The two major Canadian railroads and shippers are on track for a clash over legislation regulating service agreements likely to be introduced in Ottawa this fall.
A coalition of 17 shipper associations argues that the government needs to guarantee railroad customers have access to service agreements and an arbitrator if an accord can’t be reached with the carriers. The railroad industry contends such legislation could force them to agree to unfair contracts that would disrupt their networks, with service potentially suffering as a result.
The anticipated government involvement comes after the 2011 release of the Freight Rail Service Review, a report that found two-thirds of surveyed shippers lost money because of poor rail service. Service has improved dramatically since the launch of the report in 2008, and some of the delays resulted from the carriers reworking their networks to focus on the export boom over the last five years, said Michael Bourque, president and CEO of the Railway Association of Canada. Canadian Pacific Railway and Canadian National Railway might not have sufficiently explained to shippers why operations had to change, he said.
The greater importance of bulk exports, including lumber, agriculture and coal, to Canada’s economy is also likely spurring the increased government involvement. The legislation isn’t expected to affect intermodal operations because “there is real competition,” resulting in better service than that offered to bulk shippers, said Bob Ballantyne, chairman of the Coalition of Rail Shippers. Neither side is sure when the government will propose to amend the Canada Transportation Act, nor do they know what provisions will be proposed. But considering the failure of a government-appointed facilitator, former politician James Dinning, to get both sides to agree on a template for service agreement suggest some level of government involvement is coming.
Ballantyne said shippers aren’t looking for re-regulation of the railroad industry but the creation of a framework so there is a minimum standard of service. Arbitration would only be used as a last resort, and the threat of such government involvement likely would spur both sides to reach an agreement on their own in most cases, he said. Although service has improved, the consistency of delivery and the condition of railcars is still an issue, Ballantyne said.
"There is not a lot of confidence that any improvements would have taken place without the (government) spotlight shining on service,” he said. “There isn’t much confidence either that improvements will be sustained over the long haul" without government oversight.
CN CEO and President Claude Mongeau doesn't think there is a need for more regulation and he supports the Dinning report, which suggests new tools for commercial negotiations. The alternative could be a system where one shipper wins an arbitration case, forcing the railroad to disrupt service for other customers on the line in order to satisfy that one shipper. “This is simply unprecedented in a market-based economy and it would be a dangerous path to follow — one which could have serious consequences for the rail industry and, ultimately, the supply chain that serves you,” Mongeau wrote in a letter to customers.
The railroads have increasingly signed service agreements with customers, and service levels have risen steadily in recent years, as evidenced by Canadian Industrial Transportation Association surveys. The rating of bulk rail service has risen from 27 percent in 2009 to 72 percent in 2011. Bourque expects service rating for 2012 to be even higher. If legislation passes, the railroads want a reciprocity provision so shippers have to pay more for higher service. They also want the arbitrators to be from the Canadian Transportation Agency, the country’s transportation department that has supply-chain know-how. Arbitration also should be an option only when the shipper’s access is limited to one rail carrier.
The issue of competitiveness is central to the dispute, with bulk shippers complaining they suffer from lesser service if one railroad has no competition for the business from its rival. Pierre Gratton, president and CEO of the Mining Association of Canada, wrote in an editorial that the high capital costs of railroad infrastructure and remote locations of mines with access to a sole rail carrier have resulted in a monopoly. “We’re asking to level the playing field," he wrote in the National Post. "A reliable and efficient rail freight service is crucial to ensure Canada can compete for new mining investment against countries with significantly shorter transportation supply chains, as well as capitalize on the current growth opportunities in the sector.”
The railroad monopoly is a “myth,” and shippers enjoy the lowest pricing in the world, with rates “neck-and-neck” with those in the U.S., Bourque said. He pointed to how major mining companies and the government are working with CN to build a rail line from the Port of Sept-lless on the Gulf of St. Lawrence to northern Quebec and Labrador as a sign of increased railroad cooperation with shippers.
Despite the merits of each side’s argument, ultimately, the outcome may result more from political posturing than true supply chain solutions. That would be a loss for the railroads and shippers alike.