June 22, 2012 / 8:24 PM / 5 years ago

Canada might impose rules in rail shipment tiff

OTTAWA (Reuters) - The Canadian government will probably have to impose new rules on railways and their customers after four months of negotiations failed to find a formula to get grain shippers and other customers the service levels they demand.

At issue are complaints from customers that the railways fine them if their shipments are not ready on time, but the railways themselves do not face penalties if they fail to get rail cars to the customers on time.

The two sides spent four months in a government-sponsored committee trying to develop both a template for service agreements and a dispute resolution process that could be used commercially.

“While some progress was made, the committee ultimately could not agree on a commercial package,” the panel’s “facilitator,” former Alberta Treasurer Jim Dinning said in his report, issued late on Friday.

Canada’s two main railways, Canadian National Railway Co and Canadian Pacific Railway Ltd, haul about 30 million tons combined of Western Canada grain annually, according to the Canadian Transportation Agency, as well as large volumes of coal, fertilizer and industrial and consumer goods.

Railways impose fines for late shipments as part of their efforts to keep tightly managed rolling stock running efficiently across their networks and provide cars where needed.

Rail transportation has long been a sensitive issue for farmers, since Western Canada has no river freight system to move grain the long distances between the Prairies and ports.

While the two sides did not come to a template agreement, Dinning offered one on his own; one which would allow the railroads to be penalized financially for lateness, but only in certain circumstances.

Financial penalties could only be applied to the railways if the shipper made advance forecasts and commitments of the volume it would be sending.

“The railways argue that if there is no penalty applied when a shipper fails to present the expected traffic, then there can be no penalty to the railway that does not deliver on the expected service,” Dinning said.

He said the railways were willing to negotiate penalties under reciprocal terms. But the shippers did not broadly endorse his scheme because it did not raise the service level bar for all shippers.

CP spokesman Ed Greenberg said any agreement must be based on a balance in the level of commitment each party is ready to bring to the table.

“Shippers preferring to imbalance this relationship and force significant commitments from railways without making any commitments themselves is not a position that any commercial participant in any industry would consider reasonable,” he said.

POOR RECORD

In their arguments, the shippers point to a March 2011 rail freight review panel finding that said the railways provided grain shippers with at least 90 percent of the cars they ordered only 54 percent of time on a week-to-week basis.

The record was even worse on a day-to-day basis. The panel found grain shippers received 90 percent of the planned car supply on the planned day only 12 to 28 percent of the time.

The railways say they have worked hard to improve their services and that new regulations will just stifle innovation.

“That dealt with years past and we have moved ahead,” said CN spokesman Mark Hallman.

He said CN has now achieved an 85 percent success rate in delivering cars ordered to specific elevators on the scheduled day.

“There’s no question that the railroads are spending a lot of time and effort on trying to manage the process and work with customers to prevent increased legislative handicaps to their business,” said Raymond James analyst Steve Hansen.

“TRY IT”

Dinning also proposed a dispute resolution process and urged both sides: “Try these tools; they just might work.”

“I support this statement,” Transport Minister Denis Lebel said in a news release.

He repeated his government’s intention to introduce legislation in the fall to give shippers the right to service agreements. He did not specify what would be in those agreements, but he made clear he was not bound by Dinning’s template.

“Mr. Dinning’s recommendations are distinct from the bill,” Lebel said, adding that the two sides have until the end of July to make representations to the government on the legislation.

The shippers say that only with legislation will the shippers give them the service they need.

“The railways include penalties for shippers, but do not put in any commensurate obligations on themselves,” Wade Sobkowich, Western Grain Elevators Association executive director, told Reuters before Dinning issued his report. “Why would they? Nothing (is) forcing them. That’s why we need the service level agreement legislation.”

CN chief executive Claude Mongeau countered: ”“Make no mistake - the intrusive, regulatory based approach to service demanded by shippers would be unprecedented in a market-based economy.”

A political caveat is that a cabinet shuffle is widely expected for this summer. If Lebel is moved, it may take time for his successor to get up to speed and introduce the bill.

Additional reporting by Susan Taylor in Toronto and Rod Nickel in Winnipeg; editing by Janet Guttsman, Jeffrey Hodgson and Andre Grenon

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