* 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 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
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
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
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
"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.