CP’s Hunter Harrison confirms grain is captive to rail

Western Canada’s transportation mess and the railways’ response is getting 
lots of attention in the mainstream media

Railway executives came out swinging last week following the federal government’s March 7 order to get the grain moving, while the western provinces stepped up the pressure on Ottawa to keep the pressure on.

The Manitoba government followed Alberta and Saskatchewan’s lead in getting involved in the issue by striking a Provincial Task Force on Grain Transportation March 12 focused on making sure Manitoba farmers get their fair share of rail cars.

Manitoba is also launching a review of flood-prone areas to help farmers move at-risk grain, establishing a grain bin listing service to store at-risk grain, and being flexible with road restrictions this spring.

But it was the responses by CEOs for both national railways in newspaper and radio interviews that captured the most attention.

CP Rail boss Hunter Harrison, confirmed what grain shippers have long feared — the railways view grain as something they can move now or later.

Speaking to a Wall Street audience March 12 Harrison said bulk shipments, including grain, were “modestly” affected by the severe winter, but his railway did well moving container traffic.

“Because that’s one commodity that we’re sensitive to,” the Globe and Mail quoted Harrison as saying. “If you miss, you miss. It’s not like grain or it’s not like coal, (where) if you’re a little bit late you’re still going to haul it. If that (intermodal) trailer comes in Friday night and you’re not able to handle it, it’s probably not going to be there Monday.”

Backlog

That’s why there’s a grain backlog, says Wade Sobkowich, executive director of the Western Grain Elevator Association, which represents Western Canada’s major elevator companies.

“The railways, driven by the economic benefit to their shareholders for efficiency, are not prepared to build any additional capacity in their systems to account for surge requirements or to recover from service failures,” the WGEA said in a statement. “The railways… are not concerned with the negative effect that untimely movement may have on the operations of grain companies and farmers.”

Harrison said he is “irate” over the government’s actions, setting a minimum movement of 5,500 cars per week or face fines of up to $100,000 per day and demanded “an eyeball-to-eyeball” meeting with federal officials.

CN Rail chief executive officer Claude Mongeau, speaking at the same investor meeting in New York, said he did not like the government’s “accusative tone,” adding the railways shouldn’t be singled out for the grain backlog.

From the Alberta Farmer Express website: CN CEO sees grain backlog extending into 2015

Mongeau blamed grain companies for not moving more grain earlier when the weather was good, in a March 11 interview with CBC’s “As it Happens.”

“I’m still hopeful I will be able to convince the government that Canada’s public interest would be best served by a commercial framework,” Mongeau said referring to Ottawa’s legislation.

Not backing down

Agriculture Minister Gerry Ritz, who earlier in the crop year said the railways were doing an “adequate job” moving grain, showed no signs of backing down.

“I’ve had a number of face-to-face meetings with rail representatives,” the Regina Leader Post quoted Ritz as telling reporters after speaking March 13 to the Saskatchewan Association of Rural Municipalities in Regina. “Neither Mr. Mongeau or Mr. Harrison were at those. They had the ability to be.”

Grain shippers hope the government’s promised legislation will define adequate rail service within shipping contracts, as well as make the railways subject to fines when they fail to provide that service.

That’s also part of Saskatchewan Liberal MP Ralph Goodale’s four-point plan, announced March 17, to improve western grain handling and transportation.

The other three points are:

  •  Establish an independent system to monitor, measure, analyze and report publicly on the system.
  •  Launch a full new “costing review” to identify all the costs, revenues and efficiency gains in the system and how they are shared.
  •  Provide some basic co-ordination in grain handling and transportation logistics.

“The railway duopoly and the grain company oligopoly look out for themselves quite nicely, but farmers are held captive with no competitive options and no legal remedies,” Goodale said. “And that must change.”

The railways aren’t the only ones to accuse the government of being heavy handed. William Robson and Benjamin Dachis of the C.D. Howe Institute condemned Ottawa’s “command and control” approach in a March 17 op-ed in the Globe and Mail. They claim the revenue cap “discourages investment in the grain-handling capacity that farmers want.”

Revenue cap

That so-called “cap” is really a revenue entitlement, says Geoff Hare, chairman and CEO of the Canadian Transportation Agency. In an op-ed in the Winnipeg Free Press Hare wrote the entitlement is a compromise “between the desire of grain shippers to be protected against railway market power, the railways’ objective of having a more commercially oriented grain transportation system, and the need for all to have a degree of predictability.”

The government used to set the maximum rate the railways could charge for moving grain. Under the entitlement the railways can charge whatever they want so long as the total revenue doesn’t exceed a set amount. The formula used to set the total, takes inflation into account but not increased railway efficiency.

A lot of people don’t understand the entitlement system, Hare wrote.

“Clearly, under this regime the more grain that is being moved, the more revenue the railways are entitled to earn,” he wrote.

“While there is a cap on the average rate, adjusted for railway inflation and distance travelled, they can charge per tonne, the more grain that CN and CP move, the more they earn.”

Low taxes

According to grain shippers, removing the entitlement would result in them paying more for the same poor service.

Not only is CP Rail guaranteed good return on shipping grain, thanks to a deal struck when it was created more than 100 years ago the company benefits from lower taxes on those earnings than other corporations. In this month’s issue Canadian Business magazine reports that over the past decade CP Rail paid $138 million in cash taxes, amounting to just two per cent of its pre-tax profits. That compares to the 19 per cent rate CN Rail pays.

According to Canadian Business, to encourage CP to build a transcontinental railway the Canadian government contract stated: “That the Canadian Pacific Railway Company shall be forever free from taxation by the Dominion…”

The story notes that this tax break applies only to CP operations as they were contemplated when it was founded in 1881.

About the author

Reporter

Allan Dawson

Allan Dawson is a reporter with the Manitoba Co-operator based near Miami, Man. Covering agriculture since 1980, Dawson has spent most of his career with the Co-operator except for several years with Farmers’ Independent Weekly and before that a Morden-Winkler area radio station.

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