Rail Freight Legislation Troubles Cargo Carriers

CANADA – With the move to greener transport systems across the globe rail freight is becoming more important in countries where hitherto the road haulage operator was king but in many of the geographically larger nations cargo shifted on the tracks has always played a crucial part in supporting trade and the economy, and nowhere more so than Canada.

Over the years it seems that complacency has built up with no challenge to the supremacy of the major rail carriers, Canadian National (CN) and Canadian Pacific (CP), and constant complaints from customers about poor service levels reached a head in 2008 prompting a government review which took little time to find justification for the outcry and culminated in a recent four month conference between the rail companies and their principal customers.

Now, with no agreement being reached, and despite an acknowledgement from many customers that service levels have improved, the country is poised to impose conditions on the rail freight hauliers in an attempt to ensure standards are maintained. The proposed legislation, the Fair Rail Freight Service Act, is there to ensure that the federally regulated carriers maintain the terms of service contracts which have been mutually agreed.

The big change, which at first sight seems to swing the pendulum in favour of the shippers, is that under the new regulations any shipper who requests a contract from the carriers must receive agreed terms within 30 days. Failure to do so will mean the customer can have the matter referred to the Canadian Transportation Agency (CTA) for arbitration. The CTA will provide arbitrators for the first two years and from then the matter will be decided by private administrators with arbitration costs split equally between the two sides, encouraging both to settle before such talks are necessary.

Currently legislation outlines that such negotiated service agreements are commercially fair but the new rules include the necessity to ensure the rail carrier can maintain their network efficiently whilst the shipper has room to develop business. Should the railway break any part of an arbitrated agreement fines up to CAN$100,000 can be levied by the authorities.

The reaction to the news has generally been subdued with farmers sounding a cautious note of optimism but with the biggest shippers relatively unenthusiastic in their responses. The Western Grain Elevator Association, which represents a large chunk of the grain producers and which lodged their case with the review in 2010, congratulated government for recognising that a change to the regulatory framework was necessary to ensure improvements to service levels but qualified this by saying only when the act begins to bite will its efficacy be recognised.

Some major shippers queried how contracts exporting bulk product into the United States would be affected if service levels in this area fell whilst others stressed it was important that legislation did not stagnate but was fine tuned as matters progressed to ensure it worked efficiently and did not become weighted against one side or the other.

Both of the major rail carriers swiftly made their positions and opinions known with CP President and CEO, E. Hunter Harrison saying that Canada was, ‘fortunate to already have the best rail system in the world’ and insisting:

"CP has been implementing various commercial agreements that were included in the Dinning Report's recommendations, including a service agreement template and a commercial dispute resolution process. As such, we are confident strong commercial relationships will continue to emerge with little need for the processes described in the legislation."

Claude Mongeau, president and chief executive officer of CN, issued a full and frank response to the news and was considerably more outspoken making his feelings that this legislation was a step too far after the amendments already made over the past four years saying:

“I am troubled by the government's decision to introduce service legislation that is inconsistent with the facts underscoring improved rail service, as well as the government's stated agenda of innovation and productivity to foster economic prosperity for Canadians. I also believe the legislation sends mixed signals to customers and suppliers around the world about the government's approach to commercial markets in Canada.

“CN invites the government to identify specific, systemic service issues that warrant this legislation. We are ready to address any legitimate problems brought to our attention, in the same way we addressed all the commercial recommendations of the RFSR panel. We will continue to make our case that a commercial framework for the rail industry is what Canada needs to foster prosperity.

“Canada should not put the commercial framework of its rail system at risk through unnecessary and overly burdensome rail regulation. Such an approach would stifle innovation, chill the positive service momentum that's taken hold and result in potentially unintended consequences for the rail industry and the customers we serve.”