive, meaning they have no choice but to go with the one big rail company that operates in their area, a textbook case of a monopoly. They have no choice but to pay higher prices, no choice but to suffer the consequence of unreliable services, and no choice but to endure scheduling changes without advance notice.

Canadians have no choice but to get a black eye on the international stage for unreliable export delivery. It is a marketplace that is broken, where legitimate demand is not countered by adequate supply of services. In the words of the Canadian Industrial Transportation Association:

“Rail freight is not a normally functioning competitive market and this is the fundamental issue underlying all the price and service problems encountered by rail shippers… It is a market dominated by sellers.”

By that, it meant CN and CP. What about other modes of transportation? Why can rail freight customers not ditch the rail companies and go with delivery by truck or ship?

To quote the Canadian Industrial Transportation Association again:

“The reality of moving to other modes in most cases is not practical in any reasonable scenario. Truck equipment may not be available in the short to medium term and volumes may be too great to transport to truck…

Over the past seven decades, the railways have lost significant market share to trucking and it is likely that most traffic that could take advantage of the trucking option has moved to truck.”

In other words, trucking only works for certain distances, depending upon the value and the volume of the freight. Just to illustrate: a train hauling potash carries an average cargo of 10,000 tonnes. That is the equivalent 385 semi-trucks.

Leaving aside considerations like pricing and delivery time, just getting such a fleet of trucks is simply unrealistic, in most case, when the rail company decides not to show up on time.

And it is not just the shippers that are captive. Many of Canada’s ports are, as well.

East of Montreal, to the Port of Halifax, CN is the only major railway. A similar situation exists in northern B.C., with CN being the only railway serving the port of Prince Rupert. Likewise, southeastern B.C. and southern Alberta are served only by CP. In parts of northern Ontario, the CN and CP main lines are enough separated that they are monopoly rail carriers in those areas, as well.

Given this situation, any efforts from the industry and the government must focus on improving rail freight services while making the pricing competitive so rail freight customers are not left completely vulnerable.

One of the core issues is that shippers have no effective way to get the contracts fulfilled, if they are even among the lucky ones who are able to sign an agreement.

In the words of the Western Grain Elevator Association, rail companies continue to deliver unreliable services, “because they can – there are no effective legal or financial consequences”.

When it comes to consequences for non-performance we, again, have a completely lopsided situation.

By contrast, shippers have to pay penalty fees to CN and CP if they do not have the promised volumes ready for shipping or if they fail to load the rail cars on time.

However, it does work the other way around. If rail cars are not showing up on time or if goods are being delivered late, there is no problem for CN and CP. They get away with all the unreliable behaviour or bad behaviour without paying a penny — or should I say a nickel, today?

The shipper has no choice but to suffer the economic consequences caused by the rail companies. So, we have a pretty desperate picture of Canada’s rail customers.

What has the current government done to protect them?

For years, it kept itself busy with talking and making promises.

In 2007, the government promised an independent investigation of the situation. The much-heralded rail freight service review finally started in 2008. For almost three years, its experts gathered information, talked to shippers and rail companies, commissioned a much revealing survey and came up with eight key recommendations.

The final report was tabled in early 2011.

The Minister of Transport, at that time, promised legislation. Then what happened? There was an election. After the election: more talking.

More than half a year after the final report, the Minister of Agriculture and Agri-Food decided it was not time for action yet. So, he started the crop logistics working group.

Of course, the Minister of Transport did not want to be outdone, so he kicked off a mediation process between shippers and rail companies in late 2011.

However, as predicated, the mediation was ultimately fruitless because there is a complete imbalance of power. CN and CP were unwilling to make meaningful concessions during the several rounds of negotiations.

Without yielding any concrete results, the chair, Jim Dinning, released a report in June 2012.

New Democrats have stood with the shippers along the way. I tabled my own bill, the Rail Customer Protection Act, using the recommendations of these various reports. I have repeatedly called on the minister to give rail customers fair, reliable and affordable services they need to be successful and to make Canada’s economy stronger.

The shipping community has consistently been asking the federal government to fix major issues. They have been talking about this for at least over 10 years. One would assume that after all those deliberations and investigations the government would present a rock solid bill that protects rail customers, levels the playing field and brings a balance of power to shipping customers. Unfortunately, while Bill C-52 is a step forward, it falls short of what should be accomplished.

How? While shippers would have the right to a service agreement in this bill, there is no model, guideline or template to back up that right. Shipping customers want a model service agreement that gives shippers and rail companies flexibility to negotiate while starting with certain elements already on the table, like performance measurements and consequences for non-performance. They did not get one in this bill.

Instead the bill said nothing about what should be in the service agreements. Many shippers are already afraid they have won a hollow victory. They will sit down with a rail company, knowing they have the right to an agreement, but every single component would have to be a concession of CN and CP, which is a very tough place from which to start.

It comes as a disappointment for many shippers that penalties for non-performance are not included in this bill. Rail customers desperately need to include such penalty fees in service agreements to get compensation for service disruption and the resulting damages and productivity losses. The current bill only includes fines of up to $100,000 in the case of arbitration outcome being ignored by either party. That arbitration process is only available to shippers that negotiate a service agreement for the first time.

The other problem is that such a fine would be paid to the federal government, not to the customer. To act as a real deterrent, fines would have to be significantly higher. Keep in mind unreliable rail services are costing customers millions of dollars, while CN made $2.7 billion last year.

Another shortcoming of Bill C-52 is the brand new arbitration process is only available for shippers that are negotiating new contracts. Instead of offering quick and reliable help through conflict resolution to all shippers, Bill C-52 offers arbitration to a small group of shippers. The other problem is that the outlined arbitration process could end up being too costly for smaller shippers. To place the burden of proof on the shippers to demonstrate that they need rail customer services, that they are indeed captives, is indeed unfair and one-sided.

Bill C-52 applies only to new service agreements, not existing ones. That means many shippers will continue to be stuck with unreliable, unfair and unaffordable services. They will continue to be without any conflict resolution process in the case of violations to existing service agreements.

The bill does not even tackle the elephant in the room, which is pricing. For years shippers have been complaining about uncompetitive freight rates. It is common that shippers pay prices that are three times as high as the rail companies’ variable or direct costs for services, just because shipping companies can get away with it. There is no choice for customers.

The government is wasting the opportunity to get rail customers not only fair, reliable, but also affordable and competitively priced freight services, and to give rail customers real protection from unreliable services, price gouging and a monopoly that costs the farm, logging and mining industries millions of dollars.

In conclusion, it is clear that federal action is needed to create a level playing field for Canada’s rail customers and shippers, among them many exporters. They deserve fair, reliable and affordable rail freight services to compete and strive.

Bill C-52 is a step in the right direction, but it falls short of the hopes of many shippers. The bill would not cover all rate freight customers and many would be left behind. It would not provide a model agreement and customers would have to start from scratch. The bill would not compensate for bad service and it does not have much in consequences for unreliable service. The bill would not curb the monopoly power of the rail company giants and it would not end price gouging.

In committee I will work hard to improve the bill in line with key customer demands. I look forward to working with the government and the shipping community to address the shortcomings of Bill C-52. I am optimistic that a stronger and more useful bill is possible and that it is within reach to finally make rail freight services reliable and affordable for Canadian businesses.

This country was built on railways and we owe it to the farmers in the Prairies, the paper mill workers in Quebec and the miners in British Columbia that we make Canada’s rail system work again for all.

 

 

 

 

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