February 11, 2015

11/02/2015: CP Rail seeks revenue bump by lifting grain freight caps

Canadian Pacific Railway Ltd is calling for an end to a government-imposed limit on revenues the country’s two major railroads can make hauling grain in Western Canada, a measure designed to protect farmers from soaring shipping costs, Business News Network reports.

The so-called maximum revenue entitlement set by the government on wheat, canola and other grain for export has been outpaced by the rise in crop prices and is preventing railways from buying bigger and more efficient rail cars to move grain, the Calgary-based railway said in a submission to a government panel that is reviewing the Canada Transportation Act.
 

http://www.bnn.ca/News/2015/2/7/CP-Rail-seeks-revenue-bump-by-lifting-grain-freight-caps.aspx

“The removal of the [regulation] would allow for increased investment, capacity, and overall competitiveness in the grain supply chain,” said CP, noting commodity prices have risen by 166 percent since 2000 while the railway’s freight rates have gone up by less than 6 percent.

“Canadian rail rates are the lowest in the world.”

CP said removing the cap would allow it to replace its fleet of 5500 grain cars – which average 35 years old – with new hoppers that can carry 25 percent more grain per train.

The maximum revenue Canada’s two major railways can make hauling wheat, canola and other grain in Western Canada for export is set by the Canadian Transportation Agency using a complex formula that takes into account crop volumes, distance hauled, inflation and other factors. Railways are free to set their own freight rates, provided total sales fall below the ceiling set by the government.

The regulation has been in place since 2000, when the government replaced maximum freight rates with the system that allows railways to charge various prices to haul crops, provided farmers were protected from runaway inflation of shipping charges.

The grain companies say getting rid of the regulation would raise shipping costs for farmers and traders, and drive up the price of Canadian crops on international markets.

They note farmers and grain elevators usually have no choice which railway they use, and their businesses depend on reliable rail service at prices that are fair.

“Removing the grain revenue entitlement is a risky proposition,” said Wade Sobkowich, president of the Western Grain Elevator Association, which includes Cargill Ltd and Richardson International Ltd.

The grain group said the rule does not prevent railways from moving more grain, nor investing in hopper cars.

The rule, they say, simply limits the amount the railways can charge per tonne – not the overall amount of revenue it can make from moving crops – and ensures the rise in freight rates is in line with inflation.

“There is no evidence to show that shippers would get better service if it were eliminated. In fact, there is existing evidence that poor service and insufficient capacity would remain,” Mr Sobkowich said.

The Western Grain Elevator Association, in its submission to the review panel, seeks greater government oversight of railway service and the right for shippers to financially penalize railways that fall short.

Tensions between the grain industry and the big railways were heightened last year, when a record crop was followed by a harsh winter.

Railways blamed slow service on the cold weather; farmers and grain companies said railway cutbacks and attention to more lucrative commodities such as crude oil left them with stuffed elevators and cash-flow troubles.

The review of the Canada Transportation Act is being conducted by six people appointed by Transport Minister Lisa Raitt. The final report, which is expected to focus on the grain industry, is due at the end of the year.

CP’s submission makes 10 recommendations, including:

  • Railways be allowed install video and voice recorders that track locomotive crew actions. The move, which is opposed by the unions that represent railway workers, would encourage train crews to comply with operating rules and “reduce tendencies toward” unsafe behaviour while running trains.
  • That any new rail crossings be balanced with the closing of an existing one.
CP is also calling for a harmonization of rail and safety regulations with the United States. For example, the railway points to the different approaches to toughening standards for oil tank cars in the two countries. Canada has imposed a shorter phase-out on older cars in an attempt to improve safety in the aftermath of the 2003 derailment and explosion of an oil train in Lac Megantic, Quebec, that killed 47 people.

CP’s export grain revenue for the 2013-14 crop year was CAN$623-million, CAN$1.6-million below its cap. Canadian grain is the largest line of business for CP, which recorded a record CAN$6.6-billion in revenue in 2014.

Rival CN’s $672-million in revenue from western grain exceeded its cap by almost CAN$5-million, an amount it was told to relinquish in addition to a five-per-cent penalty of CAN$250,000. (The money goes to the Western Grains Research Foundation.)

Claude Mongeau, CN’s chief executive officer, told the Globe and Mail last year the revenue rule discouraged spending on its grain operations.

Mark Hallman, a CN spokesman, said the Montreal-based company had not yet made its submission to the review panel, and would not elaborate on its contents nor comment on the freight rate regulation.

“CN’s submission to the panel will focus on what is required, including the proper regulatory regime, to help all sectors contribute to Canada’s trade and economic growth, and on the importance of a commercial environment to sustain investments and innovation,” Mr Hallman said in a statement.
 

Read the article HERE.
 

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