Prairie farm leaders praised CN Rail for agreeing to meet here last week to discuss ways to improve Western Canada’s grain-handling and transportation system.
“I was impressed with the openness of CN,” Keystone Agricultural Producers (KAP) president Dan Mazier said in an interview (watch a video interview further down).
“I think they were genuine today.”
Mazier and representatives from the Alberta Federation of Agriculture, Canadian Federation of Agriculture and Agricultural Producers Association of Saskatchewan (APAS) took part.
The Manitoba Co-operator also attended the two-day event, which included a visit to Cargill’s grain export terminal, a tour of the port and a meeting with Canadian Grain Commission officials.
“The (grain) transportation file has been on people’s mind since 2013-14 and we really haven’t had a chance to talk to the railways and hear their side of the story,” Mazier said.
CN welcomed the chance of the meeting, said Kate Fenske, regional manager of public and government affairs. CN is planning more farmer outreach at events like Agribition, she added.
Leaving the script
Doug MacDonald, CN’s vice-president of bulk commodities, peppered with farmers’ questions, quickly abandoned his prepared presentation.
Did you cut locomotives in 2013? No, that was the other railway.
What went wrong? Record cold and a record crop.
Didn’t the grain companies warn you about a monster crop? Not until the end of September, which was too late. [Western Grain Elevator Association (WGEA) executive director Wade Sobkowich said in a phone interview later the railways were warned verbally in June 2013. This year the warning was in writing.]
“As producers, inefficiencies between the railroads and grain companies is what costs us money because we pay the demurrage on it,” Moose Jaw farmer and APAS representative Terry Anthony told MacDonald. “We’d like to see you guys fine-tune your end of it a little better and it looks like you’ve started doing that.”
There have been improvements, but disruptions can still happen, MacDonald said.
He explained CN’s new contract system, which includes ‘reciprocal penalties.’
Under the program launched in May, CN is offering 72 per cent of its car supply — about 5,500 cars a week in the fall and 4,000 in the dead of winter — to companies to contract. Contracting ensures a shipper will get a car in a specified week or the railways pay a $100-a-car penalty. Grain companies pay the same fine if they don’t take the car within a specified week.
About 50 per cent of available cars are being contracted weekly, MacDonald said. Cars that aren’t contracted go back to the spot market pool. If spot orders exceed supply they are divided up equally.
“So if I can only supply 90 per cent of the cars for the remaining orders everyone gets 90 per cent of what they asked for,” MacDonald said.
Just a start
Some farmers were puzzled. Had CN given the WGEA the reciprocal penalties it wants legislated into service-level agreements? No, Sobkowich said. Once the car is spotted grain companies are still subject to railway penalties if the car isn’t loaded or unloaded during a specified time, but the railways are not penalized if they fail to deliver that car to a port terminal during a specified time.
“Overall, the introduction of reciprocal penalties on the part of railways is just that — an introduction,” Sobkowich said. “There is a long way to go for the relationship to be truly balanced.”
The maximum revenue entitlement (MRE), doesn’t fairly compensate the railways, MacDonald said.
The MRE is a government regulation that allows the railways to set rail freight rates how they please. However, if revenues earned from shipping grain exceed the total set annually by a formula adjusted for inflation, the volume of grain hauled and distance, the excess is clawed back and the railway fined.
CN wants more clarity on how the MRE will be adjusted to reflect its investments and an amendment so when a grain company does buy cars it gets the full benefit through a higher entitlement. Currently the benefit is split between the railways — a flaw many, including most farm groups, agree needs fixing.
After hearing from CN, farmers were left confused about the railways’ role in maintaining and replacing government-owned hopper cars destroyed or retired from duty and whether the railways are being fairly compensated properly for interswitching.
An agreement the railways signed with the federal government in 2007, allowing the railways to continue using their cars for free, states the railways are “responsible to maintain (the) cars,” and “responsible for replacing cars that are retired or destroyed, which is consistent with their obligations under the Canada Transportation Act.”
Under the MRE, there are several mechanisms to encourage the railways to invest, including in cars, the Canadian Transportation Agency (CTA) said in an email.
“The Canada Transportation Act requires the agency to make adjustments to reflect costs incurred by the railways when they replace government-owned hopper cars,” the email says. “As a result, when the railways replace the older cars with newer, more efficient cars, the costs of these investments are returned.”
The MRE also compensates the railways for leasing and maintaining cars.
Asked to clarify its position CN said the following: “CN has been replacing hopper cars as they become damaged and taken out of service. Going forward, it is difficult to justify the large-scale investment required to replace the aging fleet under the current regulatory framework. While railways receive adjustments to the revenue cap (MRE) for replacing government hopper cars, the revenue cap formula does not assure adequate compensation.”
CN and CP Rail say they want the MRE removed. Following the meeting Mazier hadn’t changed his mind in favour of keeping it.
“It is a rates governor, so the railways can’t take the rates and all of a sudden jack them right up,” he said. “What it does is offer stability to the freight market in Canada.”
According to MacDonald CN isn’t properly compensated for interswitching either.
Interswitching is a regulation to encourage competition by allowing one railway to move grain off of a competitor’s line.
The CTA says the railways are properly compensated.
“Regulations set the rates to be charged for interswitching services provided by the terminal carrier, thereby establishing a predictable and fair pricing regime…” the CTA said in an email.
“Following the prescription in the act that any rate established by the agency must be commercially fair and reasonable to all parties, the agency develops the rate for the extended distance to cover railway operating expenses, capital assets consumed, interest payments on the capital used, and the federal, provincial, and municipal taxes incurred in performing those activities, plus an appropriate contribution to the railway’s fixed costs and an adequate profit for the railway shareholders.”
Meanwhile, CN is having a good year.
“Our job is to try to do what we can to get as much revenue as we can under that (MRE) system,” MacDonald said.
CN’s second quarter net income of $858 million, is down slightly from $886 million during the same period last year, CN’s website says.
In 2015 CN had an operating ratio of 58.2 per cent — “one of the lowest operating ratios among Class 1 railroads.”
It was even better during this year’s second quarter at 54.5 per cent.
Operating ratio is a company’s operating expenses as a percentage of revenue.
“In railroading, an operating ratio of 80 or lower is considered desirable,” says Wikipedia.
“The smaller the ratio, the greater the organization’s ability to generate profit. The ratio does not factor in expansion or debt repayment.”