CN calls freight service legislation unnecessary risk to transportation system

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Transport Minister Denis Lebel responds to a question during Question Period in the House of Commons in Ottawa, Wednesday April 25, 2012. THE CANADIAN PRESS/Adrian Wyld

Canada's largest railway says the introduction of new freight service regulations that include fines is an unnecessary intrusion that puts the engine of the country's economic growth at risk.

"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," CN president and chief executive Claude Mongeau said Tuesday after the federal government tabled a long-awaited legislation.

He said there is no evidence of systematic rail service performance problems in Canada that warrants Ottawa's intervention to level the playing field with shippers who have long complained about poor service.

"The objective fact is that Canada has a world-class rail system, one known internationally for efficiency and reliability — a key asset for a trading nation like Canada — and that reflects a well-functioning market for rail services."

Amendments to the Canada Transportation Act were announced Tuesday in Winnipeg by Transport Minister Denis Lebel and Agriculture Minister Gerry Ritz.

The changes follow a five-year review of service provided to shippers such as grain handlers, miners and manufacturers by federally regulated railways such as Canadian National Railway (TSX:CNR) and Canadian Pacific Railway (TSX:CP).

Lebel said legislation gives shippers the right to an arbitrated service agreement if negotiations with the railway fail.

"We have introduced legislation that will enhance the effectiveness, efficiency and reliability of Canada's rail system," the minister told reporters.

"The railway-shipper relationship is vital to Canada's economy as a whole because when shippers can move more volume this means more exports, more revenue and, for sure, more Canadian jobs," Label said.

The Fair Rail Freight Service Act bill comes after shippers and the railways spent four months unsuccessfully trying to hammer out an agreement.

Shippers wanted the railways to pay penalties for poor service, while the railways have decried the idea of legislated rules as a costly outcome that would undermine their efficiency.

The amendments require railways to provide service contracts within 30 days of a shipper's request. If terms cannot be reached through negotiations, the shipper can seek arbitration from the Canadian Transportation Agency.

The interest-based arbitration process will have a 45-day timeline, but that can be extended for up to 20 days. The agency will provide arbitrators for two years before private arbitrators are appointed. Costs are split evenly between the two parties.

The arbitrator's decision would be binding and not subject to appeal. The imposed contract would be akin to a confidential contract and have a one-year term, or longer if both parties agree.

Railways face administrative penalties of up to $100,000 for each violation of an arbitrated service level agreement. This is in addition to other existing remedies in the act.

The legislation requires approval by the House of Commons and Senate and it is not clear when the law might receive royal assent.

NDP transport critic Olivia Chow said the party will seek amendments in committee to strengthen the bill to give shippers some of the demands left out of the bill.

Among them are performance standards in service agreements, arbitration for violation of agreements not reached by arbitration and discussion of rates.

"It looks good on paper but it's a hollow victory because it doesn't really address the fundamental problem of performance standards and non performance," she said in an interview from Ottawa.

Chow said the changes are "stacked against smaller companies" because they are less financially able to absorb hefty arbitration costs if railways refuse to negotiate acceptable service agreements.

She wants the penalties increased above $100,000 but will consult shippers before proposing a higher limit.

While Chow said smaller shippers may not like the legislation, large shippers including West Fraser Timber (TSX:WFT) and Canada's propane and agricultural industries applauded the proposed changes.

"The introduction of the legislation today is a tool in the toolbox that will help us to ensure that we're seen in markets around the world to be reliable and consistent suppliers," said Gordon Bacon, CEO of Pulse Canada, an association representing growers of peas, beans, lentil and chickpeas.

"We have to be constantly striving to make the system work better and the legislation announced today is an important part of that to ensure that we have a balanced relationship with the railways who play a key role in a very complex logistical system."

The head of the Canadian Propane Association agreed.

"The flexibility allows for propane shippers to ensure their customers receive products in a timely manner," CEO Jim Facette added at the news conference.

West Fraser general manager Mark Thomson added that the forest products industry welcomes the "unprecedented level of government support to the shipping community," adding he hopes the bill will prompt greater co-operation with the railways.

Mongeau acknowledged that the review process was a driving factor in spurring further rail service improvements at Canada's largest railway.

He said CN has already entered service agreements with many customers and said the improved service is inconsistent with the government's agenda to foster economic prosperity.

Shippers acknowledge that service by CN and CP has improved but they fear such changes will dissipate without legislative teeth to force continued positive action.

Ritz said the legislation will bring "clarity and predictability" to the commercial relationship between the two sides.

"This act will be a powerful tool for the agriculture sector, creating a strong incentive for both shippers and railways to negotiate service agreements commercially."

On the Toronto Stock Exchange, CN's shares were up four cents at $90.77 in afternoon trading, while CP's shared were unchanged at $99.64.