December 11, 2012 / 4:23 PM / in 5 years

UPDATE 4-Canada bill imposes penalties for rail service failure

* Bill gives shippers right to service contacts

* Penalties up to C$100,000 per violation could be imposed

* Shippers, railways had failed to agree on a template

By Rod Nickel

WINNIPEG, Manitoba, Dec 11 (Reuters) - Long-awaited federal legislation unveiled on Tuesday would force Canadian railways to reach service agreements with shippers that request them and could impose penalties on the railways if they fail to meet their obligations.

The bill, unveiled by Transport Minister Denis Lebel and Agriculture Minister Gerry Ritz at a press conference in Winnipeg, seeks to address complaints by grain handlers, miners and shippers of commercial goods, which want better service from the country’s big railroads: Canadian National Railway Co and Canadian Pacific Railway Ltd.

The legislation would give railways 30 days to respond to a shipper’s request for a service contract. If an agreement could not be reached, arbitration would be available.

“There is an imbalance in the shipper-railway relationship,” Lebel said at a news conference attended by shipping groups, but not railways. “(A government-appointed panel) recommended the use of service agreements as a tool to enhance clarity and predictability and reliability on rail service.”

Lebel, however, said that rail service has improved recently.

The new provisions provide incentives to shippers and the railways to negotiate, and allow the Canadian Transportation Agency to issue a fine of up to C$100,000 ($101,000) for each violation of an arbitrated service level agreement.

CN Chief Executive Claude Mongeau said there is no evidence of systemic problems in moving freight by rail in Canada that warrant the government’s move, which he said goes against the gradual deregulation of the system over the past 20 years.

He said that in the past few years, shippers and railroads have collaborated to make improvements to the system, but that co-operation and innovation are now in jeopardy.

“If one of the parties has a club that they can call Ottawa and use a regulatory recourse, it forces you to be a little bit more guarded, it undermines the mutual trust and open sharing of information, and it’s a missed opportunity,” Mongeau said in an interview from Montreal.

CN hopes some of its ideas for the legislation may still be adopted, even if just by informal agreement by the parties, Mongeau said. CN would like the parties to be required to go to mediation before arbitration, and wants the Canadian Transportation Agency to handle arbitration, not just oversee the process.

Canada is one of two big global producers of the soil nutrient potash, mined in Saskatchewan and moved to port by rail, and is also the world’s No. 3 wheat exporter, with about 30 million tonnes of Western Canada grain hauled each year.

In the western Prairie provinces, grain travels an average 1,400 kilometers to port, Ritz said.

The railways also ship large volumes of coal and industrial and consumer goods.

Shippers have long said they are at a disadvantage dealing with just two dominant Canadian railroads, whereas the United States and other countries have more rail competition. Canadian commodities, especially grain, are heavily export-dependent and rely on the railways to move to ports that often are far off.

“Any legislated backstop that we can get is going to strengthen our ability to negotiate commercial agreements,” said Jean-Marc Ruest, vice-president of corporate affairs for Richardson International Ltd, one of Canada’s biggest grain handlers. “Up to this point, we’ve had a hard time doing that.”

Some shippers have said they are especially vulnerable in areas served by only one of Canada’s two railroads. Mongeau said Ottawa could have addressed that concern by making arbitration available only in those situations.

Canadian Pacific CEO Hunter Harrison said the No. 2 railway has already taken steps to enhance commercial negotiations with shippers, which he said is the best way co-ordinate freight movement.

“As such, we are confident strong commercial relationships will continue to emerge with little need for the processes described in the legislation,” Harrison said in a statement.

Analyst Fadi Chamoun of BMO Capital Markets said the bill has a neutral impact on CN and CP, even if it adds red tape.

“We believe the legislation strikes the right balance between shippers and the railroads, which we think is a manageable outcome for CN Rail and CP Rail,” Chamoun wrote in a note to clients.

Another analyst, Steven Paget of FirstEnergy Capital, reduced his ranking for CP Rail to “market perform” from “outperform”, saying the legislation and a recent increase in CP’s share price leave it with limited upside.

CP did not comment on the legislation immediately.

Representatives of shippers and railroads spent four months in a government-sponsored committee this year trying, but ultimately failing, to develop both a template for service agreements and a dispute resolution process that could be used commercially. Those talks followed a sweeping review of the country’s rail freight system that began in 2008.

Shares of CN and CP dipped 0.4 percent and 0.5 percent respectively in Toronto on Tuesday.

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