MPs support maintaining interswitching, revenue cap

The House of Commons transport committee says extended interswitching under the Fair Rail for Grain Farmers Act and the maximum revenue entitlement for railways should both be maintained as the federal government looks toward new legislation this spring.

However, the committee report, tabled in Parliament in mid-December, recognized that the measures have to work for both shippers and railways.

It said the 160-kilometre extended interswitching zone should be kept unless an alternative policy could “bolster the bargaining position of rail shippers where rail competition is extremely limited.”

However, it also said railways shouldn’t be penalized for that obligation and recommended the Canadian Transportation Agency examine rates to ensure they are compensatory.

As well, the committee said the interswitching provisions allow U.S. railways access to Canadian traffic but not the other way around. It recommended the federal government negotiate an agreement with the United States to allow Canadian railways access to U.S. traffic.

The report comes after a series of public hearings last fall to examine the future of the Fair Rail act. The act amended the Canada Transportation Act after the grain backlog of 2013-14, and although it was supposed to be temporary, it was postponed for one year in June 2016.

When Transport Minister Marc Garneau announced the government’s transportation strategy in November, he said several measures would be dealt with in spring legislation, including extended interswitching and the MRE, which is also known as the railway revenue cap. It will also include reciprocal penalties between shippers and the railways.

The railways told the committee that the legislated revenue cap formula discourages capital investment and doesn’t provide them with an incentive to move more grain or offer premium service during peak periods.

“There is a significant problem with the maximum revenue entitlement and how it treats investments, which is what we refer to as the free rider problem, meaning that if CN goes and buys 1,000 new hopper cars, the formula by definition gives 50 percent of the benefit of that investment to my competitor,” Janet Drysdale, Canadian National Railway’s vice-president of corporate development, said during a September meeting.

“I think there’s work that needs to be done with modernizing the maximum revenue entitlement if we hope to have a situation where either railway companies or customers have an incentive to reinvest in the fleet.”

Farm organizations have said the revenue cap should be retained but reviewed and updated. They want a full costing review.

“We are still waiting for the government to fulfill their promise to launch the costing review, as they had stated they would, prior to the 2015 election,” Canadian Federation of Agriculture president Ron Bonnett said after Garneau’s November announcement.

The committee said there isn’t enough market data available to eliminate the revenue cap.

“The committee is in agreement with the producers and rail shippers who recommended that the MRE be maintained, at least until there is sufficient market data to make an evidence-based decision to move to market-based rates,” said the report.

It supports changes to the revenue cap formula that would increase efficiency in grain transportation, specifically accounting for investments made by individual railroads and excluding revenues earned from interswitching and container grain movement.

The report contains 17 recommendations, including:

  • minimum grain volume movement be maintained but that the requirement not harm other shippers such as short-line railways
  • the temporary amendments regarding railway level of service compensation and definition of operational terms that could be subject to arbitration be made permanent
  • adequate and suitable accommodation” be defined in legislation to balance shipper needs and railway efficiency
  • the CTA be amended so shippers have an appropriate dispute resolution process when negotiating service level agreements
  • true commercial accountability be established by implementing financial penalties when service agreements are not fulfilled

Wade Sobkowich, executive director of the Western Grain Elevator Association said it supports extended interswitching as well as a better definition of adequate and suitable accommodation. He said service obligations and capacity of the rail system are essential to economic opportunities and to meet customer needs.

“The definition of ‘adequate and suitable’ is really there to ensure the system focuses on the market demands of those customers and not be based on what the railways might be willing to supply,” he said.

The committee said the CTA must have access to more data from all participants in the grain supply chain to make better decisions. It wants the agency to be able to initiate its own investigations into rail performance and issue temporary orders for system-wide service concerns.

It also suggested a moratorium on railway siding abandonment to support more producer car shipments and that Ottawa consider ways to help short-line railways maintain assets and invest in infrastructure.

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