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(Adds other recommendations, background, transport minister comment)
By Rod Nickel
WINNIPEG, Manitoba, Feb 25 (Reuters) - Ottawa should phase out over seven years its cap on the amount of revenue railways can earn transporting grain, a study for the Canadian government recommended on Thursday, a move long urged by railways and opposed by farmers and grain handlers.
A review of Canadian transportation laws, aimed at modernizing the system, recommended that Western Canadian grain movement become more "commercially grounded."
Canada's two big railways, Canadian National Railway Co and Canadian Pacific Railway Ltd, move most of Western Canada's wheat, canola and other crops to the United States or ports.
Farmers and grain handlers say keeping the revenue cap is necessary because of limited railway competition in Western Canada. Railways are critical to moving crops the vast distances from western grain elevators to ports in British Columbia and on the Great Lakes.
Grain movement slowed dramatically after the huge 2013 harvest, causing the then-Conservative government to impose minimum grain volume requirements on the railways.
But critics of the revenue cap say it makes hauling grain needlessly complex, and gives railways greater incentive to prioritize other commodities. Last year, Ottawa fined both major railways for earning too much revenue from grain.
The Liberal government, elected last year, made the 286-page report public on Thursday. Transport Minister Marc Garneau said he would carefully consider the findings.
The report also recommends that railways be allowed to set aside up to one-third of their rail car fleets to allow shippers the option of paying premiums to guarantee supply and service.
It also suggests the government not renew extended limits on interswitching, the transfer of cars from one railway's line to the line of another railway.
That move was meant to introduce competition from U.S. carriers such as BNSF Railway Co, but critics said it was unfair.
CP spokesman Martin Cej and CN spokesman Mark Hallman said the railways could not immediately comment.
The Western Grain Elevator Association, whose members include Cargill Ltd, Richardson International and Viterra Inc said it needed more time to review the report.
Ottawa implemented the grain revenue cap in 2000 after it eliminated a subsidy for grain movement by rail called the Crow Rate. The cap applies to revenue the railways earn by moving grain from the Western Canadian crop belt. (Reporting by Rod Nickel in Winnipeg, Manitoba; Additional reporting by Leah Schnurr in Ottawa; Editing by James Dalgleish)