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Proceedings of the Standing Senate Committee on
Transport and Communications

Issue 2 -- Evidence


Ottawa, Tuesday, April 30, 1996

The Standing Senate Committee on Transport and Communications, to which was referred Bill C-14, to continue the National Transportation Agency as the Canadian Transportation Agency, to consolidate and revise the National Transportation Act, 1987 and the Railway Act and to amend or repeal other Acts as a consequence, met this day, at 4:30 p.m., to give consideration to the bill.

Senator Lise Bacon (Chair) in the Chair.

[English]

The Chair: Honourable senators, I wish to welcome on your behalf this large group today.

We are happy to have you with us and to hear from you about Bill C-14. I understand there is an appointed spokesperson to introduce the participants and to read a common statement on behalf of all of you. We expect that this will take about 10 minutes, after which we will hear a five-minute statement on behalf of the specific associations.

Will you start, please, Mr. Doyle?

Mr. Kevin Doyle, Western Canadian Shippers' Coalition: Thank you, Madam Chair. On behalf of the group here, I would like to express our appreciation for the opportunity to appear before this committee to present our views on this very important legislation. I might also add that we very much appreciate the fact that hearings on this matter are being held.

As you mentioned, Madam Chair, there are a number of groups appearing before you today. After I make some initial comments on behalf of the group, a representative from each of the groups will make a few comments in turn.

We are here today to express general support for this new legislation, Bill C-14. The government has moved to address legislatively some of the problems faced by Canada's railroads. We support that general thrust.

There are, however, two serious flaws in this legislation which will have the effect, over time, of seriously limiting competition for railway traffic. I refer to clauses 27(2) and (3) and 112.

Above all, Canadians are exporters, and jobs and economic well-being depend on our ability to compete internationally. Currently, Canadian exports represent about 38 per cent to 40 per cent of our gross domestic product, the highest percentage in the western world and well above that of any other country in the western world. The United States, as an example, currently exports about 6 per cent of its GDP. You can see the enormous difference between our two countries. In western Canada, the part of the country in which I work, that percentage is even higher. It is something over 50 per cent of gross domestic product.

Export markets have been good for Canada in the sense that we can generally sell all that we can produce. The problem in recent years for Canadian producers is that the international marketplace determines the price that we will receive based on international competition. These prices have generally not favoured Canada, and in real, non-inflated terms, export commodity prices in Canada have declined steadily over the past 20 years. As evidence of that, I would cite the Bank of Nova Scotia commodity pricing statistics which go back for more than 25 years.

We see no possibility of that trend to lower prices changing in the foreseeable future. As a result, fewer plants for the export of commodities are being built in Canada, and while Canadian exporters have had increasing volumes for export, Canada, in many of its commodity markets, continues to lose market share.

These Canadian resource-based commodities rely heavily on rail transportation in gaining access to Canadian and export markets. A majority of our resource commodities are, in fact, captive to the rail mode, and rail transportation represents a major cost for these commodities. For example, for Canadian sulphur, rail costs currently represent 50 per cent of the f.o.b. value of Canadian sulphur. For coal, it is currently 35 per cent or more.

Recently, a CP Rail spokesman facetiously suggested that commodity shippers need only truck to the nearest U.S. railroad. I would like to give you an example of what that might mean.

Canada exports about 6 million tonnes of sulphur annually. That represents 250,000 truckloads at 25 tonnes per truckload, or 1,000 trucks a day, and the nearest U.S. railroad is about 400 kilometres away. With that one commodity, you can imagine the highway pressures it would create. Potash production is about 17 million or 18 million tonnes a year; Canadian coal production is about 34 million tonnes a year; and grain and agricultural products are much higher than both those numbers. You can see the impossibility and the impracticality of truck competition in most instances in this country.

For the first time, the National Transportation Act, 1987 provided a pro-competitive environment for captive shippers. Where a shipper was served by only one railway, the act gave that shipper access to another railway through extended interswitching or competitive line rates.

The effect of these shipper-relief provisions has been to cause the carrier and the shippers to negotiate agreements seriously rather than to appeal to the National Transportation Agency. There has been no abuse of these provisions over the past eight years. There has only been a handful of applications before the National Transportation Agency during that period and there is no demonstrated need to provide new barriers to accessing these pro-competitive provisions.

The barriers proposed in clauses 27(2) and (3) and 112 will represent a huge deterrent for shippers in terms of time, cost and uncertainty about their business. We have been told they will be applied on a case-by-case basis by the Canadian Transportation Agency. The effect of this will be fewer commercial negotiations between shippers and carriers and a much greater involvement of lawyers in the process. In the future, railways will be much freer to price their services as they wish and shippers will have major hurdles to overcome in terms of time, cost and uncertainty, or, alternatively, being forced to accept the terms railways dictate.

The effect of all this will be to reverse the pro-competitive thrust of the current National Transportation Act. It will have a detrimental effect on Canada's international competitiveness. Canada needs railways that are focused on continuing to reduce their costs and improve service to enhance Canadian competitiveness, not railways focused on revenue increases.

Our country's extensive reliance on export trade simply cannot permit a transportation framework which will function in practice to discourage effective competition. We wish to point out that this legislation has the potential for job losses due to a loss of competitiveness, and it is inconsistent with stated government policy, which includes the national transportation policy defined specifically in clause 5 of Bill C-14.

Our national transportation policy clearly requires the balancing of not just competing commercial interests but the balancing of commercial viability interests of shippers and carriers, along with the interests of national economic policy in terms of jobs, export trade and maintaining the economic well-being of this country.

Moreover, potential job losses resulting from the exercise of rail monopoly power over shippers due to the flawed procedural provisions in Bill C-14 are most troubling because they are avoidable and unnecessary.

In summary, I should like to refer to the Prime Minister's reply to the Speech from the Throne of February 27, 1996, which reaffirmed his government's mandate, in which he stated:

We were elected to restore the economic well-being of Canada. Unemployment is down considerably from the time we took office in 1993 but it is not down low enough for our liking or for the liking of Canadians. Too many Canadians are still out of work. Too many more are still worried about holding on to their jobs....

No true balance sheet can ignore the heavy and growing cost of chronic unemployment. It is wrong. It is wrong on a human level. It is wrong on an economic level. It is wrong on a commercial level. It is wrong on a moral level.

For all the reasons that I have just mentioned, we urge this committee to recommend to the Senate that it amend Bill C-14 by deleting clauses 27(2) and (3) and 112 of the proposed Canada Transportation Act.

That concludes my opening remarks. I would like to turn now, if I may, to Mr. Leroy Larsen, who will speak on behalf of Prairie Pools Inc.

Mr. Leroy Larsen, Prairie Pools Inc.: Madam Chair, members of the committee, with me today is Charlie Swanson, President of Manitoba Pool Elevators.

On behalf of Prairie Pools Inc., I would like to thank the committee for committing to give full consideration of the potential impact of Bill C-14 on Canadian shippers. We appreciate the opportunity to meet with you.

I would like to introduce the prairie pools to you. Alberta Wheat Pool, Saskatchewan Wheat Pool and Manitoba Pool Elevators are western Canada's largest farmer-owned cooperatives. Together and on behalf of their farmer members and owners the three Prairie pools handle close to 60 per cent of the grains and oilseeds delivered to licensed facilities on the Prairies through more than 800 country elevators.

Alone or in partnership the pools own export terminals at the ports of Vancouver, Prince Rupert and Thunder Bay. Together, they employ more than 5,000 Canadians and generate annual revenues of in excess of $3 billion.

The pools work together as Prairie Pools Inc. on issues of regional, national and international importance to their farmer-owner members and the cooperative operations.

Every year, more than 114,000 prairie grain and oilseed farmers produce over 50 million tonnes of grains, oilseeds and special crops. Less than 25 per cent of prairie production is used in Canada.

While the industry is making progress toward increased further processing in Canada, exports are and will continue to be the major source of revenue for the grain and oilseeds industry. More than 30 million tonnes of grains and oilseeds are exported annually.

The grain from over 100,000 prairie farmers is delivered to about 1,000 shipping points. In order to meet the export demand for grain and oilseeds, the storage capacity at those shipping points must be filled and emptied five times each year. The ability to do this depends upon an efficient transportation system.

The Canadian prairie region is a landlocked production base. Geography prevents competition from road or water. A waterway from the Prairies to export ports does not exist and trucking is not a viable alternative for both economic and physical reasons.

Current truck rates are much higher than full rail rates. For example, the truck rates from Calgary, Alberta to the Port of Vancouver are $10 to $15 per tonne higher than rail. The greater the distance from port, the higher the truck rate.

Even if economics worked, trucking would not be a viable alternative. In order to achieve the same level of exports out of the Port of Vancouver as was moved by rail on average over the last few years, a fully loaded super "B" truck would roll down Hastings Street in Vancouver every two minutes, 24 hours a day, 365 days a year, one truck per stop light. Even if Hastings Street could take the traffic, the port facilities are not set up to handle a large number of trucks.

In November and December of 1993, the government implemented an emergency trucking program whereby trucking was made eligible for the equivalent of the rail subsidy. Despite a severe rail car shortage and a critical demand, only 270 tonnes of grain moved by truck to Thunder Bay, and 600 tonnes were trucked to the West Coast. That is the equivalent of 10 rail cars.

The number of rail cars which unload at the West Coast average around 5,000 rail cars per week. It is clear that rail is the only economically and physically viable means of transportation for Prairie grains and oilseeds.

There are only two national rail carriers in Canada and, in the prairie region, the division between the two is clear. In significant portions of the northern Prairies, there is no alternative to CN Rail. In significant portions of the southern Prairies, there is no alternative to CP Rail.

The best example of the lack of market competition in the grain industry is demonstrated by the incentive rates paid by the railways. Incentive rates have been the only way in which the railways have competed for rail grain traffic. Yet, between 1988 and 1995, as the system became more efficient, incentive rates for both railways declined. In addition, in 1995, not only were incentive rates substantially lower, they were identical for the two railways in all cases.

The incentives provided for 51 to 100 cars, and over 100 cars by both railways have been identical since 1991. Until 1995, both CN and CP offered additional incentives for volumes. In 1995, those were discontinued. The reason given by both companies was that too many shippers were taking advantage of the volume discounts.

This kind of limited competition is the best case scenario for the grain industry. In large areas of the Prairies, shippers have access to only one rail company. In High Level, Alberta, grain shippers are over 500 kilometres from the nearest alternative railway.

We believe that it is cases like the transportation of bulk grains and oilseeds for which clause 5 of Bill C-14 was written. This clause recognizes the need to use economic regulation where shippers do not benefit from market competition.

Until August 1, 1995, grain and oilseeds shippers operated under the Western Grain Transportation Act which provided freight rate assistance, regulated freight rates, protection for prairie branch lines and a transparent rate-setting mechanism based on costing reviews.

With the repeal of the WGTA, grain shippers were assured that they would have full access to the shipper protection provisions of the NTA, 1987. They were assured that these provisions would ensure that grain shippers would not be placed at a disadvantage because of the lack of effective competition in the grain transportation business.

If this legislation passes in its current form, we will not get NTA, 1987 but a system whereby the railways will have an unreasonable influence on our business decisions and on the configuration of the grain collection system, ultimately reducing our ability to compete in the international marketplace.

The loss of the Western Grain Transportation Act and the provisions for the branch line disposition in the Canada Transportation Act will force our industry to move more quickly to consolidate our country grain collection system. We will be making very serious decisions about how many facilities we operate and where they are constructed. Our ability to access the transportation services of two railways, either through market competition or through regulation, will have an impact on those decisions.

Grain shippers agree that rail carriers should be relieved of unnecessary regulation and provided with the opportunity to reduce more easily costs and to become more efficient. Bill C-14 effectively achieves that goal. As a result, Prairie Pools supports most of the provisions in this bill. However, we join with all other Canadian bulk shippers in concern around clauses 27(2) and (3) and 112. It is our opinion that these clauses render the promised shipper protection provisions virtually useless.

Mr. Doyle: I should like to ask David Finlayson and then Terry Park to speak on behalf of the Canadian Chemical Producers' Association.

Mr. David Finlayson, Canadian Chemical Producers' Association: Madam Chair and members of the committee, the Canadian Chemical Producers' Association, CCPA, represents some 70 companies which produce about 90 per cent of Canada's total output of manufactured chemicals. Chemical manufacturing is a key industry of considerable importance to the Canadian economy. The industry supplies vital materials and technology to many other industry sectors. Our member companies use Canada's transportation system to move shipments valued at almost $12 billion annually to both domestic and export markets resulting in the direct employment of some 30,000 people.

The shipments generate an annual freight bill in excess of $1 billion per year. For many chemicals, transportation costs rank second only to raw material costs as a component of the final price.

Our member companies need a safe, flexible, efficient and cost-effective transportation system to support their competitiveness in both the North American and global marketplace. Rail competition is especially important for CCPA members because about 45 per cent of their shipments are by rail. Hence, in assessing the proposed Canada Transportation Act, the preservation and enhancement of rail competition are the key criteria for us because, as in any market, competition provides the market discipline necessary to drive needed rate and service improvements.

Our primary concerns are with clauses 27 and 112. The provisions of these clauses did not appear in the National Transportation Act, 1987. They will detract from the competition NTA, 1987 achieved through allowing shippers unimpeded use of competitive access provisions based on clear, objective legislative language. We therefore urge you to recommend the removal of these two provisions from Bill C-14.

In many cases, the volume of chemicals shipped make the plant captive to rail when it is not physically or economically feasible to move the plant output by truck. Even if these hurdles could be overcome, the increased truck traffic on highways, and especially trucks converging on port cities, would raise additional safety concerns.

The safety and volume arguments will be complex. We are concerned that they may not always be fully understood and appreciated. Given the emphasis placed by the railways on their view of captivity, we believe that if the agency does not accept these arguments, shippers will be unlikely to obtain relief.

I will turn the floor over now to Mr. Terry Park. He is Logistics Manager for Novacor and Chairman of CCPA's logistics committee. He will take a few moments to describe the impact of the contentious clauses 27 and 112 in Bill C-14 on his company's investment plans for Canada.

Mr. Terry Park, Canadian Chemical Producers' Association: Madam Chair and committee members, I am honoured to be here today. I want to tell you this afternoon of our experience with the past legislation and where we think the proposed legislation would take us in terms of the western Canadian petrochemical business.

As some of you may know, Alberta Gas Chemicals was the first company to file for a competitive line rate in 1988. I can speak to you about the reasons we did that. We did not do it to be vexatious or irresponsible; we needed it to survive as a company. It was clear that without that relief that company would have gone bankrupt.

I should like to talk about "substantial commercial harm" in relation to clause 27(2). I do not know what that means, which I think is our whole problem. In the case of the methanol company, we could have proved "substantial harm," as a result of which we would have gone bankrupt. Today, I still do not know what that means.

There are many reasons one would want to enter into a competitive line rate. Most of them are economic; however, some are tactical. I cannot think of one reason why we would want to put a qualifying test on such a fair relief mechanism for the shipper. It makes no sense.

I also wish to tell you about Novacor Chemical's investment in Alberta. We have proposed a $1 billion ethylene plant with companion derivative plants to be erected and operative by the year 2000 in Joffre, Alberta. That plant alone will bring an increased 20,000 carloadings annually. We have broken out of the norm with this investment because it is the first significant petrochemical investment in Alberta in 15 years. We think it is very important for the infrastructure and well-being of Canada that others follow.

However, we worry that with legislation like that which is before this committee our investment will be held at ransom. There is nothing to stop carriers from imposing ridiculous, uncompetitive freight rates on us, thereby putting that investment at risk. We are landlocked.

Unlike my competitors from the United States gulf coast, where the chief petro-chemical industry is in the U.S., we have no alternatives. As my colleagues have noted, trucks are not a competitive alternative. The distance is too far and the volume is too big. We are talking about dangerous petrochemicals which you do not want on highways.

We have no choices. We are baffled as to why you would want to put further restrictions on us when the regulation has worked well since 1987.

We hope that you will see our point of view on these matters and agree to amend the proposed legislation and leave it as it was. Ladies and gentlemen, you do not have to do a darn thing with it.

Mr. Emile Dubois, Western Canadian Shippers' Coalition: Madam Chair, committee members, Luscar Ltd. operates eight mines in Alberta and Saskatchewan. In 1994, we shipped 6.4 million tonnes of coal by rail, which represents about 20 per cent of all tonnage moved by rail in Canada. During the past 25 years we have shipped some 95 million tonnes of coal by rail.

Canada's total coal production in 1995 was 75 million tonnes. Coal exports total 34 million tonnes. The coal industry's direct employment is 8,400 people.

Our markets are global with our competitors scattered around the world. For some insight on Canada's major competitor, Australia, I would point out that they are in the process of deregulating and restructuring their railways. In Queensland, the restructuring will mean an $8-per-tonne freight rate reduction by the end of the decade.

An $8-per-tonne reduction in Canada would represent a freight rate reduction in the area of 35 per cent to 40 per cent. This is a very significant reduction, something which we find disturbing.

In New South Wales, private rail operators will be able to operate on state-owned track. We claim the $3 freight rate reduction will increase their exports by 15 per cent. This will mean a $500 million investment in mines, a move which will create some 2500 jobs.

Canada's proposed legislation is moving 180 degrees in the opposite direction to our competitors in Australia. Luscar has a serious stake in this issue because of its proposed $250 million Cheviot mine project which is to replace the Luscar mine. If these Australian initiatives are not answered by the Canadian railways, Luscar's replacement mine may not proceed. Some 450 mine employees will be out of jobs. Additionally, hundreds of construction jobs simply will not materialize.

In Canada, the government is setting up barriers by introducing clause 27(2) and (3) and clause 112. In Australia, they are tearing their barriers down. Luscar recommends these clauses be deleted from Bill C-14.

Mr. Doyle: I will turn now to David Church of the Canadian Pulp and Paper Association who will make the last formal presentation today.

Mr. David Church, Canadian Pulp and Paper Association: With me today is Mel Nunweiler who is with Canfor Corporation in Vancouver. He is chairman of CPPA's transportation and distribution section. Also with me is Mr. Russ Lewis of Stone Consolidated in Montreal. He is chairman of the Sections and National Transportation Policy Committee, the senior committee which developed CPPA's positions on transportation.

CPPA is a national association which represents some 52 member companies located around Canada. Many of their 150 mills are situated in the remote regions of the country where they are often the only major employer in the community. The industry and its related forest product activities employ some 240,000 people, all of whom are dependent upon the industry's ability to compete in world markets.

The pulp and paper industry ranks first in Canada's contribution to Canada's balance of payments. Last year, the industry's net contribution to the balance of payments totalled $22.4 billion. Net exports of other forest products brought the total contribution to $37.2 billion.

We are the world's largest exporter of pulp and paper, last year selling some 29 million tonnes to markets in some 70 countries around the world. In each of these countries, Canada is not the major supplier. We are the secondary or tertiary supplier competing with the other pulp- and paper-producing countries that are much closer to these markets. It is the customers in these markets that set the price at which we are able to sell our products.

One of the major factors that influences our ability to sell in these markets is transportation costs. Under the current Transportation Act, our industry has grown from a 24-million-tonne industry in 1987 to almost 29 million tonnes in 1995, a growth of close to 25 per cent in eight years.

The continued growth rate of this industry achieved during this period is threatened when the government places unnecessary impediments, namely, clauses 27(2) and (3) and 112 on shippers in their attempts to negotiate satisfactory commercial arrangements with the railways.

In conclusion, I would like to comment on the remarks made by Mr. Stan Keyes, Parliamentary Secretary to the Minister of Transport, when he appeared before this committee on April 23. He noted that shippers can respond to changing market conditions by expanding production to a new location in another country or by closing an operation that is in decline.

In suggesting that, he is telling you that these two provisions in the proposed legislation are more important to Canada than the 240,000 Canadians we employ in our industry and in the other industries represented at this table. We should not be encouraging legislation that will chase jobs offshore.

Mr. Tom Culham, Western Canadian Shippers' Coalition: I would like to emphasize Mr. Church's point. I find it hard to believe that Stan Keyes, speaking for the Minister of Transport, can imply that it is okay for exporters to close down plants and to move out of the country for the sake of the railroads. This is clearly contrary to the statements made by the Prime Minister about the importance of export jobs. It is also contrary to the interests of Canada.

We should be doing everything possible to maintain and to promote jobs here in Canada. This legislation does not do that. This legislation removes regulatory gobbledegook for the railways and sticks it to the shippers. That is not acceptable.

Mr. Doyle: That concludes the formal remarks that our various groups wish to make today. I should like to repeat something that I said in my remarks. It is for all these reasons that we urge this committee to recommend to the Senate that it amend Bill C-14 by deleting clauses 27(2) and (3) and 112.

We would be happy to respond to any questions from committee members.

The Chair: Mr. Doyle, on behalf of the committee I wish to thank you for sending your written presentations to us in advance. It has helped us to be more aware of your concerns.

It seems that your concerns focus on clauses 27(2) and (3) and clause 112. It seems to me, and I hope I am right, that you are supportive of many aspects of the bill despite the concerns which have been expressed by those of you around the table today.

You seem to think that the term "commercially fair and reasonable to all parties" which is set out in clause 112 is offensive. Is that not a reasonable basis on which to do any sort of business?

Mr. Doyle: Madam Chair, I will respond to your first question and then ask Russ Lewis to respond to your question concerning the wording "commercially fair and reasonable to all parties."

We are generally supportive of the thrust of Bill C-14 with the two exceptions mentioned. We say that without dismissing our individual concerns. Believe me, as shippers, we do have those concerns. We see the railroads having the freedom to abandon plant or to pass that on, perhaps, to shortline carriers. In that respect we have heard numbers like one-third of their trackage over the next five years.

Most of us are responsible for plant operations which are on spur lines and branch lines. We recognize that we could be seriously at risk; but we also recognize there are difficulties with the railroads in Canada and that those difficulties must be addressed. We are prepared to assume some risk to assist in addressing those problems.

Clauses 112 and 27(2) and (3) go far beyond that willingness to accept the general thrust of the legislation.

The Chair: Even after both clauses have been amended by the House of Commons, do you feel it is not enough?

Mr. Doyle: If those clauses were removed, I think all of us here could support the legislation. I would make that statement on behalf of my company. With the reservations I have stated, I could support the legislation. I believe the views expressed by my colleagues also recognize that. It is not without trepidation that we say this.

Mr. Russ Lewis, Canadian Pulp and Paper Association: If clause 112 is not deleted from Bill C-14, then this provision will provide a field day for the legal profession. It will inhibit shippers from seeking recourse from the agency. It is the need to establish the subjective thresholds on a case-by-case basis which concerns us, and for the following reasons we feel that clause 112 is unnecessary.

The clause in Bill C-14 which deals with interswitching rates and competitive line rates already contains safeguards to the railways that such rates must be compensatory. The levels of service provisions in Bill C-14 require the railways to provide reasonable service. Therefore, clause 112 is redundant and will simply promote unnecessary litigation and disparity of treatment.

Furthermore, the interpretation by the agency of what is "commercially fair and reasonable" on a case-by-case basis will likely require an analysis of the financial viability and size of the applicant. Such considerations are irrelevant to the policy of the legislation which states that competition is desirable.

Transport Canada and the drafters of this bill have no practical experience negotiating with the railways. They have never shipped a tonne, negotiated a freight rate, or paid a freight bill. They simply have not understood shippers' concerns regarding the implications of clause 112.

I would ask senators to bear in mind the following. I represent 10 paper mills in Canada. We ship approximately 3.5 million tonnes of pulp and paper, the majority of which is moved by rail. If I have effective competition, then I will use it. If I do not have competition, then I cannot bargain with the railways unless I have effective access to the agency. If the barriers are not removed, then I lose access to the agency and my negotiating power with the railways is diminished. I am forced to fight before the agency and spend my time in court rather than negotiating with the railways.

The same scenario applies to clause 27(2) and (3) relative to the wording "substantial commercial harm."

Senator Roberge: Have you any real evidence that the railways tend to adopt monopolistic practices? To come back to what you have just said, it would seem to me it is not in the interests of the railways to affect the market wrongly or to squeeze it so that it becomes unprofitable for both parties. Are you not assuming bad faith on the part of the railways?

Mr. Doyle: I should like to relate my own personal experience in that respect. Prior to the 1987 act, I represented the same industry which I now represent. We were captive shippers. The railways met with us regularly to tell us generally what the prices would be for our commodity. We had the option of accepting that or consider appealing under the public interest section that existed in the pre-1987 act. That was regarded as a hurdle which cost hundreds of thousands of dollars and involved, perhaps, weeks and months of time. As a shipper, we regularly turned away from that and ended up accepting the pricing of the railways. I think it is demonstrable that the railways often took more out of the value to produce our product than a producer did.

After 1988, with the competitive access provisions that were put into the act, the response was absolutely amazing. The railroads sat down and bargained seriously with us, as well as most other shippers across the country. We generally reached commercially acceptable agreements. There are very few instances out of tens of thousands of bargaining situations where we did not. The serious bargaining was brought about by the free access to those shipper relief provisions.

To move to what is proposed in clauses 27(2) and (3) and clause 112 is a return to the bad old days of pre-1987 where we were told what we will pay. The railroads say to us, "Trust us. We have been there." We do not trust them.

The interesting thing in Canada is that this government has moved in the case of telephone companies to try to introduce competition and to move away from monopolies. Why in this legislation is the government trying to go in the reverse direction? It is of great puzzlement to me.

Senator Roberge: Would you not say that the philosophies of the operators of railways could be different in the 1990s than they were in the 1970s?

Mr. Doyle: Should we risk the economic future of this issue on trust, or should we make some simple changes in the legislation that ensure that that will happen?

Mr. Larsen: A good example with regard to monopolistic powers is in the grain industry which has been regulated up to now. There was opportunity for incentive rates with respect to that industry. In my statement, I identified the similarities of the incentive rates that they offered to their customers. They were basically identical and declined as time went by in the sense that they were withdrawing the incentive rates to the grain shippers. That is a prime example on record with regard to grain rates in Western Canada.

Senator Roberge: You were talking earlier about prices. You mentioned that the price in your industry has been decreasing, generally speaking, for the past 20 years. From the figures that I have seen, prices have been stagnant from 1988 to 1991. From 1992 onward, commodity prices have increased substantially.

Mr. Doyle: My reference was to non-inflated prices. The Bank of Nova Scotia publishes, in two forms, export commodity price indices. One is in the form of inflated prices. The rate of increase for Canadian export commodities has been slowing steadily over the past 20 years. While those prices fluctuate up and down, the trend line has been to smaller and smaller increases over the past 20 years and more. In real dollar terms, that line has been trending steadily downward. Real dollar non-inflated prices have been trending steadily downward since about 1972.

Senator Roberge: We are getting the same kind of information from the Toronto Stock Exchange. It shows a bit of a difference between commodity prices versus rail prices. The lines are going in different directions. If the commodity prices have been going up, and you say minimally, and we know that rail prices have been going down for the last 10 years substantially, has there been any effort on your part to sit down with the railways to try to negotiate something else?

Mr. Culham: One way to respond to this question is to talk about the transportation markets themselves. We experience quite significant fluctuations in the prices of our products. Pulp and lumber prices do that. We are in an international marketplace. When we look at the railway and transportation marketplace - and I think that is a more reasonable comparison to make - over the past 10 years you have seen declines in the prices of transportation, in terminal costs, in railway costs, in Canada and in the United States, in trucking costs overall in North America. I believe the case is true for airlines as well.

We have seen declines in the price per unit of transportation. If you look at that marketplace, I think that is what you would find. Therefore, I think a more fair comparison is to look at railways versus railways in the United States.

Mr. Robert Renwick, Chairman, Western Canadian Shippers' Coalition: I would add that during a substantial amount of the period we are talking about, there was large recession in Canada. Everyone's prices were under pressure to compete. One would not think that the railways would be in any different position from other businesses in that regard.

Senator Roberge: My last question is addressed to the representatives of the pulp and paper industry. I understand that you are currently trucking to reload centres in the U.S. As a percentage of your overall business, is your trucking down?

Mr. Church: Trucking for the pulp and paper industry represents about 30 per cent of our movements. However, one must remember that we have many mills located in urban areas, such as Montreal and Toronto, closer to the Canada-U.S. border. As well, many of our major pulp and newsprint producers are located in the remote regions of the country. They rely primarily on rail transportation to get the product to marketplace.

Yes, we do some trucking - there is no question about that. However, that is a decision based on the ability of the railways to provide the service to meet the truck competition where those mills are located, where those markets are located and where the ultimate customers are. By and large, our industry requires rail transportation to meet the needs of our customers given the volumes we ship and the location of our mills.

Senator Spivak: I was here during the 1987 debate, as was Senator Forrestall. At that time, my understanding was that the key was competition. We wanted to balance competing rail and shipping interests. We wanted to balance those commercial interests with the economic well-being of Western Canada as a region, and we wanted to do that through competition.

I am puzzled by the need to introduce this measure. In your extensive and comprehensive testimony here today, you have said that the 1987 act works, so why change it. In your mind, what are the reasons for changing it? I have not read the testimony given to the house committee. However, the only thing I can think of is, perhaps, railway interests believe that it is bent too much in the direction of shippers' interests.

I should not say this, but I understand that there was some indication in CN's prospectus that we might want to rebalance the interests of the shippers and the railways. I can only speculate that, perhaps, the railways have asked for this measure.

The other question I want to ask is a bit more specific. Some of the information placed before us states that the wording of clause 27(2) in terms of "substantial commercial harm" is not meant to be a barrier for shipper access to the agency; it is meant to be a guideline to help the agency in its determinations in particular cases as to whether a shipper would suffer substantial commercial harm and that it cannot be defined because each case is different. Could you comment on that? I see you have your legal counsel here.

I have discovered that you cannot always get everything you want in the Senate and in Parliament.

Of the two clauses you find objectionable, I presume you find clause 27(2) more objectionable than clause 112, although you would like to see them both removed.

As a Western Canadian, I cannot help but sit here and be extremely sympathetic to your concerns. I lived on a farm for part of my life. My father was partially a grain farmer.

Mr. Doyle: First, Senator Spivak, in simple terms, we believe the 1987 legislation did work. It was not perfect or ideal, but it worked.

There is no effective competition through much of Western Canada, or elsewhere in Canada for that matter. Most all of us who are served by the railway are served by one railway, not two. The 1987 legislation provided that when you could not have competition, shipper relief provisions introduced a form of competition. If I was served by one railroad and could not be satisfied, I could then try, through a competitive line rate, to access another railroad that might offer a reasonable rate.

The interswitching provision provided the same opportunity on a more limited basis. When those alternatives were not options, there was an opportunity to bring forward a third party in the form of a final offer arbitration to look at disputes between the parties.

Perhaps it is imperfect, but the 1987 act worked. This bill appears to be an enormous change from the era before 1987.

We see clauses 27(2) and (3) and 112 as impediments to those shipper relief provisions. We believe they will become effective barriers. There is no definition of those rather general words. It is very much in the economic interest of the railroads to challenge whatever meaning the agency might try to apply to those words on a case-by-case basis.

Our experience has shown us that under the old public interest case, which was set out in section 23 of the pre-1987 act, the railroads pursue their economic interests just as we do. We will end up in terrible legal battles that will not solve much economically in this country in a positive way.

Senator Spivak: Would you say there is a good balance between the shippers and the railways? Would you say that that balance should not be disturbed?

Mr. Doyle: I think it is as reasonable a balance as one might achieve in a nation as diverse as ours. A perfect balance is not possible. However, I think most would agree that, on balance, it was fairly reasonable.

Railroads have described this legislation as a "shipper bill." If a shipper bill says that in the absence of competition you have an alternative to another carrier, then perhaps it is a "shipper bill."

Mr. Lewis: The abandonment sale provision proposed in this legislation takes the railways down a whole new road and makes it significant for them to be able to rationalize their plant. We recognize that some of us will be put in awkward positions as a result of this bill, but we support it on the basis that it will be good for Canada, it will be good for the railways and it will be good for us when they do their rationalization. However, we do not like the idea of going through these barriers if we need to get to the agency.

Senator Spivak: The question of rail line abandonment is one that I would like to raise. I take it that we are addressing your two major concerns here. That is a concern of mine as well. Perhaps someone will raise this issue later.

Mr. Jim Foran, Counsel, Western Canadian Grain Shippers' Coalition: We referred to the question of balance in our brief. In 1993, in dealing with the report of the National Transportation Act Review Committee, the Standing Committee on Transport stated the following about these competitive access provisions:

Any endeavour to encumber these provisions with additional requirements and elements of subjectivity will guarantee their non-utilization by shippers...

It went on to say:

The NTA, 1987, was an attempt to balance the interests of the shipper and those of the railways through the enactment of these competitive access provisions. We believe, based upon what we heard, that this delicate balance should not be disturbed.

That was a unanimous recommendation of the Standing Committee on Transport. Stan Keyes was the vice-chairman of that committee. We do not know what has happened in three years to change the situation.

How well has the legislation worked? There is an old adage with which we are all familiar: If it ain't broke, don't fix it.

What has been remarkable about the NTA, 1987 is that in the last eight years, there have been thousands of confidential contracts entered into with the railways as a result of negotiations, the give-and-take process, and only a handful of applications to the agency, because the competitive access provisions could be utilized effectively by shippers.

Shippers had the option to go to the agency and to get a competitive line rate or extended interswitching if they were within 30 kilometres, and those sections were laid out. The government has indicated that they do not intend to change those provisions.

What you are not being told is that those provisions already have safeguards in them. You could only get a competitive line rate if you were captive to one railway at origin. Therefore, you must be served by one railway to get it. The act also says that the rate must be compensatory. That means it must return the railway's variable cost of the movement, as well as a contribution to their fixed costs. There is already a safeguard in there that the railways are not called upon to move for something less than their cost. There is a formula built into the act as to how the competitive line rate is calculated. That is the way the agency must do it.

With respect to extended interswitching, the agency is called upon on a yearly basis to establish interswitching rates for the whole system which must exceed the average variable cost to the railways. These provisions already have safeguards in them.

I would like to make one other point regarding the level of service, the common-carrier obligations. The law is already crystal clear that the railways are only obliged to provide reasonable accommodation for traffic. The legislation itself, and the courts themselves, have stated that only reasonable services must be provided. I go back to the questions that have been posed to you by other members: What is the purpose, then, of the words "commercially fair and reasonable"? It is already built in. What is the purpose of the words "substantial commercial harm" when the provisions already have these safeguards?

We can only conclude that they are there to establish roadblocks, fences or barriers in shippers' accessing the agency because they require the formulation of the agency's opinion on a case-by-case basis. As Russ Lewis said, when you go to the railways and you want to negotiate, they say, "Here is our arrangement. This is what we are prepared to give you." You then say, "We cannot live with that. We will go to the agency." Prior to that, you could obtain those recourses as a matter of course. Now, you will have to meet these substantive barriers, these case-by-case determinations, and the railways, as they did before 1988, will say, "Well, we will see you in court."

We will therefore move from a regime of commercial negotiations to case-by-case litigation. As Tom Culham says, while the regulatory glue has been removed from the railways, it has been stuck to the shippers. These clauses have no need, no purpose, and will constitute real obstacles and barriers to shippers. They have to be removed to keep the good that has been done over the last eight years.

Senator Spivak: I gather you are saying that you do not agree with what I think the House of Commons standing committee had in mind when it proposed the words "substantial commercial harm," in that it was not a barrier at the application stage but, rather, legislated guidance to the agencies. I know what you are saying in terms of the impact, and I agree with you, but that is the way they set it up. Do you agree with that interpretation or not?

Mr. Foran: No, I disagree with it. I would say that it will compel the agency to make those findings, but it is guidance that is not needed, if, indeed, it is guidance at all.

Senator Forrestall: I am concerned as to why the two amending clauses are here. I would also be interested in learning, either from the witnesses or from the chair, why the government or the agency itself did not initiate these changes. Why did the standing committee, presumably of its own volition, move these amendments?

Mr. Renwick: It is safe to say, sir, we do not know why either. We do not know why they put forward something that would change the balance that existed, making it so difficult for shippers. We have been asking ourselves that same question ever since last June.

Senator Forrestall: It is fair, to ask the witnesses whether they had an opportunity to question these amendments. Were they questioned at the time in the standing committee?

Mr. Renwick: Yes, they were, senator. Almost every shipper organization which appeared before the standing committee questioned them. I cannot tell you off the top of my head how many groups there were. It seems to me there were around 60 or 70. Every group said to the standing committee, "This is wrong. It is harmful to our ability to compete. This is a bad thing for Canada." They went ahead anyway.

Senator Forrestall: Is there a four sentence response as to why they had to go ahead with it? Did they tell the witnesses why they felt it necessary, notwithstanding the appearances and the submissions made?

Mr. Renwick: I am not aware of any of the shippers ever being told why those measures were left in.

Senator Forrestall: Then I gather it is also fair to say that we do not know what prompted or compelled the committee to make these two changes. It is a bit of an unusual procedure for the committee to initiate what had the appearance, at least, of being substantive amendments to the bill, changing in part, perhaps, the intent of the bill. I wonder, first, how they were allowed to do that and from where their legitimate base comes.

Second, how do I go about getting the answers to this type of question? It seems to me we are hearing why we should take them out but we have not heard why they should be left in. I had an opportunity to go through the Parliamentary Secretary's comments, but I would not want to stand on his observations as to why these measures were inserted. Can you help me, Madam Chair? Why is there this dilemma?

The Chair: We will have to ask that question of the minister when he appears before the committee.

Senator Forrestall: I think that is necessary.

Mr. Doyle: Might I make a personal observation from a shipper's perspective about the process before the standing committee of the house? It was a very adversarial process, more adversarial than any process that I had been involved with before.

Senator Forrestall: Who were the adversaries?

Mr. Doyle: The adversaries appeared to be some members of the committee against shippers, an attitude, in my view, of "How dare you come before us with those viewpoints?" No member of the committee ever told me why they were proceeding in the fashion in which they did proceed. I believe that a lot of it had to do with the privatization of CN and assuring the shareholders, many of them American, that they would get an adequate return on their investment. That was very troubling to we shippers who would be served by CN.

Senator Roberge referred earlier to the fact that we should think about trusting the railroads in that we and they, perhaps, have much in common in terms of objective. One of our concerns is that they have shareholders to whom they must answer. If I am the president of one of the railroads in deciding whether to get an adequate return for my shareholder or feel sorry for some shipper, then I might well choose to satisfy my shareholder.

Senator Forrestall: I will stop there with this observation. I have no idea whether or not this was an action designed to make more palatable the privatization process of CN. I have no way of finding that out, unless the minister or some member of government is prepared to shed some light on it. If that is the case, then I must consider it a very serious charge with respect to the process and procedure.

You will understand from this observation that I am most anxious to hear not just what the minister has to say but I would like to go a little further than that and ask that the Chair cause a formal inquiry to be made of the government as to the origin of this whole kettle of fish. I would like to have some answers.

I have no desire to hold up the bill or to do anything like that at all. When we laboured four years ago over the much needed and long overdue changes to the National Transportation Act, we did not foresee that it would be tinkered with like this. Nor did we foresee that the review process we put in place would lead to governments taking hold of that review and looking at it, which they did. I must say I think they did a good job with it. I was satisfied and happy with it, until this happened. I still do not know what it means. I am not carried away by your rhetoric that this is the end of the world.

If it is in there for the wrong reasons, or if there is any chicanery or any games being played, then I would like to know about it.

Senator Perrault: Some important information has been brought before the committee today. It has been very interesting and it represents a great deal of research.

At the outset, Mr. Doyle, you made a statement that I think caused some dismay in the room. You said despite the efforts by all, our competitive position internationally is declining. It is mind-boggling to think with a debilitated dollar worth $1.34, we cannot be more competitive than apparently we are. Surely, it cannot be related totally to transportation, nor did you say it was. Certainly, there is something more fundamental facing the exporters of Canada if, currently, we are losing market share. What is the problem?

Mr. Doyle: I do not know if there is a simple answer to that. For most resource commodities, if you examine their international position over time - and it is certainly true of sulphur, coal and a variety of other commodities - we have increased year over year the tonnage that we export.

Senator Perrault: Market share is declining, is that it?

Mr. Doyle: Yes, it is declining. My belief is that we are having increasing difficulty competing at the prices that the international marketplace is willing to pay for many of our commodities. In the 1980s, the commodity with which I am involved sold at $90 U.S. a tonne, or more. In the 1990s, we are selling in the order of $35 a tonne or more. We all remember 10 years and more ago when coal sold at $80 and $90 U.S. per tonne.

Senator Perrault: I remember those negotiations. I was part of some of them.

Mr. Doyle: It is now more in the order of $50 to $60. My belief is that one of the major impacts is that of technology which is insidious and widespread. It is something with which we are having to cope internationally. It is also that there are many more sources of competition.

Senator Perrault: Underdeveloped countries are coming on line with various commodities.

Mr. Doyle: Yes, sir. We do not blame it all on the railroads.

Senator Perrault: There were additional reasons for it.

Mr. Doyle: What we do say is that the railroad costs represent a major part of our costs.

Senator Perrault: You want to achieve maximum efficiencies in everything you do, including labour and every other aspect of it.

Mr. Doyle: That is right.

Senator Perrault: Recently, the Americans served notice that they are getting rather feisty in matters of competing for Canadian transportation markets. What is the possibility of American lines, such as Great Northern or whatever it is described as these days, shipping Canadian grain through Portland, Seattle and San Francisco? Is that feasible? Is it something of which we should be afraid? Or is that an option being considered by your members?

Mr. Larsen: The rates are not competitive when you go just by rail to the West Coast. You get competitive rates from the railroads when they are in competition with the Mississippi River system and other factors.

Senator Perrault: That is heavily subsidized despite the protests of the Americans, is it not?

Mr. Larsen: The trucking of Canadian grain to the U.S. rail system is not a viable option.

Senator Perrault: It is not cost effective, is it?

Mr. Larsen: No.

Senator Perrault: Is the Mississippi route cost effective?

Mr. Larsen: It provides a competitive rate. They are certainly competitive in the marketing of grain once it reaches port position. Railroads in that catchment area of the Mississippi are competitive. When you get into the direct railroad to the West Coast, there is no relief to me as a shipper of grain in using the American system.

Senator Perrault: I am from the Vancouver area. I talked the other day to a chap who is a member of the grain workers' union. He said it has been impossible to achieve any kind of settlement with the grain companies, the terminals, until now. They say they are willing to offer very flexible rules, and that they would like to get a deal settled. Do you see a settlement somewhere down the line?

Mr. Larsen: Are you talking about the labour situation out there?

Senator Perrault: Yes.

Mr. Larsen: I would hope so. Some of the contracts are a number of years old. One of the things we are trying to achieve on the West Coast is continuous operation of the terminal. We cannot afford to take out of a tonne of grain the high overtime rates that are in the current contracts. We need continuous operation at a more reasonable labour rate so that we can operate seven days a week rather than five.

Senator Perrault: This observation goes to the cost of our operation. I was told, "Yes, in order to keep the grain industry competitive, we have to be more flexible and more cooperative. We would like to sit down and put a deal together quickly and get this thing behind us." May I suggest that, perhaps, it is time to talk to them again?

Mr. Larsen: As a matter of fact, we have some people meeting with the labour unions today and tomorrow. They will be talking about the West Coast situation.

Senator Perrault: Many eloquent statements have been made around this table today. I understand that you would like to see clauses 27(2) and (3) and 112 simply removed from this bill. Is there any hope that they could be modified or changed by way of a compromise or a more explicit description of what the powers of the board will be?

Mr. Doyle: Senator, there are several groups here today. We have not had an opportunity among ourselves to discuss those possibilities. It would be something that we would have to come back to you on.

Senator Perrault: We do not want to see anyone held hostage to the rail companies or any other part of the economy. We are interested in the views you have expressed. I certainly feel that way about it.

The Chair: If you have any other recommendations to make to the committee, perhaps you could send them to us before the end of the committee's deliberations on this bill.

Mr. Doyle, you mentioned job losses in your statement. Do you have any numbers or any idea of what the job losses could be?

Mr. Renwick: That it is a very difficult question to answer. We can look at this in two ways. First, this is a new piece of legislation. If these clauses stay in, then I do not think anyone on the shippers' side can judge how and when the railways will decide to take advantage of those provisions.

Second, we have been told today that there are at least a couple of major operations in Western Canada which remain to be built or which should be built. What will be the effect on those two companies if those two subclauses stay in? We do not know.

Personally, I believe that any rewording of those clauses will still constitute a barrier and will still give those shippers the same problem as they have with the original wording.

To avoid job loss, if it is not possible to reach an arrangement with the carrier, it becomes a question of either fighting in court, simply giving in and paying the railways what they will charge, or getting priced out of the market. Your question is complicated because it has many downsides to it for Canada's companies. I cannot see a single upside to it.

The Chair: When you mention job losses, certainly you have an idea of what it will be like, do you not?

Mr. Renwick: No, we do not. We know that jobs will be put at risk and many at substantial risk. We cannot quantify it because we do not know what action the railways might take in any particular situation.

Mr. Park: It gets down to choice. People make economic choices based on probability and rationale. If you were faced with a choice between this kind of imposition or building a facility in another area where all other things are equal, I suppose you would invest in the other economic area.

It is hard to foresee the amount of the job loss. However, as I said in my remarks, there has been no petrochemical building activity in Alberta in the last 15 years. We now have the prospect of some; let us encourage it rather than discourage it.

The Chair: The jobs which exist already could be lost and potential new jobs would not be created, is that what you are saying?

Mr. Park: All levels would be affected, in building and construction and then in the establishment of the industry over the years.

Mr. Doyle: Our industry is only a small sector of the industrial activity in western Canada. Our industry employs about 20,000 people directly and indirectly. If we were not to ship and export - and I mentioned earlier that we export about 6 million tonnes, on average, per year - then those 20,000 people would be unemployed.

It is hard to imagine us not exporting anything, but I can tell you this. In the 1960s and the 1970s, our industry only exported a portion of what it produced. On the Prairies we piled up 23 million metric tonnes of sulphur which we could not sell.

In the 1980s, in a more competitive environment, we were able to move most of that. We are beginning again to accumulate sulphur in blocks and vats on the Prairies. It is possible that, in tough economic circumstances and facing costs with which we could not compete, some of those 20,000 people would be unemployed. We have been there before.

Mr. Renwick: I would like to refer to something which I had omitted earlier.

In the Speech from the Throne which opened the second session of this Parliament, the federal government committed itself in a renewed mandate to promote employment security and jobs. It also recognized that Canadian growth in jobs depends heavily on our exports and trade by stating that every $1 billion of exports means 11,000 Canadian jobs.

Senator Perrault: I find the information regarding Australia most interesting. They are making their rail system substantially more efficiently.

Senator Forrestall: I am still very much adrift on this. How can the railways stall to the point where you would have to stop selling, stop production, and lay people off? Would they do that, for example, by citing an unconscionable tariff or one that is just a little bit too high to make your life comfortable?

Would they then force you as a shipper to go through the whole process that is laid out which might take six days or six months or two years? What is the worst case scenario if you had that type of situation and you had to come back to this issue and go to the agency? After going to the agency, you still have recourse to the courts. How long could the railways tie you up? Could they be that crippling?

Mr. Foran: That is a very valid scenario which you have set out, Senator Forrestall. The railways could implement a tariff. Once that tariff came into effect, it would be the legal tariff.

The shipper would either have to accept that tariff or he would have to take proceedings. If he decided to go for a competitive line rate and deal with another railway, he would then have to make his application to the agency, prove that he would suffer substantial commercial harm if the relief sought was not otherwise granted, and also prove that the rate that he sought was one that was commercially fair and reasonable to all parties.

That would require a hearing and consideration by the agency. Under the act, the agency has 45 days to decide on a competitive line rate. The agency would have to make those determinations. However, if the shipper were successful, most likely there would be leave to appeal to the Federal Court of Appeal on the basis that the agency misconstrued what those words meant. Those are issues of law.

Because the case would be a landmark case, conceivably, it could go to the Supreme Court of Canada. We could be looking at something in the excess of two years to have that matter determined. There could also be appeals under the act to the Governor in Council which would take an indeterminate amount of time depending on when the governor chose to answer.

For some period of time, this process could be repeated because the determination constitutes the agency's opinion based upon the facts of each case. We could be involved in a series of appeals and procedural matters before the courts. Determinations by the agency would be ongoing for some period of time, sir. The first cases at least could take in the vicinity of two-years-plus to be determined.

Senator Forrestall: I see why it is rather important that we find out something about the genesis of these two amendments.

The Chair: We are not through yet.

Senator Forrestall: That is awesome.

Senator Spivak: I want to ask my question on rail line abandonment. Why are you not more concerned about it? Is it because you feel that, in many cases, shortlines will spring up and be viable?

Obviously, this legislation greatly liberalizes rail line abandonment. Are you prepared to accept that? You do not seem to have many complaints about it. Could you comment?

Mr. Doyle: We have very real concerns about how that will work. However, as shippers, we also recognize that the Canadian railroads are experiencing economic difficulties. The biggest characteristic which points up those economic difficulties is their revenue per track or per tonne mile.

It is clear that the Canadian railroads have a lot more rail track that they must maintain than they do tonnage. They need to address that problem. While it puts us potentially at risk as shippers, and we do have very real concerns, we have recognized that we need to be mature about this and allow some changes that will assist the railroads to address their economic problems.

In the shortest possible way, that is my feeling about it as a shipper. I would ask my colleagues to add their views, if they wish.

Mr. Larsen: With regard to shortline railways, I think they would be more applicable in the grain gathering system of the prairie region. Even if we put in place a shortline railroad, they are still captive to the national carrier, either CN or CP, and they must go through the same barriers to get the proper efficiencies that they require. If they do not, then they are of no value to the grain gathering system.

Senator Spivak: That is very helpful.

Mr. Culham: We could send you a copy of a paper prepared for Minister Axworthy on the competitiveness of the western Canadian transportation system. There is a discussion in it about the impact of railway and transportation rates on jobs and that sort of thing. That may help you answer some of those questions. I will undertake to make that available to the committee.

The Chair: I thank you very much, gentlemen. We are appreciative of the way you have handled the discussion this afternoon. It was most informative for members of the committee.

Mr. Doyle: On behalf of my colleagues, we very much appreciate the opportunity to appear here today and to make our points of view known. We wish you well in your deliberations.

The committee adjourned.


Ottawa, Thursday, May 2, 1996

The Standing Senate Committee on Transport and Communications, to which was referred Bill C-14, the Canada Transportation Act, met this day at 9:00 a.m. to give consideration to the bill.

Senator Lise Bacon (Chair) in the Chair.

[Translation]

The Chair: I would like to welcome Mr. Tellier and thank him for being with us this morning. I know that committee members are looking forward to your presentation and especially to ask you questions afterwards. We have set aside 45 minutes for your presentation and following question period. Therefore you will have 10 to 15 minutes for your introductory remarks. Afterwards, we would like to give the members the opportunity to ask questions. The floor is yours, Mr. Tellier.

Mr. Paul M. Tellier, President and Chief Executive Officer, Canadian National: Thank you for your invitation, Madam Chair.

[English]

With me today are Gerald Davies, our Senior Vice-President, Marketing; our senior counsel, Serge Cantin; and, from the Ottawa office, Dave Todd, our Vice-President; and Sandra Wood, General Manager, Government Relations.

This bill is very important to us. A great many things have been said to you in this committee over the last while, and I wish to put the record straight. Everyone in the room will agree that it is important not to lose sight of what this bill is all about.

This bill is a partial attempt to address some of the existing rail problems. These rail problems are real. You are very much aware of the low levels of net income in the rail industry. The rate of return on investment was around 6 per cent for the period 1988-1993. The rate of return on investment is a real issue.

I do not think any shipper appearing before you argued that we should buy new locomotives or that we should replace our rolling stock. In order to do that, a decent rate of return is needed. We are now an investor-owned company. Therefore, we cannot sign contracts, as I did a few months ago with General Motors to buy $300 million of locomotives, unless we get a decent rate of return, and that has not been the case. Our operating ratio is still eight to ten points above the comparable railroads in the U.S.

More importantly, those reviewing the 1987 act, such as the National Transportation Act Review Commission and the Royal Commissions, one led by Lou Hyndman, confirmed that these problems were serious and that something had to be done. In light of this, we did not wait for Parliament to take action. We have ourselves taken a great many actions to correct this situation. Canadian National has gone through its most significant change during its long history going back to 1919.

On the cost side, we took 11,000 people off our payroll over the last three and one-half years, something which was painful and unfortunate. This year we will be taking another 1,500 people off the payroll. I deplore that, but we have no choice. As a result, the costs of labour have decreased from about 48 per cent of revenues to about 34 per cent of revenues today, which is still higher than the U.S. railroads.

In respect of network rationalization, we have shed 2,700 miles of tracks. We will continue along this trend. This bill will be helpful to us in this regard.

We have renegotiated labour contracts. We experienced a strike last year. There was tough bargaining. However, today we have much-improved labour agreements.

We have reduced our overhead. One of the first things I did when I took over the CEO job three and one-half years ago was abolish half a dozen VP jobs in order to reduce the overhead and to de-layer the organization.

On the revenue side, we have done a certain number of things to become much more customer focused. For instance, we have completed investing $100 million on a new information system to keep better track of shipments in order to serve customers better. Last year, we completed the new Sinclair Tunnel which reduced the journey between Halifax and Chicago by 24 hours for double-stacked trains. From Halifax to Vancouver, we have built the most extensive intermodal network in North America.

These measures have produced some concrete results. For instance, three and one-half years ago this company was losing $100 million. In the first three months of this year, we produced $82 million of net earnings. This is not good enough. In order to have a manageable rate of return, we need to earn at least $500 million profit year in and year out. As committee members will know, we are a long way from that.

We have done as much as we were able to fix the problems. However, we think that regulatory reform is essential. The bill before the committee today falls far short of what we had hoped when compared with deregulation of the rail sector in the U.S., which has been a tremendous success. This bill falls short of the Staggers act passed by Congress in 1981. This bill is a modest change. It is still protective of shippers. The current legislation is the most protective piece of legislation of any transportation mode in North America.

In order to refresh your memory, I point to our common carrier obligations. As a railroad, Canadian National does not have a choice - we must carry shipments for our customers. The competitive line rates are real. The shippers say that they are never used. However, it is a fact that these provisions exist.

If you are a shipper 200 miles down the road on our line, and if the CP line is 200 miles down the road, if you do not like our rates, you can go to CP.

Statutory interswitching is another very exceptional provision. If GM is not satisfied with CP's services in Ste-Thérèse, it can come to us if the interchange point is less than 30 kilometres and ask us for a rate. CP would then have no choice but to allow us to carry that traffic on their line.

Finally, there is final offer arbitration. If a shipper and a railroad can get along and agree on a set of rates - again, a very exceptional measure - they can present their final offer for arbitration purposes.

Let me briefly address some of the concerns expressed by the shippers. They have been talking about clause 27(2), and you have heard quite a bit about this. They did not like "significant prejudice" in that clause. They asked for new wording, which the committee of the House of Commons gave them. Then they were here yesterday and said they did not like that.

One of you asked yesterday why this was put in the bill. This was put in the bill because the shippers asked for it. When we say that they should demonstrate "substantial commercial harm," let us keep in mind that this is an exceptional measure. It means that we are leaving the market forces aside. A shipper is coming forward to the agency and using an exceptional recourse. You are asking the shipper to tell the agency, "If you do not give us that relief, we will suffer substantial commercial harm." I have a tough time understanding the concern of the shippers in this regard.

The shippers were bitching - if I may use that word - about clause 34. They said that the phrase "frivolous and vexatious" was offensive to them. What happened in the House of Commons? That phrase was dropped from the legislation.

Clause 112 says that the rates, if they are imposed by the agency, "must be commercially fair and reasonable to all parties." Again, this is very much an exceptional recourse. Instead of market forces determining the value of our services, one must go to a government body, the NTA, and ask it to set the rates. The phrase in clause 112 is that these rates should be "commercially fair and reasonable." In order to address the shippers' concerns expressed in the House of Commons committee, the phrase "to all parties" was added.

The way I see it, the railroads are very much paying today for our past sins. I would be ready to confess that, in the past, we had no customer focus whatsoever. There was a tendency on our part to run the railroads and get to the customer whenever we had the time. I recognize that, in the past, these companies were mismanaged. I recognize that, in the past, we were not bottom-line oriented. I would say that our style of management was an imperial style of management. However, over the last five years, the railroads have changed a great deal. Today, it is a partnership.

I find it difficult to understand CEOs arguing, as they did yesterday, that jobs will be lost if this bill is adopted as is. I cannot, because of confidentiality, give you names, but 10 days ago Mr. Davies and I met with one of the largest chemical producers in the world. These people say they will build a plant in Alberta because of the high quality rail service we will provide them.

Again, I cannot give you the name of the company, but a coal producer in Alberta was in serious difficulty five years ago. We sat down together and decided to reduce our rates. As a result, that company has been turned around. Mr. Davies and I were in Calgary meeting with the coal producers and paying a personal visit to the CEO of that company, and he thanked Canadian National for helping them through a difficult period. Today, they are expanding. Their production has moved from 2 million tonnes a year to 3 million tonnes.

I understand the shippers' concerns. There is an old mentality, especially west of Ontario, that when you get up in the morning and the weather is not nice, you blame the CNR or the CPR. In the past, I think they had a good point. However, the point I want to leave with you is that our company, Canadian National, has changed significantly. I do not want to speak for CP because it is big enough to do that on its own.

Let us look at the facts. The shippers think that we will take them for a ride in terms of rates if this piece of legislation is passed. Let us look at what has happened to freight rates over the last 10 years. In real terms, not in nominal terms, freight rates have decreased by more than 3 per cent per year. This is more than 30 per cent. As a matter of fact, it is closer to 35 per cent over the last 10 years. We have increased our productivity by 45 per cent on the labour front over the last three-and-a-half years. Every time we reduce our cost structure, the shippers have been the first ones to benefit. We are now establishing partnerships. Why would we jack up the rates and hurt a producer?

Look at coal as an example. Most of the coal in Western Canada goes to Asia, especially to Japan, and competes with coal coming from Australia. Why would we jack up the rates when we know that about 50 per cent of the retail price of that coal in Tokyo is based on transportation costs, freight rates and marine transportation costs? Obviously, if the coal producer from Alberta or British Columbia is not selling coal in Asia, we will not be hauling that coal on our trains.

Honourable senators, I think that the bill in front of you is a compromise. That is what I am saying to the shippers. I am not especially happy with it, and I know they are not especially happy with it. It has been in front of Parliament for almost a year. Therefore, I plead with you to pass the legislation as quickly as possible.

We would be delighted to answer any questions.

The Chair: We heard Halifax Grain Elevators Ltd. express a concern about lack of competition in the Maritimes. Would you care to respond to that?

Mr. Tellier: Halifax Grain Elevators Ltd. is in the business of handling grain. My short answer is that we will not apologize to anyone because we serve our customers well. We are providing the farmers, the producers of red meat in the Annapolis Valley, better rates as a result, to some extent, of bypassing the Halifax grain elevator during the winter. They do not like that, but, as I said, we will not apologize because we are producing cheaper feed grains to these producers in the Annapolis Valley.

Mr. Gerald Davies, Senior Vice-President, Marketing, Canadian National Railway: Our focus is to keep Canadian producers and consumers competitive in the world market. That is the factor that is at play in the Annapolis Valley. Their ability to be competitive in their market-place depends in part on low-priced feed grain. As long as we have the opportunity to move that feed grain from Saskatchewan or Manitoba into the Annapolis Valley at a profit, we will continue to do so.

The Chair: Is it fair to say that this bill is critical to your future, from a financial point of view?

Mr. Tellier: Yes. There was significant improvement between the 1967 and 1987 acts. The 1987 Transportation Act was a step in the right direction. We were hopeful that, following the five-year review, this act would go further than it does, but it is a step in the right direction. It is a minimal requirement to enable us to perform as a North American company. I remind you that we are a North American company with 38 per cent of our revenues coming from either the U.S. or cross-border traffic.

Senator Spivak: Mr. Tellier, one cannot help but admire what you have done with CN in the last while. You are a very persuasive articulator of policy. However, I must say that you have, in a sense, made the shippers' case for them, very eloquently. You pointed out how the rates have gone down in the last 10 years. The shippers say that too. They say, "It is not broken; why are you fixing it?"

I wish to focus on clause 27(2). You talk about market forces. In the west in particular, they say that there cannot be market forces because they cannot go to competition. Grain producers, for example, cannot use trucks. They have illustrated that vividly. I am sure you read their remarks on why they cannot use trucks. There are no market forces there.

You are saying, "Why would we want to jack up the rates?" That is the "trust me" argument. I have no doubt that that is the case. However, in a situation like this, a "trust me" argument cannot work. They say that this will result in all kinds of litigation, and I am sure that it will.

Why are the words "suffer substantial commercial harm" so important to you? The shippers want those words removed. Why would it not be good enough for you in this instance, in terms of your own profitability and productivity, to take those words out and leave the situation as it was? It was working well. You have other things in this bill. You have, for example, very fast abandonment of rail lines.

I should like you to address the issue of lack of competition and the lack of market forces. Market forces cannot work when they do not have an alternative route. Would you indicate why those words are so important to you and why you believe that there would not be a great deal of litigation, which is not productive for anyone except lawyers?

Mr. Tellier: I will address why this wording should stay in, and then Mr. Davies will address competition.

If we had our way, all the protections which exist in the act would be removed. We believe that these are exceptional measures. I remind you that the final-offer arbitration and the competitive line rates and so on do not exist anywhere else in North America. Therefore, these are very exceptional measures. Our preferred position was to tell parliamentarians like yourself that these protections should be removed. We lost that battle; the shippers won that battle.

In terms of protection of the shippers, the status quo remains. If these very exceptional measures stay in the bill, it is only logical that when there is an intervention by the agency, for example, the shipper should have the burden of proof to demonstrate that if the relief is not granted there will be substantial commercial harm. My point is that it is a very unusual and exceptional course of action.

Senator Spivak: Let us understand what the words "protective measures for shippers" really mean. The railway has a monopoly. There is no competition. If there were competition, we would not need any protective measures for shippers.

I am sure that you believe in market forces. I believe in them to some extent, although perhaps not as much as you. However, where there are no market forces, something must be done. We cannot compare ourselves to the United States. Their shippers are much closer to markets. How do you answer for remote areas with only one access route?

Mr. Tellier: First, there is competition -

Senator Spivak: Not for the grain producers.

Mr. Tellier: Yes, there is.

Senator Spivak: They cannot use trucks.

Mr. Tellier: I disagree with you. You know as well as I, if not much better, the geography of the prairies. In Winnipeg, ourselves and CP are competing head to head. From Saskatoon, they go in a straight line to the West Coast. In the northern and very southern part of the prairies, there is no head-to-head competition. However, everywhere else there is head-to-head competition.

Let us look, for instance, at the rationalization process now taking place in terms of putting in high through-put elevators. We won seven of the last eight projects. In each case, including Camrose, there was head-to-head competition with CP. Therefore, there is, to some extent, competition in that north-south corridor.

Mr. Davies: The driver in the disciplinary side of the market-place is indeed the world market-place in which our Canadian producers work, and it is indeed a competitive world market-place. The producers of sulphur, coal, grain, forest products, and petrochemicals are all competing on that world stage. Those products must be delivered to the ultimate destination at a world-competitive price. That is the primary market discipline.

There is no requirement that you have eight railroads serving every location, or even two railroads. Indeed, when we compete into the United States market with forest products out of British Columbia, Quebec, Ontario, or Alberta, we compete in markets where Americans can put that same forest fibre into those market-places. If we are not price-competitive, that market will use a U.S. source or perhaps a Chilean source, and if that is because of us, we simply will not carry the product.

The only thing that Canadian National does is deliver rail transportation, so we must work very closely with the producers to ensure those products are laid down in the ultimate market-place at a price that is competitive and that works for the producer, because they must be profitable through this process, as well as for our railroad, because we also must be profitable.

Senator Spivak: I understand what you are saying. However, I have sat on this committee for a number of years and listened to the producers talk about their disadvantage because of their remote location. There is no question that transportation costs are key to them.

Let me get back to the essential point, and I will put the question another way. What was there prior to this? The minister, did not send it down this way. It was changed in committee, as I understand from yesterday's meeting. Perhaps I am wrong.

What is the essential difference? Could you quantify it? Since it was not working badly before, according to the shippers, why is it so important to you to have this wording there? Is not goodwill with the shippers equally as important? They are dead against this.

Mr. Davies: In my view, one of the critical features is keeping the relationship between the railroads and their customers in a commercial framework. We do not need the government in the middle of it.

If there is a situation where the shipper believes that the government must have access, why should they not indicate the substantial, potential harm to themselves before they gain access to this very unusual remedy? There are a series of other remedies which come into play before they get here.

Senator Spivak: Why was it not good enough the way it was? They must demonstrate something. These are directions to the agency. Why do you need that in legislation? Obviously the agency would not grant relief if there was no good case.

Mr. Tellier: They are trying to move toward further deregulation by asking the shipper to demonstrate the need for that kind of relief.

I suppose that it comes down to a question of philosophy. We strongly believe that the value of rail services should be determined by market forces and nothing else. Therefore, each and every one of these measures are exceptional measures. Is it not reasonable then, given that they are exceptional measures, to ask that the shipper demonstrate the potential commercial harm for which the relief is being sought?

To go back to your previous point, when the former Minister of Transport introduced the bill almost a year ago, clause 27(2) spoke of "significant prejudice." The shippers said that term was not clear, and there were transportation law issues. After a long debate, the term was replaced at their request with the phrase "substantial commercial harm." Now they want to go back to the status quo and have nothing. Not only that, the House of Commons, in its wisdom, decided to add clause 27(3), which is a series of guidelines which the agency would be called upon to follow in granting any relief.

I suppose the divergence in views between us could be because you do not consider these measures exceptional in nature; therefore, there is no need for that kind of safeguard. There may be a point of disagreement there. We think that these measures are exceptional. They do not exist anywhere else. Rail-Tex is the most successful short-line operator in the U.S. You can ask them whether these measures exist south of the border.

Senator Spivak: We are not south of the border.

Mr. Tellier: No, but keep in mind that we are competing for investors' money. Rate of return is a serious issue. Every month, when we have a board meeting, we all must justify the capital expenditures which are brought to the board.

What will happen if the financial viability of the railroads through further deregulation is not assured? One way or the other, we will not be able to reinvest in the plants. There will be more broken rails next winter when the temperature falls below 30 degrees for 19 days in a row, as happened last winter. We will have more derailments and more problems. This is a real issue.

We must be able to raise our rate of return. Therefore, more and more, the relationship between a shipper and a carrier should be determined by the real value of our services. It is not in our best interests to damage that relationship in any way, shape or form.

[Translation]

Senator Poulin: Mr. Tellier, I very much appreciated your presentation. This is a very complex issue. Reporters talk about it all the time. You managed, in a few minutes, to sum up the key issues, to show how seriously the railway and transportation situation in Canada has been studied in recent years and to list the decisions you made in the past and their outcome.

However, if I understood you correctly, you try to always place the emphasis on the objective. In order to survive, we need in this country less regulation and updated regulations that take into account the context and objectives.

I would like to focus on the issues. You stated in your presentation that you would be willing to answer questions. When you talk about having a "low rate of return", could you explain why this is so?

Mr. Tellier: The return on invested capital today is close to 8 per cent. It is roughly half the cost of our capital. Since Canadian National was privatized, we have two sources of capital: the equity market, meaning shareholders, and the debt market.

Our debt-equity ratio is 39 per cent. To use a round figure, let's say that 40 per cent of our capital is raised on the debt market. This is the debt we contracted over the years. The cost of this debt is close to 8.1 per cent per year. This is the interests we pay on our loans. The rest, equity, came from our shareholders, people who were willing to invest in the Canadian National. We pay them dividends.

Our capital cost, as reflected in the decision regarding wheat brought down the day before yesterday by the National Transportation Agency, amounts to 16.1 or 16.2 per cent, according to their calculations. Therefore, if we cannot get a fair return on investment, we cannot justify these costs to our shareholders, who are private individuals and institutions. Consequently, we will be compelled to reduce our capital spending.

Canadian National is spending this year $400 million in its capital budget to purchase engines, improve tracks, repair bridges. So, if the return on investment is insufficient, we will have to reduce this budget and will be caught in a vicious circle. The quality of service will decrease and we will lose market share.

One very important figure to keep in mind is this. If you look at the total revenue of the transportation industry in Canada in 1970, we, the railroads, accounted for 70 per cent. Today, we are down to 30 per cent. Who gained? The trucking industry.

We need, on the one hand, to get a return on investment that will justify these capital expenditures and allow us to improve service and, on the other hand, to stop this erosion of our market share and get the upper hand again on the trucking industry. It is all interrelated.

Senator Poulin: What figures are you looking for in three years time, as chief executive officer?

Mr. Tellier: I think we should have a return on capital equal to our cost of capital. As I said, in the decision it handed down yesterday, the National Transportation Agency said that our cost of capital is 16 per cent. Otherwise, the situation will continue to deteriorate instead of improving.

The Chair: Do you have something to add, Mr. Davis?

[English]

Mr. Tellier: We have suggested several amendments to this bill in our brief. If it would be easier for you and your colleagues, Madam Chair, for us to withdraw these amendments to ensure that this bill receives Royal Assent as quickly as possible, then we are ready to do that.

We think this bill is a compromise. As you can tell, we are not 100 per cent happy with it. However, it is a step in the right direction. I plead with you and your colleagues on the Senate committee to approve this bill as quickly as possible.

The Chair: We will now hear from Mr. Bruce Flohr, Chief Executive Officer of Rail-Tex. Please proceed, Mr. Flohr.

Mr. Bruce M. Flohr, Chief Executive Officer, Rail-Tex: I last spoke to your committee in 1992 before the Canadian National rail line in Nova Scotia was sold. This committee then, under the chairmanship of Senator Finlay MacDonald, was looking carefully at that whole transaction. We have come a long way since the last time I appeared before this committee.

We very much support Bill C-14. From our standpoint, we are focusing more on how to save rail service in rural Canada.

Today, Rail-Tex is the leading short-line railroad company in North America. Our company now operates 25 railroads, covering 3,475 miles of track in 20 states, two Canadian provinces, and Mexico. Our 1995 revenues were $108 million U.S., with an after-tax profit of $8.3 million. We have assets of $205 million U.S. Our company, over the last five years, has had a 41 per cent per-year compound annual growth rate in revenues.

We are making money in the railroad business. Our Goderich and Exeter railway in Ontario is a 70-mile line purchased from Canadian National in 1992. In Nova Scotia, we operate a 245-mile line, the Cape Breton and Central Nova Scotia Railway, which was purchased from CN in October of 1993. Most recently, we purchased the rail assets of the Central Vermont Railway, a former CN line, running southward 326 miles from East Alburg, Vermont, on the Canadian border, south of Montreal down to New London, Connecticut.

Combined, we have over 650 employees. Three of our 25 railroads have labour unions representing the employees.

Our financial information is on file with the United States Securities and Exchange Commission because our company's stock is traded on Nasdaq. In fact, The Globe and Mail carries the listing of Rail-Tex stock every day, and I checked that this morning.

In the material I have provided is a brochure that tells a little bit about all 25 of our existing railroads.

As I mentioned earlier, we have purchased three lines from Canadian National. All three have been arm's-length transactions in which we bid to buy the line. Each bid included a purchase price and a per-car fee, or the amount of money that Canadian National pays back to us to cover our costs of bringing the car from the shipper down to the main line of Canadian National.

Canadian National received 100 per cent cash payment for each acquisition, and Canadian National does not guarantee any of our debt. Our debt is with the National Bank of Canada for our Canadian lines. We do not have any minimum revenue guarantees with CN, nor with any of our other railroads. There are no federal or provincial loan guarantees, no tax abatements, and no government subsidy payments on any of our Canadian lines. We like doing business in Canada.

I am deeply concerned that many interested parties, especially shippers, do not understand the real reasons large railroads in North America are selling off their light density branch lines. The ability to sell those lines is another big part of this legislation.

This really reflects the same process that has been ongoing in the North American airline industry for years. The large airlines are turning over the service in the smaller communities to regional airlines or commuter airlines which can operate at lower costs with smaller-sized planes while still providing service to rural parts of Canada and the United States.

The big railroads are selling off their branch lines to downsize for profitability. There is a reduction in wage costs and wage rates, but the biggest change is the improvement in work rule efficiencies because the small railroads do not have the same union craft lines. For a big railroad like CN, a locomotive engineer cannot even wash the windshield on his locomotive. That is another employee's job, a person who belongs to a different labour union. Having no work rule craft line distinctions produces great cost savings by reducing the number of employees working on a rail line.

As an example, on our Cape Breton railroad, 47 employees today are handling 20 per cent more business then when CN operated the line with 110 people. When we acquired the Central Vermont from Canadian National, there were 161 employees. Today, we are operating the same line with 95 employees.

The big railroads also sell off so they can get a higher return on their invested dollar, as was asked of Paul Tellier in the last presentation. They can improve their asset utilization, and they get better service from the little short line. That is all we have to sell.

On our Goderich railroad, Canadian National was going back into Stratford three times a week. The big shipper on that line is Sifto Salt from their big salt mine in Goderich. We are now going five or six days a week, compared with CN's three trips per week.

We have improved car supply. Rail-Tex has 3,480 cars today. Many of those are brought to Canada to haul grain. I will tell that story later.

We provide better management supervision of the activities. We certainly caused the line to stay alive rather than being abandoned. We actually generate more business. The big railroads, not just CN or CP but all the big railroads in North America today, are selling their traffic under the 80/20 rule where 80 per cent of the business comes from 20 per cent of the customers. They pay real close attention to the Ford Motor companies of the world but the little shipper does not even get a telephone call any more. That is where we get our business.

For the first three months of this year, our business is up over 8 per cent over last year, and the big railroads' business for the first three months is actually down 3.2 per cent. That is how hard we work at bringing shipments back to rail.

We also focus on the short haul.

We won a Golden Freight Car award back in 1982 for a 14-mile haul of steel from a shipper to a receiver. It took 35 trucks a day off the highway.

On our Goderich railway, we came in and charged the shippers down around Centralia - the small elevators in that area - a half a cent a bushel less than the trucker was charging. For each shipping season, generally around August and September, we have taken 900 trucks off the highway going through downtown Goderich down to the grain elevator during their peak tourist season. The grain elevator has increased its rail car unloading from a two-car spot to a 25-car spot.

We are taking wood chip cars and wood rack cars to Nova Scotia. We were astounded in Nova Scotia that the two paper plants were not bringing any wood fibre in by rail. It was all coming by truck. We are now hauling pulp wood and wood chip into those paper plants by rail. We got the trucks off the highway. We can beat the trucks, even at short haul.

What do the shippers think about this? In 1989, the Interstate Commerce Commission in the United States did a survey of shippers that had been on a large railroad. The large railroad sold the line to companies like ours. What did the shippers say? Of the 382 responses, only 5 per cent reported worse service and 52 per cent reported improved service. As far as freight rates are concerned, 12 per cent reported higher rates and 20 per cent saw lower rates. The large shippers saw very little change, but small shippers saw significant improvement.

Many people do not realize there is a death spiral to a branch line. If a big railroad does not want to continue service to rural areas in Canada or the United States, it will cut back on track maintenance and the speed of the trains. Then it will cut back from daily service to weekly service. It will not supply the railroad cars. It will literally cause the branch line to die. Companies such as ourselves want to get in fast enough, before all the business is driven off to truck, so that we have a chance of making it.

We tried to buy a rail line in Ontario for over four years. It runs from Stratford up to Owen Sound. It was during the time the NDP was in power when there was successor rights legislation in Ontario. This meant that we would have had to take all the existing CN rail unions. We worked very diligently to accommodate rail labour in this case. We could not come to an agreement, and all that track has now been torn up. We would have continued to operate approximately 150 miles north of Stratford and then take the rest of the rail and build into Kincardine where the Bruce energy centre is located. An active industrial activity in that area will take the waste heat from the Bruce energy centre to do everything from processing alfalfa to processing canola beans. They are growing tomatoes in hothouses. They could have used rail service, and it is all gone because of the issue of successor rights.

I mentioned earlier our Cape Breton-Central Nova Scotia railway and how the employees there went from one 110 to 47. Of the 47, 45 are former Canadian National employees who were all working for labour unions. I include in my testimony a publication with interviews from the employees of that railroad, all former Canadian National employees, talking about how wonderful it is working for a new company. One of them is the former local chairman of the Brotherhood of Locomotive Engineers, the person who drives the train. He talks about how he really likes his new job. He gets to go down off the locomotive and do line switches. He even make sales calls. We give all of our employees business cards. He likes the variety of the job. I thought if there was one person whose work habits would be hard to change, it would be the locomotive engineer. They sit in the nice, warm, dry seat of the locomotive all the time. However, this gentleman loves to do other things. He also says that he does not need a guaranteed job provision in his labour contract when he sees the new owners trying to bring more business back to rail. That is his guarantee of a job. He sees our traffic growing rather than shrinking.

This same story was told in the November 1995 publication of the Canadian Reader's Digest. I did not bring a reprint with me, but I will supply a copy of that reprint to the committee because it relates to outsiders talking to our employees and, I think, getting a very impartial opinion of how things work.

The problem that we faced in the past and that the legislation seeks to correct is the length of time for the approval process. When we signed the agreement with CN to buy the Goderich railroad, it took us 19 months, over a year and a half, from when we signed the agreement until we finally received approval. First, we needed federal approval; then we needed provincial approval. With respect to the Nova Scotia line, the same thing happened, but we cut the process down to 12 months.

This legislation eliminates federal involvement in the sale of a rail line. We definitely support that part of the legislation because it is not fair for the shippers to be in limbo for a long period.

Although the Nova Scotia line took 12 months to finalize, we have been in the court system in Canada for over two years, first before the labour board and then through the court of appeal. It was only three months ago that we finally won in the Supreme Court. We did not have to take back the former union structure. The Brotherhood of Maintenance of Ways fought that.

There still is successor rights legislation provincially in British Columbia and Saskatchewan. There was successor rights legislation in Ontario, but it was recently removed. However, this legislation does not address the issue of successor rights for rail lines on which VIA operates or rail lines which cross provincial boundaries.

Especially in the prairie provinces, the natural layout of those rail lines crosses provincial boundaries, and we will not be able to acquire some of those lines as long as legislation mandates successor rights on federal undertakings which cross provincial boundaries. We are only buying rail lines within a provincial boundary.

We are not anti-union. I mentioned that we have three railroads where the employees have chosen to unionize, and one of them is in Goderich. However, we are an anti-craft line because we believe the person who runs the train can also wash the windshield.

We are disappointed that the legislation does not go into successor rights. I was one of the stakeholders that helped write the legislation, and this was an area where we did not prevail.

I will be happy to answer questions on captive shippers, but I think you had a good dialogue with Paul Tellier on that issue.

There are two other issues I do wish to talk about. One is with respect to testimony before the House of Commons committee.

The shippers said they do not like the provision that a short-line railroad only outlets to a single, large railroad, and there should be access rights or trackage rights to go to another large railroad. If CN were to sell a line to us, we would have the right to operate over the CN and eventually to connect with the CP. The legislation does not permit this, and I totally oppose anything that would affect this, even though the shippers have been pushing for it.

Of our 25 railroads, only 10 outlet to a single carrier, two of those being our largest. We willingly negotiated the agreement. We are in partnership with the big railroad. They want the traffic, but they want it delivered to them more efficiently than they could bring it down to the main line system. We have an excellent relationship with CN. They do not dominate what we are doing.

The concerns of the shippers simply are not justified, and I ask you to talk to the shippers on our rail lines to determine if they feel that CN is dominating us in any way. It simply does not happen.

We will willingly buy more lines that only outlet to one large railroad. In fact, in the United States, the United Transportation Union is trying to get similar running rights legislation passed. The UTU is supporting this because they know that if it ever were enacted, the big railroads would stop selling their branch lines to avoid giving up that long haul traffic to another large carrier. The UTU is doing this to stop the sale of branch lines, which really means allowing branch lines to go through this death spiral.

I believe this legislation goes a long way to continuing to preserve rail service to rural Canada. It is similar to the situation in the United States. The provincial laws provide protection on how they want to treat the buy-sell of a railroad, but they do not go far enough to addressing the successorship rights. At some time, Canada must address that issue.

I will be happy to answer any questions.

The Chair: Mr. Flohr, what do you see as the total market potential for short lines in Canada?

Mr. Flohr: Right now, we see about 10,000 miles of light density branch line. In fact, I give talks to many shipper groups here in Canada. I will lay a Canadian $20 bill on the podium.

The Chair: We want an American.

Mr. Flohr: It is worth more, yes. I will bet them the $20 bill that if their factory is now served by a one-train-per-day railroad, that within the next five years, they will be served by a short-line railroad company, because that is what is happening all over North America.

The big railroads do best by putting 100 cars behind four locomotives over a long haul. The little guy does best by bringing that traffic down to the main line. I foresee, in Canada, that the two main-line railroad systems will ultimately be owned by CN and CP while everything else will go to small railroad operators, companies us or like Tom Payne and the Central Western.

Senator Atkins: I sat through the hearings on the Truro to Sydney line. One of the major questions then was maintenance. When you talk about reducing the number of employees from more than 100 down to 42, it is surprising to me that you are able to continue the level of maintenance expressed throughout those discussions. Is the standard as high if not higher?

Mr. Flohr: We believe the standard is as high and, in some cases, actually higher than before. We made big savings in situations like this: A train crew would go on duty at Sydney and drive the train down to Havre Boucher, roughly 120 miles. They would get off the train, rest, and then, the next day, take another train back east into Sydney. They worked for about four and a half hours but were paid the equivalent of ten hours' pay.

Now we run the train from Sydney all the way down to Stellarton with one crew, about 200 miles. They are being paid about nine hours' pay. They do more work for the same amount of pay. They get rest at Stellarton and go back to Sydney after their rest. We have literally cut the train crew costs in half. We pay them for eight to nine hours' work, and they actually work those eight to nine hours.

In the track maintenance area, we are using some outside contractors to do heavy repair work. They will come in and change out a large number of ties. However, Canadian National left that railroad in very good condition. We are now doing just continual maintenance of the line.

Senator Atkins: Have you reduced the number of people working on the line?

Mr. Flohr: No. The net result is that we have not reduced the number of people working on the line. We simply changed the organization of how they do the work. We actually have more people working on locomotives right now than CN had when they were operating the line.

Senator Atkins: If this legislation goes through, it is a big opportunity for you to increase the number of short lines in this country.

Mr. Flohr: Let us just say it provides an easier opportunity. We acquired lines under the existing legislation, and it did work. We were very patient for the 19 months and 12 months. This will simplify the process. We remain interested, but there is a lot of agony that goes on with both the federal hearings and the provincial hearings. I think that agony is unnecessary in this particular case. This will simplify the process immensely.

Senator Atkins: The notion exists that CN is responsible to its board of directors and its shareholders. CN will be selling off more of its rail lines.

Mr. Flohr: I agree, yes.

Senator Atkins: Is that a good thing?

Mr. Flohr: Yes, and we see a real opportunity for us here. We want to buy more rail lines here in Canada.

Senator Atkins: Do the shippers see that as an opportunity for them? I know it turned out to be that way in the Truro-Sydney line, but what about these western lines?

Mr. Flohr: We do not agree with some of the things Canadian Pacific has said about their prairie lines. CP is publicly stating that they would prefer to move all the grain to large, very efficient elevators already existing on the main line of Canadian Pacific. Then they can tear up the rail lines going out to the smaller elevators.

We would rather see the smaller elevators exist so that the farmer can bring the grain in from his harvesting machine, have a place to dump it quickly close by, and then we can move the grain from those small elevators, four or six cars at a time, down to the big elevator. It will sit in the big elevator for six to nine months until it is sold into the world market-place.

In Goderich now, for a half-cent less per bushel than the truckers charge, we will haul it down to the big elevators. That has become very popular with the farmers in Goderich. We are doing the same thing in the state of Kansas. Canadian Pacific is missing an opportunity. It will be fighting a lot of opposition from the farmers. It would be much better for them to sell these grain branch lines to companies like ourselves and let us haul it down to the big elevator with just shuttle trains moving back and forth.

We bring a number of our covered hopper cars here. Last year we brought over 60 up to Goderich just for that two-month period in August and September, shuttling the grain from places like Centralia into Goderich. As soon as that movement was over, we took the same covered hopper cars and moved them to Michigan to haul edible beans from small, rural elevators down to the big elevators. It is the same sort of concept. That is the one area where we do not agree with Canadian Pacific on their abandonment policy in the prairie provinces.

Senator Atkins: Do you agree with CN that allowing market forces to prevail will be in the best interests of both CN and the shippers?

Mr. Flohr: We believe that is the case. I do not believe that there are truly captive shippers, as much as I enjoyed your eloquent comments on that.

Nova Scotia Power has two power plants on our line in Nova Scotia. All of their heat comes from coal which is currently being mined by Devco in Sydney. Now that Nova Scotia Power is privatized, they are really working on Devco to drive down the price of the coal, for reasons everyone here will know.

Nova Scotia Power has been out in the world market looking to buy coal offshore to bring into Nova Scotia to power those power plants. It does look like they are now captive to coal and rail with us, but three years from now they might start buying coal from Poland or Australia. We bought 140 rail cars to serve the coal movements for Nova Scotia Power, and they are not at all captive to us because they could start buying coal offshore.

In the case of grain and world market competition, if rail does not keep their price down to make the customer competitive, they will not ship into the world marketplace.

With our railroad, the Old Central Vermont, we are now working hard to bring more chemicals from the Montreal area down into New England, chemicals which had been coming from the Houston, Texas, Gulf Coast area. Now, with NAFTA in place, the chemical producers in Montreal are very price-competitive. There is more chemical movement from Canadian manufacturers going into New England than there is coming from Houston. When the chemical shippers claim they are captive to rail, overall, yes, they probably are, but you can change that source from Houston up to Montreal. One railroad will lose and another railroad will win. That is the marketplace functioning the way it is intended to function.

Senator Atkins: Does this legislation, in your view, create more abandoned lines?

Mr. Flohr: No. This legislation will actually save lines from being abandoned because it creates an easier process for companies like us to come in. It also creates a process that, if a local community or a province wants to buy the line, there is a mechanism in place that would allow various parties to bid on buying the line. Yes, there are some things that I would like to see a little different, but it is not really worth the argument. The legislation is drafted in such a way that the structure of potential branch line sales is adequate and protects all parties.

Senator Spivak: I am particularly interested in the western situation. I am delighted to hear your comments because, in many areas, the cost of trucking is not just the cost of shipping but also the cost of the roads. The taxpayers are bearing the costs of roads which were never designed to carry that kind of truck traffic. There are also safety issues involved.

You mentioned the difficulties in the western provinces. Will there be enough time for you to get in there and get those lines before they are torn up? Why are they tearing up lines? If you have lines now in Owen Sound, you could get in there at a later date. I do not understand that. What is required to give you that time line?

I understand succession rights. I think it would be very beneficial for western grain farmers to have the option, aside from hauling everything 100 miles, of using the smaller elevators. That makes so much sense. I guess that is why it will never happen.

Mr. Flohr: A few more lines may need to be physically torn up before reality sets in. We have had several meetings with the Rural Municipal League in Saskatchewan. In fact, at their fall 1995 semi-annual convention, we were given two hours on their agenda to make a presentation about how Saskatchewan will need to eliminate successorship rights, at least in railroads. If they want to do it in other industries, fine.

We even proposed in Ontario that at least the very small operations should be carved out, those rail lines affecting less than 50 employees. There was much talk about how their highways would be torn apart if more grain trucks operate there. Reality will not set in until several lines are physically torn up.

Senator Spivak: Have you been to Manitoba?

Mr. Flohr: There is no problem in Manitoba. Canadian National or Canadian Pacific has not put any lines on sale yet.

Senator Spivak: Will you aggressively get into that area?

Mr. Flohr: Yes, we will. We are working in Alberta. I personally have been to Edmonton several times. I met with the vice-president, western region, for Canadian National. They are looking at several of the lines in Alberta and Manitoba. There is still the problem, if you look at a railroad map, that many of those lines run more east and west and cross provincial boundaries. There is still a problem of successorship rights on lines which cross provincial boundaries.

Senator Spivak: Regarding offshore coal, you must remember that we need to keep jobs in our economy. If we cannot ship grain from our western provinces, our economy is devastated. We cannot hold that option as a matter of public policy and public interest.

Senator Adams: According to these figures, where CN had 160 employees, you reduced it down to 92. You mentioned that your employees are happy and are not unionized. A few years ago, Mr. Tellier was here and talked about union regulations that would only allow engineers to drive locomotives for about eight hours per day. Between Montreal and Ottawa, although it is only a four-hour drive, they would get eight hours' pay.

Short lines do not have great distances to run. You mentioned some engineers get eight hours, some get ten hours. Do you pay them overtime, or is it straight hours?

Mr. Flohr: We pay by the hour. After 40 hours in any one week, then we pay them overtime. Sometimes they take the train over the territory in five or six hours, and we pay them that amount. However, we guarantee 40 hours a week in a five-day work week. Anything worked on a sixth day or anything worked over 40 hours is overtime.

Senator Adams: According to our figures, an engineer makes about $80,000 per year.

Mr. Flohr: That is correct.

Senator Adams: Your employees are now happier. Do they have any guarantee for retirement? How does that system work?

Mr. Flohr: The retirement system is the existing Canadian retirement system. There is nothing special on that. Our people do receive profit-sharing, which is approximately 15 per cent of their base wage.

Senator Adams: Mr. Payne was here last week and talked about buying an abandoned railway line for about $30,000 per mile. Is that true?

Mr. Flohr: If it is a line in very poor condition with light rail - that is small, cross-section rail - the price will be as low as $15,000 per mile. If it has fairly heavy rail and is in good condition, it is about $30,000 Canadian per mile.

Senator Adams: Do you have a problem with that sort of price? Are you still interested in buying more short lines?

Mr. Flohr: No, we have no problem buying at a price like that. The big problem we have, first, is to find enough shippers on the line who will continue to use the line. After we find that there are enough good shippers, then we will go to look at the condition of the rail and the bridges and figure out a purchase price. We have no problem with that as a selling price of railroads.

Senator Adams: You do not have long-distance rail. If you receive a large, bulk order that you cannot cover, do you have some kind of agreement with CN or CP for an at-cost rate for transport by CN?

Mr. Flohr: A shipper could approach us about wanting to make a movement originating on our railroad. In Nova Scotia, it might actually move 240 miles. Then it would go onto CN at Truro and be hauled all the way out to western Canada. CN and ourselves and the shipper will agree that the tariff will be, for example, $4,000. That is what the shipper sees, and the shipper will get its bill from Canadian National. Canadian National then turns around and pays us perhaps $500 for bringing the car from the factory down to the interchange point at Truro. That is a separate agreement between CN and ourselves.

In our agreements with them, we have a standard division of revenue for single-car movements, things that do not happen very often. If there are big movements, such as from Michelin Tire, Scott Paper, and so on, in Nova Scotia, we have special divisions of revenue, especially if we supply the railroad car or if Canadian National supplies the railroad car, but it is a sharing of revenue.

Senator Adams: You are an American company. Because of conflict of interest, you do not have to answer if you do not wish to. What is your percentage of shareholders between Canadian and Americans?

Mr. Flohr: I do not know. That is the easy answer. I do know that some of our employees here in Canada own stock in Rail-Tex and it is listed in The Globe and Mail, but as far as the number of Canadians, we do not even keep track of that.

The Chair: Do you have any problems with liability insurance?

Mr. Flohr: It is expensive, but we can buy liability insurance. In fact, today we are carrying $50 million per occurrence, and this is primarily for something like a major train wreck where you might be handling chemicals and you might have to evacuate a town. Our self-retention is $250,000. We were down as low as $50,000 but we have now moved it up as the company has become larger. We have no problem buying liability insurance.

The Chair: Thank you very much for your presentation.

Our next witness is a representative of National Farmers Union. Mr. Boehm is with the transportation committee.

Mr. Terry Boehm, Chair, Transportation Committee, National Farmers Union: Before I begin my presentation, I should like express our organization's gratitude for the invitation to appear today, and particularly for the scheduling. I could not have scheduled it any better myself than to follow Mr. Tellier and Mr. Flohr.

I am a grain producer from Saskatchewan. We are very interested in demarketing of branch lines in particular, and we feel that this legislation does not address that problem. Demarketing, the death spiral that was described in the previous presentation, is a very real occurrence.

One thing that should be recognized, and which is not recognized in the legislation, is that a producer and shipper are definitely two different entities. There is an assumption that the interests of shippers and producers are in tandem, and in many instances they are not, particularly over demarketing.

To a great extent, shippers and the main-line carriers in the prairie provinces are interested in rationalizing the system as quickly and as compactly as possible. Branch lines are not part of that picture. The possibility of a branch line firm coming in will not exist if the railways have slowed service to a branch line, if they have not spotted cars to a grain elevator or to a pick-up point, or if they have created freight rate discrepancies that discourage farmers from shipping or delivering to that local point. The shipper or grain company will eventually close down these small points because they want to consolidate to the larger points, which, in effect, eliminates the possibility for a short-line railway.

As a representative of the farmers union, I feel this issue has not been addressed in the legislation. In our brief, we recommend that that issue be addressed.

Mr. Tellier suggested that the Staggers Act of 1980 in the U.S. was something that the Canadian legislation should strive to mimic. I have a few concerns there. When one is considering the market-place per se in rail transport in Canada, you cannot use the U.S. example as a model. There are all sorts of distortions that occur.

For example, Burlington Northern services captive shippers in Montana, and they also service farmers in Nebraska. Montana farmers are paying substantially higher freight rates although they have a natural competitive advantage of being 500 miles closer to port. However, they are captive to Burlington Northern, so they pay a higher freight rate than Nebraska farmers 500 miles further down the same rail line.

We do not see anything in this legislation that will prevent that sort of thing. This legislation is an attempt to deregulate the rail industry, and in my mind nothing can address a situation like that. Theoretically, that is occurring in the operation of the so-called invisible hand of the market referred to when discussing the North American market.

Senator Spivak mentioned the costs under the act. Once shippers and main-line carriers rationalize and compact the rail system, the road structure will deteriorate in the prairie provinces because there is no provision in the legislation for looking at traffic flows or regional planning. In the state of Maine, there are intermodal transportation recognitions that take into account traffic flows and the effect that the removal of one particular form of transportation will have. In the Canadian legislation, there is no recognition that there are costs to the Canadian economy beyond just the rail freight rate.

There was a good example in Saskatchewan with the recent flooding. Truck traffic had to be re-routed over a secondary highway. In two days, that highway deteriorated to the extent that it became impassable. If we see consolidation of the rail system, and if there is not a recognition of traffic patterns, this will be a very common occurrence.

You can have an infrastructure deficit which will become expensive at a later date, or you can have a fiscal deficit. This legislation is concerned primarily with the government's fiscal deficit.

In tandem with this, the WGTA was removed. We, as producers, have moved rapidly through two stages of deregulation - the WGTA and the NTA. Now we are moving to the Canada Transportation Act, Bill C-14.

We are very concerned about the lack of competition in the rail industry. We are in favour of short lines picking up where the main lines leave off. However, we do not feel that there is competition in the rail industry. The competitive access provisions in this legislation obviously point out that the legislators believe there is no competition between the two main-line carriers.

Mr. Tellier was concerned. He said that he would be willing to remove the amendments proposed by CN if this legislation went ahead as is. The railways are no longer be subject to costing reviews. Without costing reviews by the agency, we are concerned that productivity gains will not be translated back to users of the system. They are very interested in not being under that kind of scrutiny. In the past, under the WGTA, we had a 50-50 sharing of productivity gains.

There is an idea that freight rates are likely to increase on a slow, inflationary basis. Actually, if competition and productivity gains were taken into account, we should see a decrease of freight rates over time. The argument could be made that the WGTA more closely mimicked competition than will this legislation where we have two rail carriers.

Producers should be recognized as a major stakeholder, but they are not. A relationship is established between shippers and rail lines. The producer ultimately pays the price, either through picking up the infrastructure deteriorations or paying the freight rates that occur.

Public interest, I think, should be recognized.

Proving substantial commercial harm is not quite as vexatious a thing as Mr. Tellier points out. With respect to substantial commercial harm to the shipping organization as a whole, if it is a large unit and freight discrepancies occur at smaller shipping points, they cannot prove substantial commercial harm because their entire unit is not suffering. I do not feel that provision is particularly grievous to the rail lines.

There is no outlet for producers to appeal to the CTA. Even if they did, they would be liable for the costs of the review. We feel left out of the process.

I come from a town called Allan, Saskatchewan. Approximately 55,000 metric tonnes of grain was shipped out of that community in the past year. With the elimination of the WGTA, our freight rates have risen approximately 56 cents a bushel. Given that commodity prices are buoyant at the moment, there has not been much squabbling. It costs approximately $33 per tonne to ship that grain. Two years ago, I sold wheat on the cyclical commodity market for $64 a tonne. It was frozen, but these kinds of things happen. I think my return on investment is every bit as valid for the economy of the country as the railway's return on investment.

Senator Spivak: Hear, hear!

Mr. Boehm: Competition can be generated by common running rights on the railways with a common road bed.

We are always looking south of the border for examples, but there are European examples, such as Sweden, where the public owns the road bed. On paying a subscription fee or a dispatch fee, any carrier can put together a train and operate. We feel that would generate competition in transportation.

We are captive, really, to the railways. We believe that provincially "jurisdicted" short lines - if they occur and if we can prevent demarketing to allow them to occur - should also have the competitive access provisions that federally operated rail lines have under this legislation.

The short lines point out that they are interested in being partners with the main-line carriers, not competitors, which is what the main lines are interested in. That is fine if they are allowed to get into the transportation business prior to the ripping out of lines. As producers, we do not want to see lines ripped out. The Saskatchewan Association of Rural Municipalities does not want to see rail lines ripped out. We are not particularly opposed to measures that will ensure the operation of branch lines.

There are a few typographical errors in our brief. I hope you have read past those.

I should like to say a few words about the final offer arbitration aspects of this legislation. In regard to short lines, we feel that final offer arbitration should occur for people interested in purchasing branch lines. Where an agreement cannot be reached or where a main-line carrier chooses not to operate a line, and if it is deemed in the public interest to carry on that line, an offer by a short-line firm or a community should be accepted through a final offer arbitration procedure.

Public interest is an important part of transportation. Canada exports 38 per cent of its gross domestic product. I understand it is something like 5 per cent in the U.S. You cannot parallel legislation in the Canadian economy to the U.S. example. The Staggers Act may work to a certain extent in the U.S., but there are distortions. As a producer, I do not want to be subjected to the distortions to whivh Montana producers are subjected.

All sorts of ancillary costs can be incurred by producers, such as in rail car spotting, staying charges, demurrage charges, et cetera. None of this is addressed in the legislation. There is interest by producers in purchasing the federal rail car fleet. We are extremely interested in using that as a lever in dealing with the railways. It is not a unique situation because, for example, the potash and sulphur industries own rail cars. We are very concerned that productivity gains should be include in freight rate determinations.

That sums up some of the things I wished to say, and I would be happy to take your questions at this time.

The Chair: Do you know to what extent farm producers are captive to railway transportation?

Mr. Boehm: In the prairies, given our distance from ports, there is no other effective way to move a bulk commodity, low-density product such as we produce. Trucks are not competition to the rail lines. For short hauls into gathering points, yes, but beyond that they really cannot and will not. There is no highway structure to support the movement of 37 million metric tonnes of commodity out of the prairie provinces.

We have no alternatives. We do not have waterways. The American producers in certain areas have rather extensive waterway and barge shipping potential, but rail is our only option.

There is only one carrier in northern Alberta and northern Saskatchewan. The competitive access provisions in this bill will provide some relief, not for a producer directly, but only if a shipper - that is, a grain company - acts on their behalf. I want to make clear that those interests are not the same in all instances. They can often be quite opposed.

Senator Spivak: What would you see as an effective legislative measure to ensure a redress of the balance between trucking and short-line railways? Trucking is now, I think, 60 per cent of the shipping market share in this country, and the railways' share is down. In the west, for example, if you wanted to equalize that balance, what do you see as an appropriate measure of legislation? It is not in this bill.

Mr. Boehm: In the west, I do not think those figures apply to grains. One of the biggest concerns is a mechanism that prevents the demarketing of rail lines or a situation where there are no shipping collection points along a line because they have closed down and, thus, there is no need for a short line to come in.

Senator Spivak: That is what they doing.

Mr. Boehm: Exactly. The main-line carriers in the west and the grain companies are working in tandem for consolidation. It is simply a downloading of costs onto a producer. We are also picking up costs on road traffic.

The commodity must be moved one way or another. There are suggestions that there will be more domestic processing, but we simply export the vast majority of our production. Transportation is absolutely integral and essential for the existence of a viable agricultural industry and a viable economy in Western Canada.

Senator Spivak: In the discussion of a new national transportation policy, there was some talk of looking at the impact this would have on the configuration of the western Canadian economy. Nothing in this act seems to mitigate against unintended consequences, such as what it is doing to grain producers. There is nothing in this legislation, from your point of view.

Are rail freight rate caps only in place until 1999?

Mr. Boehm: At present, yes.

Senator Spivak: Are they to be reviewed by the government, or do they automatically come off?

As I look at your presentation, you state that one of the things we lost with the WGTA was the sharing of efficiency gains.

Mr. Boehm: Exactly.

Senator Spivak: If our objective is to make the railroads more efficient, who could disagree with that? It is a wonderful thing. However, if there are higher costs to producers as a result, what is efficient about that?

Mr. Boehm: Exactly.

Senator Spivak: It is simply a downloading of costs. It does not make the transportation system more efficient. It is not simply the railroads that we want to benefit; we want to benefit our Canadian economy, not just the western Canadian economy. Transportation is so vital to Western Canada.

Mr. Boehm: Under the WGTA, there was a 50-50 split of efficiency gains. Historically, the figures I have indicate that the railways have been able to obtain approximately 2 per cent. Canadian National will say one 1.7 per cent; people independent of the carriers will say a reduction of costs through productivity or efficiency gainsof 2.7 per cent.

As I said, there was a 50-50 split under the WGTA. It was translated directly into freight rates - the producers. The railways were allowed to keep 50 per cent of the productivity gains, and 50 per cent was reflected back to the producers. This was determined every four years by a costing review conducted by the agency. As a result, we had a jagged line freight rate increase over time.

There are no longer costing reviews in this legislation. We feel that is important. There is a slight change from Bill C-101 to incorporate productivity gains into the freight rate structure. However, we feel that that particular formula is pretty insignificant when reflected back to producers.

The freight rate cap, if historical efficiency gains continue, accomplishes nothing. It is set at a predicted inflationary level. Without costing reviews, it is substantially higher than the productivity gains that the railways historically have made. If there were a mechanism to account for that, freight rates would be lower than this cap.

There has not been a costing review since 1992. The legislation removing the WGTA removed that provision.

We are starting with a new formula from whenever this legislation is enacted. This has allowed the railways to capture the benefit of those productivity gains, which are substantial, with no reflection back in any respect.

Senator Spivak: What do you think of the argument of the railway companies, as exemplified by Paul Tellier today, that it is in the interest of the railways to have a relationship with the shippers - he mentioned shippers, but he did not mention producers - so that Canada can be competitive in the international market? I characterized that as a "trust me" argument. Do you think that will prevail? What is your opinion of that statement?

Mr. Boehm: I felt he directly contradicted himself because he admitted that they were imperial under previously regulated legislation, that they did not really do these things, and that somehow they were able to circumvent the legislation and not be responsive and really pay attention to the interests of producers and shippers.

Senator Spivak: He did not mention producers - or maybe he did?

Mr. Boehm: Or shippers.

Now, suddenly, if we have deregulation, and perhaps because it is now a publicly traded company, he feels that they will pay attention.

Railways talk of partnerships with their shippers. It is true to a certain extent. Railways are interested in return on investment to the point where a shipper can still produce and ship. Obviously, that point will be as high as possible. I as a producer would like that point to be as low as possible.

Senator Spivak: It is not really a sharing situation; it is more of an adversarial situation.

Senator Adams: I do not know very much about transportation. Are you a grain farmer?

Mr. Boehm: Yes.

Senator Adams: I understand that quite a few trucking companies are now going to some farmers and offering to deliver their grain to the elevators. How does that system work? Do they just charge you a straight cost to deliver the grain, or do they buy it and then deliver it to the grain elevator?

Mr. Boehm: No. We pay the cost of trucking to the elevator. Obviously we absorb the cost ourselves if we do it ourselves. We also pay full freight from elevator to port. Ultimately we pay the bill. However, under the legislation, we have no agency to take our grievances as small producers.

Senator Adams: Bill C-14 seems to create a more open market. If a trucking company can offer you a price for your grain and then sell it to the grain elevator, would the system work better? Now it seems that, before you can sell your grain, it must go right to the FOB in Thunder Bay or Vancouver. How does that system work?

Mr. Boehm: We have two systems. The Canadian Wheat Board grains are sold. We will deliver it to an elevator, and a cheque is issued to that particular company on behalf of the Wheat Board. Later payments, if any are obtained from their marketing of the grain, are paid back to producers.

The second form is open market grains. We can sell directly to a grain company or agent. There is a basis in that price which contains freight rate and elevation charges. We end up with a number, but these costs are in that basis, and the basis varies from time to time.

If I understand your question properly, you are asking whether a trucking company could offer "X" for the grain and then we would not worry about it after our gate?

Senator Adams: If I was in private transportation, I could buy all your grain and take so many tonnes and sell them myself. That way you do not have to hire a trucker to deliver your grain to the elevator. You would not have to worry about any other payment.

Mr. Boehm: There are some people who might like that idea. I personally, and I think the vast constituency of Western Canadian producers, do not like that idea. We like the Canadian Wheat Board. We like that particular system which reflects the prices that are obtained in the world market directly back to us and acts as a marketing agent. We will look after the freight and the elevation charges. That way, we have a direct stake in the freight and the elevation charges.

The bottom line is, I am in business as much as the railways, except there is a whole bunch of us. Without us, there are no railways. So remember us.

The Chair: Thank you for your presentation.

Honourable senators, we have two motions which we must address today.

The first motion involves the special study on communication. Could someone move a motion that:

The special study on communications referred to the committee by the Senate on May 1, 1996, be referred for consideration, pursuant to the rules of the Senate, to the Subcommittee on Communications of this committee.

That is the motion which I presented in the Senate yesterday.

Senator Spivak: I so move.

Senator Adams: I would second it.

The Chair: All in favour?

Hon. Senators: Agreed.

The Chair: The motion is carried.

The second motion involves a request from representatives of the National Farmers' Union to be reimbursed for travelling expenses. That would be for reasonable travelling and living expenses.

Senator Atkins: I move that we make that reimbursement.

The Chair: Is it agreed, honourable senators?

Hon. Senators: Agreed.

The Chair: That motion is also carried. Thank you.

The committee adjourned.