A top CN executive says Bill C-49 is already sparking a wave of grain transportation investments.
Both CN and CP Rail have ordered 1,000 new high-capacity grain cars and are investing in other infrastructure to move more grain faster partly due to the legislative changes, says Sean Finn, CN’s executive vice-president of corporate services and chief legal officer.
“Our view is, bottom line, C-49 is legislation that is conducive to reinvest and that’s what we are doing as we understand the rules of engagement,” Finn said in an interview in Winnipeg July 3.
“Between both railways the fact that we no longer share the benefits of having replaced cars as in the past both CN and CP have announced the acquisition (of cars)…
“We’ve shown that with the cars and also taking our cap ex (capital expenditure from $2.7 billion) to $3.4 billion. We understand the rules of C-49.
“You know we could debate this or that but overall it’s balanced. The minister, Mr. (Marc) Garneau, did a pretty good job when it comes to consulting with the industry. Do we always agree? No.
“It’s a compromise. But ultimately we can stand up and explain to (CN) investors that the current environment we understand its impact to our business and we have made investment decisions that are substantial for the benefit of farmers, our customers and all of Canada.”
Finding ‘balance’ between grain shipper and railway needs to goes back to the start of the railway and opening of the West.
When CP Rail completed Canada’s first transcontinental in 1885 it had a monopoly.
Other railways were built and over time consolidated into CN. Most economists agree the two railways have a lot of market power, which led to various forms of government regulation to protect shippers.
A cornerstone of the current regulation is the maximum revenue entitlement (MRE) introduced in 2000. It allows the railways to charge whatever freight rate they want to ship grain from Western Canada to export ports. In so doing the railways can discount rates to shippers who are more efficient and charge more for those who aren’t. However, regulations limit the total amount the railways can earn shipping grain. It’s based on a formula deemed to provide a fair return on railway investment. (Some farm groups suspect it’s overly generous because it hasn’t been revised for more than 20 years to include improved railway efficiency.)
The formula is revised annually to take into account higher operating costs and is also adjusted by the amount of grain shipped and the distance hauled. That way no matter how much grain there is to haul the railways have an incentive to move it.
C-49 corrected an MRE oddity that split the compensation for replacing cars between the two railways. Now when a railway buys cars, it is allowed to recoup the full amount of that car itself.
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While grain companies pay the shipping bill, which covers railway costs, including car replacements, ultimately it’s passed back to farmers in the price of grain.
Some, including the railways, have argued the MRE and other regulations are a disincentive to railway investments. They argue if you pay more, you’ll get more.
But grain shippers argue since they are captive, without regulation the railways could charge what the market will bear without any guarantee of better service.
Shippers say they already spend more to ship grain in unregulated corridors and the service is no better.
The Emerson Report on how grain transportation should be reformed, recommended phasing out the MRE. It didn’t happen.
“That’s water under the bridge now,” Finn said, while in Winnipeg to update several farm groups about CN’s commitments to doing a better job after a grain backlog developed on its lines last fall and winter.
CN said it would order 200 new locomotives and so far 60 have arrived. Some of them will replace older locomotives, Finn said.
“Most are assigned to Western Canada to help us be better prepared for the bigger demand,” he said.
CN has also hired 1,200 new conductors currently being trained in Winnipeg.
Finn noted CN is spending $3.4 billion upgrading its network. That’s 25 per cent of its gross revenue. Most American railways invest about 16 to 18 per cent back, he said.
Four hundred million dollars is being spent upgrading CN’s Winnipeg-to-Edmonton line, which includes Jasper to the Port of Prince Rupert. Improvements include more and longer sidings.
“You can get more trains in the same corridor,” Finn said.
“It’s a question of creative redundancy, but also just more capacity. Trains can meet on a more efficient basis. You can plan it better.”
Finn also praised the federal government for committing to invest in several projects to improve trains moving in and of the Port of Vancouver. Both CN and CP are investing too.
Some of CN’s new cars will be hauling grain by next spring, Finn said. He said he doesn’t know how many old cars will be scrapped. But because the new cars are shorter and can hold more, every train of them will carry 10 per cent more grain, he said.
C-49 also requires the railways to come up with a tentative grain shipping plan by July 31 and a more definitive one by October.
Better planning and improved resiliency should improve grain movement, especially following cold winter weather, he said.
Grain shippers say when grain production is normal the railways never provide enough cars between October and February when Canadian grain is in most demand.
The railways argue it’s too expensive to provide extra capacity for just part of the year. But shippers say that capacity would exist in a competitive market. They compare it to a farmer’s combine — it might only get used two months a year, but it’s essential.
C-49 also requires railways to negotiate level-of-service agreements with grain shippers. If they can’t agree then it goes to the Canadian Transportation Agency for arbitration. It’s expected the railways will be reluctant to commit a lot of service for fear of failing and having to pay penalties.
“When you have a third party imposing your commercial agreements it’s not usually a win-win,” Finn said.
Finn was in Western Canada for a series of meetings including meeting Manitoba provincial ministers and farm groups in all three Prairie provinces.