The association representing the largest grain handlers in Western Canada is breaking its silence and giving the Emerson report on transportation a failing grade.
The Western Grain Elevator Association (WGEA) represents the six major grain firms and approximately 90 per cent of the West’s grain handle.
WGEA says the fundamental issue appears to be that the report is built on an incorrect assumption — that meaningful competition exists in the rail sector in the region.
“The review did not fully address the fundamental problem of railway market power and the impact that this market power has on the availability of rail service that meets the needs of Canadian industry to be competitive in global markets,” the WGEA stated in a written response to the review, overseen by former Liberal and then Conservative cabinet minister David Emerson.
The report examines all components of the Canada Transportation Act, not just grain moved by rail and was made public in February. The former Conservative government commissioned the report hoping to use it as a guide to revamping the act.
Liberal government Transport Minister Marc Garneau promised further consultation before amending the act.
The WGEA has long complained Canada’s two main railways operate as regional monopolies that don’t invest in surge capacity to provide better service because grain shippers are captive customers.
The association has stepped up calls for regulations forcing the railways to act as if competition existed — including penalties for failing to meet promised service — since 2013-14 when a grain hauling backlog prompted the federal government to order the railways to move a minimum amount of grain weekly or face $100,000 fines per infraction.
Most farm groups were critical of the Emerson report too, especially the recommendation to phase out the railway’s annual Maximum Revenue Entitlement (MRE) over seven years.
The MRE is a formula that guarantees the railways a fair return from hauling grain. It allows the railways to charge what they like, so long as total revenues don’t exceed a certain level set annually. Rate flexibility is used to encourage more efficient car loading and unloading.
Farm groups and the WGEA contend ending the MRE will result in the same lacklustre rail service at a higher cost.
The WGEA declined to comment when the Emerson report was first issued, preferring to take its time studying it. After doing so the WGEA concludes the report is flawed.
“The report… is built upon a basic assumption that there is a competitive transportation environment in Canada,” the WGEA statement says. “This assumption does not apply to the western Canadian grains, oilseeds and special crops sectors. Canadian Class 1 railways are in monopoly positions. Most shippers are served by one carrier and are subject to monopolistic pricing and service strategies. Therefore, government, in this instance, has a critical role to play in establishing a regulatory structure that strikes a measured and appropriate balance.”
The WGEA has five recommendations it wants the government to address through amendments to the transportation act:
- The 160-kilometre interswitching limit, extended as an emergency measure, must stay. It allows shippers within that distance to ask a competing railway to haul its grain. The WGEA says contrary to the Emerson report, shippers are using interswitching and its mere existence encourages competition.
- Rail service should be demand driven not supply driven. (WGEA executive director Wade Sobkowich said in an interview that means the railways should supply the capacity required to move the grain companies can sell, not sell grain based on the capacity the railways provide.)
- Railway accountability needs to be legislated. Without it little can be done when rail service fails. According to the WGEA there are virtually no negotiated service level agreements between grain and rail firms.
“This is due to imbalance of market power between the railways and shippers attempting to negotiate these agreements,” the WGEA report reads. “Adequate and equal commercial accountability for service commitments is a prerequisite to the prevention of the next grain transportation crisis.” (Currently grain shippers are penalized if they fail to meet car loading or unloading deadlines, but the railways face no penalties for failing to deliver cars on time.)
- Set aside all discussions on rate issues until service levels and railway accountability are resolved. The WGEA says it opposes the recommendation to phase out the MRE, but thinks some changes can be made to the formula. In the meantime rate discussions are a distraction.
- The Canadian Transportation Agency should be given the authority to investigate railway service on its own and the power to issue orders in situations requiring urgent attention. The review report makes the same recommendation. Currently the CTA can only investigate after a shipper files a complaint.
Since the 2013-14 backlog in grain shipping, the WGEA has been regularly taking its message directly to MPs and officials in Ottawa, most recently last week, association executive director Wade Sobkowich said in an interview June 2.
“The railways are actively telling their story, so we need to make sure the government has the whole picture from the grain shippers,” he said.
To help tell that story the WGEA has prepared a brochure (http://wgea.ca/wp-content/uploads/2016/05/WGEA-One-Pager-U-web.pdf) stressing that in the absence of rail competition regulations are required.
The paper shows the railways moved almost 15,000 more cars between October 2015 and February 2016 than the same period a year earlier. However, it also shows the shipment of other non-grain rail cars dropped by almost 227,000 cars.
The decline is partly due to lower oil prices, which are expected to rebound and so too the demand from those and other shippers for rail service, Sobkowich said. That’s why the WGEA is pushing for major and permanent changes in the transportation act, he said.
The railways say more regulations will make grain transportation less efficient and more costly.