THE STANDING SENATE COMMITTEE ON NATIONAL FINANCE
EVIDENCE
OTTAWA, Tuesday, May 30, 2023
The Standing Senate Committee on National Finance met with videoconference this day at 9 a.m. [ET] to examine the subject matter of all of Bill C-47, An Act to implement certain provisions of the budget tabled in Parliament on March 28, 2023.
Senator Percy Mockler (Chair) in the chair.
The Chair: I wish to welcome all the senators as well as the viewers across Canada who are watching us on sencanada.ca.
[Translation]
My name is Percy Mockler, I’m a senator from New Brunswick, and I’m Chair of the Senate Committee on National Finance.
I’d now like to ask my colleagues to introduce themselves.
Senator Forest: Welcome, everyone. Éric Forest, senatorial division of the Gulf, in Quebec.
Senator Gignac: Good morning. Clément Gignac, senator from Quebec.
Senator Galvez: Good morning. Rosa Galvez, independent senator from the Bedford senatorial division in Quebec.
Senator Loffreda: Good morning and welcome. Senator Tony Loffreda from Quebec.
[English]
Senator Duncan: Good morning. Senator Pat Duncan from the Yukon.
Senator Pate: Kim Pate, and I live here in the unceded, unsurrendered territory of the Alongquin Anishinaabe, Ontario.
Senator Smith: Larry Smith, Quebec.
Senator Marshall: Elizabeth Marshall, Newfoundland and Labrador.
[Translation]
Senator Dagenais: Jean-Guy Dagenais from Quebec.
[English]
The Chair: Honourable senators and the viewing public, today we continue our study on the subject matter of Bill C-47, An Act to implement certain provisions of the budget tabled in Parliament on March 28, 2023.
[Translation]
Today we welcome Marc Brazeau, President and Chief Executive Officer, Railway Association of Canada, and Jeff Morrison, President, National Airlines Council of Canada.
We also welcome via video conference, from the Canadian Canola Growers Association, Dave Carey, Vice President, Government and Industry Relations, and Steve Pratte, Senior Manager, Transportation and Biofuel Policy.
[English]
Welcome to all of you and thank you for accepting our invitation to appear in front of the Senate National Finance Committee.
I understand that your associations will make presentations. I recognize Mr. Brazeau to give his comments on the subject matter of Bill C-47.
[Translation]
Mr. Brazeau, the floor is yours.
Marc Brazeau, President and Chief Executive Officer, Railway Association of Canada: Thank you, Mr. Chair. Thank you for the invitation to appear before you today.
[English]
The Canadian rail system is world class. It is efficient, reliable and cost-competitive. Extended interswitching, however, threatens this system. Canada’s railways join transportation experts, industry leaders, unions and others in strongly opposing the extended interswitching proposal in Bill C-47.
To quote Murad Al-Katib, CEO of grain processing giant AGT Food and Ingredients:
We’re not in favour of supply chain measures that benefit very few shippers yet can have a very serious impact on the supply chain.
Each switch adds to transit time. The more switches you do, the bigger the slowdowns. The more you handle a car, the longer it takes to get moving. Extended interswitching adds, on average, one to two days to rail transit times. It also adds unnecessary greenhouse gas emissions.
Extended interswitching was tried between 2014 and 2017 and failed. It was abandoned by this government after a statutory review of the Canada Transportation Act. Then-transport minister Marc Garneau acknowledged the policy was always meant to be temporary. Nothing has changed that would justify going back to extended interswitching.
Let’s review why the policy was sunset.
First, there is lack of reciprocity in the U.S. Regulated interswitching does not exist in the United States. Under the government’s proposal, U.S. railways can solicit Canadian traffic at below market rates without any reciprocity for CPKC and CN to do the same in the U.S. That means fewer available carloads for Canadian railroaders to move across Canada.
It may also mean less available work for port workers if shipments end up in Seattle rather than Vancouver, for example. These are good-paying, overwhelmingly union jobs. The Teamsters and others have expressed concern.
[Translation]
Why should Parliament intentionally disadvantage Canadian railroads for the direct benefit of U.S. railroads?
[English]
Helena Borges, former ADM at Transport Canada, told Parliament in 2017 that extended interswitching was, “having unintended consequences on the competitiveness of our railways vis-à-vis the U.S. railways.”
Long-haul interswitching was the government’s response at the time. This gives shippers access to competing railways up to 1200 kilometres at essentially commercial rates based on comparable traffic without the damaging consequences we saw with intended interswitching previously.
Now the government wants to resurrect a policy it already recognized was a failure.
The second reason for sunsetting was a non-compensatory rate. Bill C-47 will force Canadian railways to move traffic sometimes in the wrong direction and always at below market rates. The 2016 review found that below-market rates hurt railways’ ability to reinvest. Everything railways purchase is at market rates, from steel to locomotives to labour. Railways cannot be the only part of our supply chain not operating at market rates.
The National Supply Chain Task Force never consulted railways on the complicated subject of interswitching before making this poorly thought-out recommendation. It also did not speak with any rail operations experts.
Grain rates are already regulated through the Maximum Revenue Entitlement. Any shipper can challenge a railway rate or service offering through arbitration at the Canadian Transportation Agency under existing regulatory processes. Rail is already one of the most regulated industries in this country.
All grain starts in a truck. All major grain companies have elevators on both CN and CPKC lines, another form of competition for our railways.
To move one tonne of grain one mile in Canada, it costs on average just 2.97 cents U.S. Our Class 1 railways both set records for grain movements during this crop year, which was made possible by a billion-dollar investment in new hopper cars built in Hamilton, Ontario, and tens of billions of dollars of investment in capacity and technology over the past decade.
An independent study in January found that Canadian freight rates are on average the lowest amongst market economies — in fact, 11% lower than the U.S. These rates support the competitiveness of all Canadian railway shippers.
Extended interswitching is a cure in search of a disease. There is no justification for even more market intervention, particularly through such an irresponsible policy.
[Translation]
The government’s decision to eliminate this policy was the right one. It was based on facts and evidence.
[English]
What those asking for in this policy want is a cheaper rate. It is not about improving service, nor will it improve competitiveness. Extended interswitching will do the exact opposite.
Division 22 must be deleted entirely or at least amended.
Honourable senators, we are asking, at a minimum, that rates be market-based and applicable only to Canadian origins and destinations. You will find more details in our brief submitted to this committee. It’s collaboration and not more economic regulations that will move supply chains.
[Translation]
The Chair: Thank you, Mr. Brazeau.
I will now turn the floor over to Mr. Morrison from the National Airlines Council of Canada.
Mr. Morrison, the floor is yours.
Jeff Morrison, President, National Airlines Council of Canada: Good morning, and thank you for inviting me to be with you today.
[English]
I too want to acknowledge that we are on the territory of the Algonquin Anishinaabe people, and I thank them for letting me live, work and play on this land.
The National Airlines Council of Canada is the national association representing Canada’s largest passenger airlines.
In the short time I have, I’d like to focus my remarks on one element of Bill C-47, that being the changes to the Air Passenger Protection Regulations, otherwise known as the APPRs.
Despite claims to the contrary, nothing in the APPR amendments will improve or strengthen air travel in Canada. These changes, nor any measures in Bill C-47, will improve airport infrastructure. These changes don’t hold any other responsible entities in the air travel system to any sort of accountability standard. They don’t lower the cost of air travel. In fact, C-47 will increase the cost of travel. They don’t lead to better regional connectivity. In short, at a time when demand for air travel is strong and growing, government’s focus should be on strengthening air travel, not penalizing it. Given the APPR legislation that is before you through C-47, let me recommend two amendments.
If Bill C-47 passes, there will be a regulatory process that will define the exemptions that airlines can claim from paying compensation over and above refund and duty of care. It is imperative that through that regulatory process, adherence to safety is the primary guiding principle. As you all know, safety is and must remain the top priority for airlines, including many factor — for instance, weather, unforeseen mechanical issues or defects, labour disputes at essential service providers, and even things like bird strikes or security risks. The idea that airlines should be penalized for doing the right and often the legal thing by protecting the safety of passengers flies in the face of a balanced, fair and equitable approach that was the original intent of the APPRs as especially enunciated by Minister Garneau, previous transport minister, when first introduced.
We will soon share with this committee a list of safety-related exemptions being proposed in Europe aimed at clarifying the exceptional circumstances exemptions that exist in the European regulations, also known as EU261. We want to make sure that the development of APPR regulations is guided by a clear, yet broad and accurate understanding of what constitutes safety. We do not want an EU261 situation where over 50-plus court rulings have had to establish those parameters. In order to capture this importance of safety and guide the subsequent regulatory process, NACC is recommending adding the following clause within the APPR section of Bill C-47: Regulations must always prioritize the safety of our transportation system and do not jeopardize it by assigning financial consequences to air carriers for any safety-related decisions.
The second recommendation is that this legislation currently includes a clause stating that airlines would be required to provide refunds in the event of a Government of Canada-issued travel advisory. Carriers increasingly organize their various fares into distinct products to differentiate themselves and their offerings and provide passengers with more flexibility and transparency when they purchase a ticket, also known as branded fares. With a requirement to provide full refunds in the event of a government-issued travel advisory, which is entirely outside the control of airlines, the legislation is putting into question this entire flexible pricing scheme. As a result, we are suggesting that this reference to government-issued travel advisories be eliminated or, at a minimum, amend the clause to only apply to government-issued travel advisories issued after the ticket was purchased so that the system of branded fares is not compromised.
Mr. Chair, to reiterate my original point, nothing in this legislation will improve the overall air travel system. Although the data are clear that air travel has significantly improved since last summer, one of the lessons we learned last summer was that when any entity in the air travel system does not perform adequately, travel is disrupted. Yet, under APPR, it is only the airlines who are held to any form of account. In short, airlines have essentially become the insurance agent for all other entities. That’s why NACC recently released a report containing recommendations to operationalize a system of what we call shared accountability whereby all entities in the air travel ecosystem would be held to account through the use of service standards, a public reporting system, communications protocols and a means for airlines to recoup financial penalties if other entities cause disruptions. This system of shared accountability recognizes that improvements for passengers are not possible without shared accountability amongst all these entities.
Mr. Chair, I’d be happy to discuss other elements of Bill C-47 as well, or elements not in Bill C-47 such as, for example, the absence of a biofuels strategy or the increase in the air passenger security charge, but I believe my time is up.
I look forward to the conversation.
[Translation]
The Chair: Thank you very much, Mr. Morrison.
[English]
Sharing the time allotment, we will have Mr. Carey followed by Mr. Pratte. Mr. Carey, the floor is yours.
Dave Carey, Vice President, Government and Industry Relations, Canadian Canola Growers Association: Thank you for the invitation to appear. I am joined by Steve Pratte, Senior Manager, Transportation and Biofuel Policy.
CCGA represents Canada’s 43,000 canola farmers on issues that impact their farms’ success and is led by a farmer board of directors with representation from provincial grower groups from Ontario west to British Columbia. CCGA is also the largest administrator of Agriculture and Agri-Food Canada’s Advance Payments Program.
Canola is Canada’s largest agricultural commodity, earning farmers $13.7 billion in farm cash receipts in 2022. Canada exports 90% of the canola we grow to approximately 50 countries around the world as seed, oil or meal. Exports were valued at $14.4 billion in 2022, and Canada is the world’s largest exporter of canola. International trade underpins the canola sector’s $29.9 billion annual economic contribution that contributes to 207,000 Canadian jobs.
Rail is the only practical means to move canola from areas of production to port. Canola travels on average 1,520 kilometres by rail from farm to tidewater to be in export position. Transportation of grain is one of several commercial elements that directly affect the prices offered to farmers. When issues arise in the supply chain, the price farmers receive for their grain can drop, even at times where commodity prices may be high in the global marketplace.
Additionally, recent announcements over the last two years in the Prairies of five new or expanded canola processing facilities signal that demand for canola is on the rise. These private investments of over $2 billion will increase Canada’s domestic processing capacity by over 60% of what it was in 2022. Increased rail capacity will be required to move more product. The reliability and the timeliness of rail service will be integral for Canada’s farmers to meet this demand.
At full build-out, this increase in domestic processing will likely create a shift in dominant trade flows of canola product, with less raw seed heading to the port of Vancouver and more canola oil being transported domestically, especially to supply the expanding renewable fuel sector in North America. As such, we were pleased to see the budget recognize the need to incentivize competition in our Class 1 railways by proposing a pilot trial to increase the extended interswitching limits in the Prairies. If done correctly, this pilot will promote fair competition, reduce transportation costs and enable Canada’s reputation as a reliable supplier of canola.
To further strengthen this policy, this committee should consider the following three recommendations.
One: Set the extended interswitching distance to 500 kilometres to ensure competitive market forces are available to all grain elevators in major agriculture-producing regions. Under the 160-kilometre radius, there are significant regional geographies in the three Prairie provinces that remain outside the pilot, such as the Peace River area in Alberta and the Carrot River area in Saskatchewan, producing an uneven playing field based on physical location.
Two: Ensure extended interswitching is available to all North American railways to further integrate the North American market and shorten the distance goods need to travel. There is no valid policy rationale to exclude any Class 1 carrier operating in the Prairie from this pilot.
Three, and most importantly: Ensure this pilot lasts a minimum of five years to unlock the full potential of competition. The functional use of an 18-month extended interswitching pilot may be practically limited due to the fact that many shippers have previously negotiated service contracts with the railways. The metrics by which we judge the success of this pilot will be critically important.
To close, you often hear the term “cash cropping” used to refer to farmers who grow grain. That’s because farmers don’t get paid until they deliver their grain, even when they have a contract in place. Worst-case scenarios occur during the busy season for grain hauling, from October to December, if farmers are told they can’t deliver their grain because their local elevator or processor is full. This means farmers don’t get paid when they expect to, causing stress and financial strain as their bills come due for inputs, equipment, land rental, et cetera. Elevators or processors get full when they don’t have timely and reliable rail service or there simply aren’t enough grain cars to meet the demand of the growing region of which they serve, causing hardship for Canadian farmers.
Interswitching isn’t a panacea, but it is the only feasible tool to inject any sort of competition into Canada’s duopoly of Class 1 railways. The National Supply Chain Task Force report concluded that interswitching is an important tool to give shippers more rail options and address shipper railway power balance issues.
Thank you, chair.
The Chair: Mr. Carey, does Mr. Pratte have any comments?
Mr. Carey: He is here for questions.
The Chair: Thank you very much to the witnesses for your presentations.
Now we will proceed to questions from senators. First round, senators, will be five minutes. The second round will be three minutes.
Senator Marshall: I’m going to ask my questions in the order of the presentations, so I’m going to start with Mr. Brazeau. I read your brief to the Finance Committee. Can you clarify whether there was any consultation that you were involved in with the government? Was there a consultation period, and did you participate? I realize from Mr. Carey’s statements that he supports the amendment in the budget. Just reading the background material, this was already tried in 2014, and it was concluded by the government that it wasn’t a good idea. Can you tell me what the impetus is for the government to make the change and talk to us about the consultation period?
Mr. Brazeau: Thank you for your question, senator.
On your first question regarding whether we were consulted, we met with members of the National Supply Chain Task Force, the co-chairs, Jean Gattuso and Louise Yako, and the participants, the other members of the Supply Chain Task Force. We provided our input and written briefs, and this came from the Railway Association of Canada as well as our Class 1 members, CN and CPKC, so written briefs, separate meetings. We had an opportunity to have dialogue. We are in favour of any recommendation that aims to improve the fluidity and the capacity of the supply chain. We believe in that, and we wanted to contribute to that. But at no point were there any discussions specifically on extended regulated interswitching, and that’s where we have serious concerns because there were no discussions with the operational experts, the people who run railroads 24-7, 365 days a year. We never had an opportunity to have that discussion.
When we saw the recommendations submitted to the Transport Minister back in the fall and there was the recommendation of extended regulated interswitching from 30 kilometres to 160 kilometres, we then met with Transport Canada officials, and we were reassured by the minister and his staff that there would be discussions before going forward with any of those recommendations. So we were very surprised to see in Bill C-47 that extended regulated interswitching was recommended and that it be changed from 30 kilometres to 160 kilometres. We were not fully consulted, and frankly, we were surprised that that ended up in the budget.
On your second question, with respect to the 2014-17, pilot project, data was collected during those three years. The government had an opportunity to look at what occurred during that three-year period, and then-transport minister Marc Garneau acted on a recommendation from David Emerson who said that interswitching was not helpful and that the 160 kilometres interswitching limit raises issues about connectivity and competition from railway carriers in the United States as American carriers can solicit Canadian traffic but the reverse is not true.
The ADM of Transport Canada at the time, Helena Borges, responded by saying:
… after the assessment we did, we uncovered that it wasn’t heavily used, but it was having unintended consequences on the competitiveness of our railways vis-à-vis the U.S. railways.
So both the Emerson report and Transport Canada officials confirmed that extended regulated interswitching from 2014 to 2017 was bad policy.
Senator Marshall: What were the unintended consequences that you just referred to? Did that impact the length of time it takes to move the product? Does it increase the cost, and who bears the increased cost?
Mr. Brazeau: On average, interswitching adds one to two extra days to transit time, and I mentioned loss of traffic, loss of jobs to the U.S., thousands of car loads redirected to the U.S. as a result of this. There was a cost incurred or revenue loss by Canadian railways, and that’s going to be even worse this time around because there’s talk now of going beyond 160 kilometres. So there certainly was a cost, and additional car loads went south.
Senator Marshall: Who bears the cost?
Mr. Brazeau: The railways. Under the extended regulated interswitching, you have to provide service at below-market rates within that distance. As I mentioned in my opening remarks, we pay labour and equipment all at market rates. We have a responsibility to reinvest in our network. We are a capital-intensive industry. In order for us to do that, we have to earn fair return, and that’s a loss to us.
[Translation]
Senator Forest: Thank you for being here and enlightening us on this issue. Mr. Brazeau, I understand that this measure is disturbing and that it seems to be leading to increased competition. Do you agree with the part about providing the government with the necessary information to study this policy’s effect on rates and service quality?
Mr. Brazeau: Thank you for the question. We are always available to participate in studies and to share information. I’d like to point out that right now, railroads have to share a great deal of information on a daily, weekly and monthly basis with Transport Canada, so the data is already shared.
Between 2014 and 2017, when the pilot project was in place, a great deal of information was shared with Transport Canada. Therefore, all of the data and statistics were already in Transport Canada’s hands. We will continue to share and collaborate with the government to ensure that information is shared in an accurate way.
We ask that shippers share their information, because the supply chain is complex. All players must work together to provide information — not just railroads — and all must commit to reinvesting in our network. That is our wish and our commitment.
Senator Forest: So there’s no problem around information sharing. You tell us that transit times could be prolonged by one or two days if this measure were implemented. For the average Canadian that I am, can you explain how a rule that adds 130 kilometres to the interswitching can have such an impact? It’s rare for grain to be transported over a distance of 160 or 200 kilometres by rail. Conversely, CN and CP also do business in the United States. How does it work on this side of the border?
Mr. Brazeau: I will take Mr. Morrison’s example. A direct flight from Montreal to Vancouver will take less time than a Montreal-Toronto-Vancouver flight because of the connection in Toronto. It’s a rather similar example. Interswitching requires more equipment, more staff; the switch takes time, and it’s complicated. All of this adds to the complexity and can result in a rail transit time of one or two days, as I mentioned in my opening remarks.
Senator Forest: Thank you. I understand. Mr. Morrison, I’m a little taken aback by the increase in air fares in the regions. For a round-trip flight in Canada — that is, within our borders — the increase was $19.94, compared to $16.89 for the United States. The rate is more affordable to leave the country than to travel within it. I cannot understand this situation.
[English]
Mr. Morrison: One of the challenges that Canadian airlines have is that we operate in Canada within a user-pay model. That means that when you look at various third-party fees that Canadian airlines and passengers must pay compared to the Americans, it is significantly higher. For example, the Airport Improvement Fees that Canadian passengers must pay are significantly higher vis-à-vis Canadian airports than they are at American airports. As another example, we saw a couple of months ago that NAV CANADA, which administers the air navigation system in Canada, raised rates on Canadian airlines by approximately 30%, 29.8%. In Bill C-47, we have an increase of 30% in the Air Travellers Security Charge. This bill also contains a number of measures vis-à-vis APPRs which will increase costs as well.
When you have this constant increase of third-party fees and charges, including those by government departments that they do not have in the United States, you’re absolutely correct that the cost of travel in Canada is going to be higher than it would be south of the border.
[Translation]
Senator Forest: Then it’s clear that the increase in these costs will be passed on to security, among other things. Will this improve passenger security and baggage screening at airports, especially regional airports, where transportation costs are already excessively high?
If I fly from Mont-Joli to Ottawa, it’s twice the cost of flying from Montreal to Paris.
[English]
Mr. Morrison: I wish I could say that these increases in fees would lead to better service for both the airlines and the passengers. I cannot say that. For example, with the increase in the air security charge, that is money that goes into general revenue. Although the fee is going up 30%, all that funding goes into general revenue. In all fairness, in Bill C-47 there is an increase to CATSA funding directly, but that’s not a direct funding source. The same with the airports. Although the airport improvement fees are going up, will that lead to better infrastructure? Will that lead to better service? We don’t know because, of course, airports as well as airlines took on considerable debt during the pandemic, and so a number of entities are faced with this severe debt crisis and just having to address that. Will it lead to better service, better improvements? I wish I could say yes. Airlines wish we could say yes, but given that, we don’t suspect that’s the case. Unfortunately, I don’t believe so.
[Translation]
Senator Gignac: Welcome to our witnesses.
My questions are for Mr. Brazeau of the Railway Association of Canada.
When I listen to your testimony, I find it somewhat troubling that the government tried something and then, after 18 months, realized it was on the wrong track. The government eliminated that. Now, the government is back again with the same thing.
Einstein once said that if you keep doing the same thing, you can expect the same results. What would have changed that would make it work this time? I’m not an industry specialist like you are. I’m an economist, and I’d like to draw a comparison. I can understand that the grain industry wants more competition. Usually, that is music to my ears, because it would drive down costs.
How much does it cost to transport grain? Let’s compare. You go to the Port of Vancouver — but on the American side, for the same 160 kilometres, you have to go to the Port of Seattle. Is it really that much more expensive to transport grain in Canada than in the United States? Can you tell me about the transportation costs for U.S. versus Canadian grain producers to get to the ports on the Pacific Coast?
Mr. Brazeau: I’d be glad to. In December 2022, CPCS, an international consulting firm, published an independent study of all of the rail transportation costs and fees around the world. The finding is that Canada has the lowest rail costs in the world, apart from China and Russia. Understandably, the comparison must be with countries that have free markets like Canada.
Our transportation costs are 11% lower than those in the United States. Canadian railroads reinvest 20% to 25% of their total revenues each year in infrastructure, equipment and new technologies. If we look at it from this angle, the service is of world-class quality, at costs that, as we can see, are lower than in countries similar to Canada.
We’re trying to understand what the ultimate goal is. When the pilot project ended in 2017, the government introduced long-distance interswitching to replace the 160-kilometre interswitching. Today, shippers have the option of interswitching up to 1,200 kilometres. The only difference is that it’s at the going rate. Unless shippers want a lower cost, that’s the only conceivable reason they would want the 160-kilometre extension.
Senator Gignac: You mentioned an arbitration system. I’m not familiar with that. Can you explain a bit how it works when producers feel bullied?
Mr. Brazeau: The Canadian Transportation Agency has a process for shippers to request that the agency intervene if there’s a dispute. The agency has arbitration processes in place that allow it to rule on a situation that affects service. As I mentioned, long-haul interswitching is available up to 1,200 kilometres. There are processes in place to protect shippers if service isn’t adequate, but as I mentioned, we have the lowest prices in the world, with service to customers on a daily basis.
Senator Gignac: I was a little surprised by the recommendations, because I didn’t expect the last one you made. The first is to delete the provisions of division 22. Finally, if they aren’t deleted, you say at the end that the application of this measure should be limited to grain. These proposed policies are intended to supplement grain, and that should be limited.
I don’t understand this part. Can you explain it further? Is this your second best choice or is it damage control? I thought it was mainly that, the grain industry.
Mr. Brazeau: I think there are two points I’d like to make. First, it was mentioned that if the provisions aren’t deleted, the origin of Canadian destinations should be limited. If there’s a point of origin in Canada, the point of destination should remain in Canada, too.
Second, I think that from the information obtained to date, it’s really the grain industry that’s asking for this extension. We serve all customers, be it mining, oil and other sectors. That’s why we proposed in our brief that it be limited to grain only.
[English]
Senator Smith: Mr. Brazeau, you noted in your submission that the decision was solely political, not based on facts, concerned that the government failed to take your industry’s concerns into account. Why do you believe it’s a political decision? Which parts of the country will be impacted by this decision?
Mr. Brazeau: Thank you for the question.
The government said that it wanted to do an 18-month pilot project. This was done over three years, from 2014 to 2017. This current government was the one that sunset that in 2017 with Minister Garneau. It was sunset after compiling data, compiling information and getting feedback. We are just left to wonder how another pilot project with similar parameters is going to give you different results, because all the data is there. All the facts are there.
We were not presented with any new data or any new facts to support the need for this pilot project. That’s why we feel that this is an ill-advised policy, because it is not based on evidence and facts. There is no market intervention that’s required because nothing has changed since 2017. In fact, what I will say, senator, is that the investments that the railways have made in new grain hopper cars built in Hamilton, Ontario, have allowed them to carry record amounts of grain in the last year alone. We are meeting demand, and we will continue to meet demand. That’s why we are left wondering as to why this is required now when it was sunset for the right reasons in 2017.
Senator Smith: Could you talk a little bit about the proposed change and how it will decease the efficiency of Canada’s rail supply chain? What impacts will it have on the broader supply chains, especially in the wake of the massive inflationary crisis that we’re living through?
Mr. Brazeau: We’ve said that extending the distance will increase transit times by one to two days. By the way, the same government confirmed last week in a National Post article that they are limiting this to Alberta, Saskatchewan and Manitoba because they don’t want to cause congestion in British Columbia, Ontario and Quebec. To me, you’re saying two things. You’re saying that you’re putting this measure in place to improve capacity and fluidity, but then you’re saying you’re only doing it in the Prairies because you don’t want to upset the apple cart in British Columbia, Ontario and Quebec. We know this will increase transit time and will increase costs, and it will drive business south of the border.
Senator Smith: Since this has come out, what has your association been doing in terms of dealing directly with the government to try to make sure they’re listening to you? You said there wasn’t any good communication in the initial stages.
Mr. Brazeau: We’ve taken the dust off the Emerson report, and we’ve brought the facts back to the table. The C.D. Howe Institute did a similar study as well, prior to the Emerson report that was tabled, again pointing to the fact that extended regular interswitching will hurt shippers and will increase costs. We are having those conversations with all members of Parliament and all senators to make sure the facts and evidence are brought to the forefront. Again, we do not believe that this decision was based on fact and evidence.
Senator Smith: What is your feeling right now? Are you having an audience? Is the audience listening to you?
Mr. Brazeau: We are. I think that it’s one thing having an audience listen to you; it’s another thing having an audience take action. We know that the union groups have expressed their concerns. As I mentioned, we had a CEO of AGT grain express concern that this will have a negative impact on all shippers. We’re hoping people are listening, but more importantly, we’re hoping that people take the right actions.
Senator Smith: My last thought is on this issue of competition and people complaining that there are only two major carriers in the country and that you guys have a duopoly. How do you address that particular issue?
Mr. Brazeau: I think we should be proud of the fact, first of all, that we have two highly competitive Class 1s in Canada. As I mentioned to you, CPCS did an independent study on rates, and Canada has the lowest freight rates in the world comparable to market-based economies. We also have the best safety record in North America. All of these things don’t happen by chance. They happen because we have two healthy Class 1s that reinvest back into the network, and they provide great service to shippers across the country. For example, grain elevators have access to both CPKC and the CN lines. This is not about not having a choice. You do have a choice. You have long-haul interswitching, up to 1,200 kilometres, so there are options that exist today for shippers. Again, I think we can take great comfort in knowing that we have two Class 1s that continue to deliver for shippers across the country.
Senator Smith: Thank you.
Senator Galvez: This is a very complex subject, and I wish I could have had more time to analyze and understand what’s going on. When the Lac-Mégantic tragedy happened, I spent one year studying interswitching, the number of cars, the length, and the difference between transporting grains, minerals and petroleum. I also looked at how Americans and world fuel associations can hire CP or CN, then can subhire MMA, and then they can bring American petroleum to Irving. It was a hugely complicated, and it was very difficult to understand.
When I hear you both talking, it’s like it doesn’t matter what you are transporting. You are just transporting it. And it’s not the same. Transporting potash and transporting oil are different. It’s different to be transporting seeds and grains, and it is different to be transporting different kinds of petroleum.
If this interswitching is making the convoys wait longer or be longer or be smaller in the number of cars, and we know that changes with the market, I don’t understand how, after all these recommendations, the government backs something. There must be reasons that we don’t understand for that to change. I remember these pilot projects in 2013 and 2017 because there were safety issues related to this pilot.
Senator Smith asked what the political reason is behind this and which provinces will be favoured and unfavoured. There are some bits of answers to my question.
I’m very much interested in the issue of allowing Americans to be more competitive than we are and the issue that relates to the material that is transported. Can you please elaborate on those two things?
Mr. Brazeau: I will first answer your question about rates. We believe that what is driving this desire on the part of some shippers to have this extended is to get a lower rate.
As I mentioned, we have an independent study that was done in November, December, which showed that Canada already has the lowest freight rates in the world. How low can it go? The grain rate is regulated in Canada. It’s the MRE, maximum revenue entitlement. You can ship grain at the lowest rates anywhere in the world, including Russia and China. Grain shippers in Canada already have access to a regulated rate.
We have a unique position in Canada. Again, we have two strong Class 1s, and we have an ability to continue to reinvest in the Canadian network, drive more business to our Canadian ports and create more Canadian jobs.
What we saw in 2014 and 2017 was some of those jobs and carloads went south of the border. That’s why we’re wondering. We’ve already got the best rates. Our safety record, by the way, is the best one in North America. CPKC and CN are number one and number two in terms safety record amongst all railways in Canada and the U.S.
Other than they just want a lower rate, we don’t know how that compares or correlates to better service, because it doesn’t. It’s just a cheaper rate.
Did that answer your question, senator?
Senator Galvez: Not completely, but we are getting there.
Senator Duncan: I would just like to say at the outset that I echo Senator Galvez’s comments about not being an expert, certainly, or fully familiar with this interswitching issue.
I’m also pointing out that there are no senators west of Canora on this panel except for myself. I’d like to particularly give an opportunity to Mr. Carey to address the questions of Senator Marshall. This measure proposes to affect the Prairie provinces only, on a temporary basis. Mr. Brazeau has presented this as an issue of cost and seeking a lower price. I’d like to have Mr. Carey respond to the issues that have been presented.
Mr. Carey: Thank you, senator.
I think a key thing to consider here is we’ve talked about having two strong Class 1 railways, which I agree with. We have a duopoly of Class 1 railways. However, for the majority of the country, we have a monopoly situation in which an individual shipper only has access to CPKC or CN, and that’s it.
The distance for interswitching is 30 kilometres. If you look at the size and breadth of the Prairies, in particular, north to south, 30 kilometres doesn’t get you very far in the Prairies, and 160 kilometres would capture 92% of all grain-handling facilities. Currently, if you’re in parts of the country served only by CN, as a shipper and as the farmers that deliver to that elevator, it’s not so much about the price. We hear it’s about reliability: that the grain cars are there when they need to be and that the right amount of grain cars are there when they need to be. Because when those elevators get full, our farmers can’t deliver their grain, and they can’t get paid.
I think in practical reality, it’s not so much the use of interswitching, which has been used in Canada since the 1900s, but long-haul interswitching has never been used once, because it’s a quasi-judicial process that requires shippers to hire lawyers. It only lasts for a year, so long-haul interswitching will likely never be used, because it’s a quasi-judicial process.
What we have, in practicality, is that there are grain shippers that are beholden to one railroad, and that’s it. We have a massive country. We’re not going to get another Class 1 railway at all. So interswitching is not, actually, so much about its use; it’s that it’s a negotiating tool. If I’m a shipper on a CN line only and need two deliveries a week from CN, and CN says, “We can only do one a week,” interswitching would allow that shipper to then call CPKC and say, “I need two loads a week; what can you do?” CPKC could say, “We can meet that demand.” Then the shipper can then go back to CN and say, “CPKC is willing to come get this load. Can you do two shipments a week?” Often the originating carrier will then say, “We can make it happen.”
Essentially what we have here is the only tool available to move products in Canada and to incentivize any competition outside of a monopolistic market, so that’s really why it’s so important. In Canada, 30 kilometres, if you’re a grain shipper for that individual place, there is nowhere else for it to go.
Senator Duncan: Thank you. I appreciate that comment.
This feels like an east-west debate to me, and it feels like the government is trying to institute a measure to help Prairie farmers in Alberta, Manitoba and Saskatchewan on a temporary basis, and let’s see if we can make something work for the Prairies, as opposed to a one-size-fits-all approach; is that correct?
Mr. Carey: Yes. I will say that although, obviously, I represent farmers, the Coalition of Rail Shippers, which is supportive of my opening comments, represents auto, meat, livestock and fertilizer. All those organizations that wrote to Minister Alghabra are all supportive of this. But, yes, for agriculture, it’s very important. That’s how we move our product, and farmers only have access to the grain-handling facilities or processor that’s within a reasonable truck drive from their farm. In practicality, this is just a tool to incentivize competition. It’s not a panacea, and it’s not going to fix anything, but currently massive parts of this country only have service from one, unless you’re within 30 kilometres. So 160 kilometres or 500 kilometres would allow shippers and farmers more competition so that CN and CPKC would compete for their business as opposed to being beholden to one or the other.
Senator Duncan: Thank you.
Senator Loffreda: Thank you to our panellists for being here this morning.
My question is for the National Airlines Council of Canada and Mr. Morrison. Thank you for being here. You did mention that regulations should prioritize safety and not hold financial consequences on air safety consideration decisions. Can you elaborate why you feel through Bill C-47 that air safety is imperiled, and if so, to what extent?
Mr. Morrison: Thank you, senator, for the question.
What Bill C-47 will do is essentially establish a list of exceptional circumstances in which airlines will not be liable for direct compensation to passengers, which, of course, is over and above refund and duty of care. We don’t know yet what those exceptional circumstances will contain. That list, that identification of those exceptional circumstances, will be developed through the regulatory process that would follow passage of the bill and be led by the Canadian Transportation Agency, or CTA.
What we have flagged as our key message is that via that regulatory process and the definition of “exceptional circumstances,” safety has to be the top priority, because in no way, shape or form should airlines be somehow liable or penalized for not only doing the right thing but — as I said — the legal thing in many circumstances.
We don’t know yet what that list will be, but one of our recommendations, as I mentioned in our opening statement, was that if we can provide within the legislation a guiding principle for the CTA to develop a list that has safety as the primary focus, then we’ll work with the CTA to develop that list, at least with that guiding principle first and foremost.
Senator Loffreda: Would airlines actually forego safety because of possible fines and penalties due to delays? Would they not attempt to transfer these costs to future fares rather than imperil safety or endanger safety for their customers?
Mr. Morrison: Thank you for the question.
Will airlines ever forego safety? The answer is absolutely not. Safety is priority number one, two and three for airlines. That will never be compromised by a pilot, by an airline or by anyone in the ecosystem.
However, if we define a list of exceptional circumstances that will somehow put safety-related considerations outside of that exemptions list, then what we are doing, essentially, is penalizing airlines financially for doing those actions or for taking those decisions that do put safety at its core.
Will it have an impact on cost for the passenger? Most likely. That’s hard to say with a definitive statement in terms of that element of the bill without first knowing what that list will be like via the regulations.
Senator Loffreda: Have you attempted to define what these policies would be or what a list of these exceptions would be? And would the airlines not just go to these exceptions as an escape mechanism, and, therefore, the amendment or the policy would be obsolete? Wouldn’t that be the case?
Mr. Morrison: To your first question, have we looked at developing a list? We’re currently doing that work right now.
In the European Union, oftentimes the EU261 regulation has been defined as the gold standard, which Canada is emulating. We can have a separate debate on that as I would argue it’s very much not the gold standard. They have tried for roughly 20 years to define that list, and because of politics associated with the EU, they have not been able to do that. It’s why the courts have had to do it for them. We have something like 50 plus — I believe it is up to 60 — court rulings defining what that exemptions list looks like. We don’t want that situation in Canada. We want a list that is clear, accurate and, again, puts safety at the top of the priority list.
Would airlines use such a list to somehow escape their responsibilities? Absolutely not. As I mentioned earlier, safety will never be compromised by an airline. It is part and parcel of what the airlines do on a daily basis. It will never be negotiated. But it becomes a question of equity and fairness to the airline, such that should they be held financially liable for taking those actions that are first and foremost in the interests of safety, again, many of which are prescribed by regulation? That will never be compromised, but should they be held financially liable? That’s the debate, and I would argue, of course, not.
Senator Loffreda: Maybe the government hasn’t put together such a list of exceptions, because, as you have said, the EU hasn’t succeeded in doing so. You haven’t succeeded in doing so. What is the next step?
Mr. Morrison: As I mentioned, we are currently working on that list; in fact, we are doing that, frankly, this week. We are using what has been proposed by several stakeholders in the European Union as a defined list. That’s our starting point. We want to look at whether that list would be applicable to a Canadian context, and that’s the work that we’re currently undertaking. We will, by the way, share with you that list in the coming days, at least what’s being proposed by the Europeans. When that regulatory process begins by the CTA, I would imagine that that’s where that debate will happen.
Again, if this committee, via your work and your recommendations to the government, can insert that principle that safety needs to be the first and foremost preoccupation in the development of that list, I think that would send a powerful and strong message that this committee and that the government as a whole recognizes that importance.
Senator Loffreda: Thank you very much, Mr. Morrison.
[Translation]
Senator Dagenais: My first questions will be for Mr. Morrison.
I’m going to talk to you about passenger rights. Can you give us an overview of the rules on passenger rights that have been in place since 2021 for airlines operating in European Union countries, among others? Why shouldn’t these same rules apply to air travellers in Canada?
[English]
Mr. Morrison: Thank you for the question.
We’ve looked very carefully at the European EU261 regulations, which, as I say, have been defined as the gold standard. I will say, and perhaps this is not answering your question directly, but with all due respect to any lawyers in the room, the only group that seems to like the EU261 regulations in Europe are the lawyers. That is because a large segment of the regulations under EU261 is not defined within the legislation itself passed by the European Union. They’re found via court rulings. Not only are the courts having to define what exists as exemptions, but there is a whole cottage industry in the European Union of lawyers taking individual airlines to court in order to get compensation on the part of passengers because the regulations are not well defined, lawyers, who, by the way, take a certain percentage of a cut of any settlement reached.
That is not the type of system we want in Canada, one defined by litigation. We want a clear, well-understood set of regulations that puts safety at the heart of what we do. I would argue that although there are lessons to be learned from EU261, the fact that it is a highly litigious system is not what we’re looking for in Canada. I fly many times, I’m sure you all fly many times, and I am certain I have never spoken to a single passenger who says, “Gee, I hope I can take an airline to court for any delay.” It’s not the system we would ask for in Canada.
[Translation]
Senator Dagenais: I would now like to turn to the link with the new airport security fees that the legislation will impose on your organization and, consequently, on passengers.
Could you tell us more about this? Where should the extra 30% go if we’re to talk about improving passenger services? There’s a lot of talk about the 30% going to the Canadian Air Transport Security Authority, or CATSA. I imagine that CATSA won’t be given the full 30%. I think it will be used for something else.
[English]
Mr. Morrison: Thank you for the question.
With respect to the Air Travellers Security Charge, the 30% increase is a direct carry-over to the passenger. In other words, that charge gets automatically added to the ticket price. In fact, when you pay for an airline ticket, you can see that carve out and see what that fare is. Airlines don’t have a say in that. It’s an automatic passage of the increase.
With respect to the APPR, within the regulations in the legislation, there is a proposal to essentially add a levy for airlines any time a passenger chooses to go to the Canadian Transportation Agency with a complaint. We don’t yet know what that would look like, whether airlines would still have to pay that levy even if the airline was found not to be at fault if the claim to the CTA were filed, but presumably, whatever size of the levy, that will be another burden that will fall to the airlines.
Of course, with the additional responsibilities under the APPR in this legislation, expanding the compensation requirements and the potential for fines and penalties, those are all additional input costs that airlines will face. As I said, this is all on top of additional fees that airlines have to pay for navigation services, airport services and so forth. This is all over and above certain other things such as labour, switching to sustainable fuels, et cetera. I frankly don’t know of any sector or business on the planet in which you can continually increase the input costs and not have an impact on the fare that the customer will pay. That’s the situation Canada is in right now.
[Translation]
Senator Dagenais: I have one last question for you, Mr. Morrison.
You’ve suggested some changes to the budget provisions. Which change do you think is the most important? Why should the government approve this amendment?
[English]
Mr. Morrison: Thank you for the question.
With respect to the APPR elements of the bill, adding in a principle that safety would need to define the regulatory environment, or the regulatory list in particular, that will come out of this bill would be one of the most important. If we can enshrine that principle of safety within the APPR regulations, then the airlines would be comfortable with that because one of the disadvantages of the EU system is a lack of clarity regarding what the exceptional circumstances are. If we can build a clear set of exceptional circumstances with safety as their principal, I think that would go a long way.
There are many other things the government could do to strengthen air travel in Canada, which would probably take more time than we have to discuss. Airport infrastructure, incentives for sustainable aviation fuel — which we are nowhere on the map right now — reviewing the entire user-pay system and the charges and fees that third parties charge airlines — there is a lot we could do. Unfortunately, this bill doesn’t do those things, and that’s where we hope the government will go moving forward.
[Translation]
Senator Dagenais: Thank you, Mr. Morrison.
[English]
Senator Pate: Thank you to all the witnesses.
My questions are for the National Airlines Council of Canada. You mentioned you would send some of the information you’re looking at this week. The recommendations you would make, which you just alluded to, could you send those along? I think that would be incredibly useful as well.
I wanted to ask three questions. You’ve already alluded to the ability to operate in many parts of the country during the pandemic — in the world, but particularly in the country. Many remote communities have not come back up to the delivery or the travel opportunities that existed pre-pandemic. What are the plans there? How will that impact these issues?
My second question is, in terms of the potential solutions, how do we create more affordable aviation beyond what we have right now and any recommendations you have there?
My third question relates to the complaint mechanism. Your comment around litigation was interesting. I would be interested in what kinds of issues are being litigated in Europe. It sounds like you have a fair bit of knowledge about that. I thought there was potentially a missed opportunity in Canada. If only 3% of complaints are going to litigation or quasi-judicial bodies for resolution, some explanation of how those other complaints are being dealt with would be useful, or some disaggregated data showing that people are provided with compensation or a ticket in lieu. Obviously, they are being resolved in some way. We hear about some in the media, mostly if people are not happy, but could you could talk a bit about that? It strikes me that it’s a missed opportunity for airlines to share how they are resolving issues in a way that satisfies customers.
Mr. Morrison: Thank you, senator, for those questions.
With respect to the remote communities, there is absolutely no question. That is a priority for many Canadian airlines. You will have seen airlines individually announcing new routes to some smaller destinations. We hope that will continue. I will say, again going back to the principle of cost and the user-pay system, in Canada we face certain competitive disadvantages with respect to remote communities.
One quick example is that a couple of weeks ago we had our American counterparts in Ottawa, and we met with Minister Alghabra and other officials. One of the striking data points they rose is that because of the lack of Canadian competitiveness vis-à-vis the United States, there has been about a 30% reduction in the number of American airlines flying to non-hub Canadian airports because it is, frankly, not as cost competitive as it is to fly to the U.S. For example, if an American airline is looking to go to Regina or Boise, Idaho, more and more they are choosing Boise because it is more cost-competitive to do so.
We are seeing challenges with respect to flying to remote areas, but it is absolutely something we want to address, which is a segue to your second point about making travel more affordable. One recommendation we have for the government is a thorough review of all of the third-party fees and charges that Canadian airlines must pay and which ultimately get passed on to the passenger, to look at ways to make our system more competitive and affordable for the traveller. In Bill C-47, with the APPR changes, with the security fee, the costs will go up, and that’s really counter to what passengers want. I think we need to have that somewhat thorough review.
On your last point about litigation, the European courts have really litigated on just about everything with respect to the passenger rights regime. Two weeks ago, I believe it was a court in Portugal that issued a ruling with respect to a pilot who had died two hours before his flight was to take off and whether that would be considered an exceptional circumstance. The court had to rule on that, and there was a litigation procedure on that. It’s a system that really relies heavily on the courts and litigation, which is something we don’t want.
In Canada, when a passenger has an issue, a delay or disruption in a flight, the first thing they have to do is file a claim with the airline directly. The vast majority of those claims are settled amicably and within 30 days. There is a requirement that the airline has 30 days to resolve that complaint. It is only if the passenger doesn’t agree with that airline assessment that they go to the CTA. We know there has been a lot of talk about the backlog of complaints at the CTA. One thing I want to make clear is something that the president of the CTA told your House colleagues back in January, which was that just because a passenger chooses to file a claim to the CTA, that does not mean that the airline is at fault. It is that the passenger disagrees that with the assessment that the airline had.
My time is up. I would be happy to chat more about that, but we will send that information that I mentioned. Thank you.
Senator Pate: If there is any information about complaint processes and results, that would be useful.
The Chair: We will move to the second round.
Senator Marshall: I will pick up where Senator Pate left off. Mr. Morrison, the new complaints process that’s outlined in the bill looks to be more complicated than the process in place now, but it also looks like it will cost more. Who bears that cost? Does the airline financially support the transportation agency? I’m wondering, is this going to be an increased cost to the airlines?
Mr. Morrison: Thank you for the question.
The answer is yes. Any additional compensation requirements that will be needed to be paid out as a result of this bill will be paid by the airline. Again, one of the components of this legislation is that there would be a new levy introduced. This is brand new. That would be a new cost to the airline.
Another quick point: There is nothing in the system that currently allows airlines to recoup any costs from any of the other air travel entities if they are found to be at fault. For example, let’s hypothetically say NAV CANADA has a staffing shortage and flights are delayed or disrupted. The airline will have to pay for that, not NAV CANADA. Ultimately, it’s the airline.
Senator Marshall: I’m interested in the levy, because the agency now has to have complaint resolution officers, and there is a whole convoluted process to go through. How is that levy going to be determined? Do you know what the magnitude of the cost is going to be? My second question is, will the airlines put in an additional cost to the traveller on top of the additional cost that will be incurred by the agency? Is it a double whammy?
Mr. Morrison: To your first question on the magnitude of that levy, we do not know. That will be defined via the regulatory process that will follow the legislation. We also don’t know frankly if, as I had mentioned, the airlines would still be responsible for paying that levy even if the airline is not at fault whatsoever. Again, the passenger may have a different interpretation of the airline assessment. It would still be their choice to go, so the airline would be on the hook regardless, but again we don’t know that process.
Senator Marshall: The chair is going to stop me in a minute, but I wanted to ask Mr. Carey to clarify something. You were talking about the monopoly now by the railways in certain areas. With the interswitching now, will it add time to transporting the product? To confirm, the customer does not pay the extra cost? It’s the railway company?
Mr. Carey: I will ask my colleague Steve to weigh in on the details of that question.
Mr. Pratte: Under the proposal, the Canadian Transportation Agency is going to develop the rate for the 30 to 160, which by law has to cover variable costs of the railways. It has to be compensatory. It’s not a market cost, but it’s a compensatory cost as per their parameters. The customer is still paying the market rate for the remainder of the services. For instance, with respect to moving our products down to the States, that falls outside the Maximum Revenue Entitlement program. Those are fully market rates as set by the railways and accepted by the customers.
Senator Marshall: Thank you.
[Translation]
Senator Forest: I have a question about something our last expert said.
Mr. Brazeau, in the report you submitted to us, you say that the rates for extended regulatory interswitching should be based on the current rates for comparable traffic. When extended interswitching was introduced, rates were based on costs, and those costs were non-compensatory.
Can you explain or clarify that, based on what the last expert said?
Mr. Brazeau: If I may, I’ll answer in English.
[English]
The rates for extended regulatory interswitching are below market rates. That is set by the CTA. Anything to do above 30 kilometres is market rates. As I mentioned, Canada has some of the most competitive freight rail rates in the world, and with grain it is a maximum revenue entitlement as well. Shippers have already leverage and recourse, whether it be through long-haul interswitching, which extends to 1,200 kilometres, final offer arbitration, again through CTA and, as I mentioned, the maximum revenue entitlement, which is the lowest rate in the world for shipment of grain. All of those backstops exist for shippers, and that’s something that’s in place today to benefit them.
[Translation]
Senator Forest: I have one last question.
Mr. Carey, we had a regulatory interswitching program in the past. After some experimenting with it, it was sunsetted. It didn’t really work well, so it was sunsetted.
What gives us reason to believe that this time we’ll get the right results for the shippers and carriers alike?
[English]
Mr. Carey: Thank you for the question.
I don’t want to speculate on politics too much, but there was a question around the politics at play in this current idea. I would suggest that the previous extended interswitching was a Conservative policy that was then reversed by a Liberal government, so there are politics certainly in that. They removed extended interswitching and put in long-haul interswitching.
I would suggest that things have changed significantly since that time period. We have gone through a global pandemic, we’ve had massive droughts, we’ve had forest fires and we’ve had rail disruptions from labour blockades. A number of things have changed in Canada. I think it’s very easy to pick and choose reports that speak to your point of view. The Emerson report that was written recommended sunsetting. We just had a National Supply Chain Task Force report that came out post-pandemic, post-COVID, post the rise of protectionism, that suggests this is an important tool. When it was used, it was only about 1% of grain that was actually moved under extended interswitching, but it was a tool that allows shippers to negotiate with the originating carrier to get the best possible service. I would suggest that the world has shifted significantly, senator, since the decision to sunset versus what the National Supply Chain Task Force report came out with last fall.
[Translation]
Senator Gignac: My questions are for Mr. Brazeau.
There is no doubt that Canadians have a special relationship with railways. It’s what makes our country unique. We’re proud to have leaders in this sector. In the economy, we have many leaders in a sector that is dominant in North America. It’s a source of pride.
You talk about lower costs and your safety record. These are all positive points.
Why are you so concerned about the 18-month pilot? You mentioned the potential impact on investments. Is it because you’re worried that after 18 months, it will be permanent, or that we’ll go from 160 kilometres to 500 kilometres? I’m trying to understand the reason for your concern. Can you elaborate on that?
Mr. Brazeau: Thank you, Senator Gignac.
As my colleague mentioned, I think things have changed since the pandemic. I fully agree with him. We should all be focused on ensuring the safety and reliability of our infrastructure, our supply chain, and that requires major investments.
Over the last decade, the railways have invested about $20 billion in infrastructure, equipment and technology. We’re seeing the results of all that. We’re seeing it in grain transportation, in record grain transportation since fall 2022. Today, we’re seeing the results of these investments that have been made over the years.
To reinvest these amounts, we need a competitive, free market with rates based on the market and on competition. All of this is important. Adding 160 kilometres to regulatory rates will reduce the railways’ ability to reinvest in their networks.
We need investment from all partners. We’d like the government to set up incentive programs, programs that will give us more opportunities to reinvest in our network, not only in the railways, but also in all the participants in the supply chain.
[English]
Senator Smith: Mr. Carey, I wanted to go back to your discussion about capacity. You gave an example in which the shipper needs more railcars but the designated railway cannot meet the demand. From what we have heard, is this an issue of cost alone? Could you support the recommendation made by the railway association?
Mr. Carey: It’s not just about costs; it is about service. I know that oftentimes there is a need for additional grain cars that simply are not available from the originating carrier, so a shipper will try to go to the other carrier to negotiate that. Interswitching is a negotiation tool. It’s one of the few things we can feasibly implement to incentivize any competition.
It’s important to note the primary beneficiaries. Previously, interswitching was used by canola processors. Our biggest market is the United States, so being able to send our product with the best possible options to the United States is an important feature.
Railways interswitch all the time. They have to interswitch every time they go to the Port of Vancouver, because it is a CN track that leads to the Port of Vancouver. It is measure that is used often.
There is a misnomer around U.S. competition. These are not just Canadian railways; these are North American railways that have significant operations in the United States and Mexico. If a U.S. railway wants to come into Canada, there is a hand-off at the border and that becomes a Canadian crew, and vice versa. This is an integrated North American market.
Our belief is that interswitching is not a panacea, but it is a step in the right direction that provides shippers with an opportunity to better negotiate with the originating carrier. Ultimately, it means that, hopefully, when farmers deliver their grain, the elevators are not full and they are able to deliver their grain and get paid to continue growing.
Senator Smith: What would your recommendation be?
Mr. Carey: At least a five-year pilot project. The problem is that many grain contracts are a year in duration. If we have a 90-day implementation from CTA to set the rates and an 18-month pilot — some of these shippers are under a 12-month contract — we have three months to evaluate the effectiveness of this pilot program. The most important recommendation that the grain industry and the Coalition of Rail Shippers would have is that this should be a five-year project, at a minimum. One hundred and sixty kilometres sounds like a long way, but it’s not even from here to Montreal. We are a massive country. Five hundred kilometres would capture almost all the major agriculture-producing regions from northern Alberta and northern Saskatchewan. The duration is important so that we give interswitching its proper due and properly evaluate the metrics. Long-haul interswitching is on the books. It will never be used because we need something that can be used in a commercial environment, with phone calls picked up — not a judicial system that requires lawyers, arbitration and periods of time. You need to move the product today. I would suggest a five-year period.
The other concern is that with no path to permanence or clarity on how those metrics will be evaluated, a lot of shippers will be reluctant to use interswitching, knowing that after 18 months it’s gone and now they have to deal with their carrier they just had to negotiate with on interswitching. We need to give this its proper due. The metrics used to evaluate this are important. It’s not just about use but about a number of other factors, such as timeliness, the number of grain cars, et cetera.
Senator Galvez: I have a quick question for Mr. Carey. The rail association is saying that under this regime, you have the lowest rate in the world to transport the grain. You seem to say that by using interswitching as a negotiating tool, you will increase competition and hopefully you’ll have lower rates than what are already there.
Mr. Carey: Rates are part of it, but it’s more the timeliness and reliability. Steve is our expert.
Mr. Pratte: It’s also about routing. There are potential new opportunities. We have the theoretical use of it laid over geography. Perhaps you’re moving from point X to point Y. Because you might have a different railway involved, you can shave off kilometres on that movement. It’s rates, but it’s also market access.
Senator Galvez: This seems to be in contradiction to what the rail association is saying, which is that interswitching increases the time of delivery.
In his submission to us, Mr. Brazeau said to limit this application to grain only. What is your feeling about that?
Mr. Carey: I represent 43,000 farmers. Grain is obviously our primary concern. However, the beneficiaries of the system would also be mining, fertilizer, forestry and consumer goods. From a canola perspective, we’re focused on grain. The Coalition of Rail Shippers, of which we’re a member, represents a broad segment of the economy, including auto, livestock and meat. Obviously, grain is the reason I am here today, but I would suggest that limiting it to that would be short-sighted.
Senator Galvez: Thank you.
Senator Duncan: Thank you again to all the witnesses who have appeared.
Mr. Morrison, perhaps you could submit your response in writing to the committee. As I understand it, the Air Transportation Association of Canada has argued for greater responsibility in terms of the air passenger rights initiatives. There are a lot of players involved in Canada’s airline industry; it’s not just the airlines. Could you provide to the chair a written response in terms of your position on that?
A final note on competition: At the end of the supply chain — or the start, I suppose, in some respects, being in the Yukon — what a difference it has made by having more than one airline service the country and our area — differences in airfares from $1,500 per ticket and one flight a day to $99 connected fares and four flights. What a difference competition makes in terms of providing service to Canadians. Thank you.
Mr. Morrison: ATAC, the Air Transportation Association of Canada, represents smaller airlines, and we represent the larger passenger airlines. They have come out fully in support of the report we released two weeks ago that outlined the framework for a shared accountability system in terms of the notion that airlines could do everything 100% correctly, yet could still face disruptions, delays and cancellations of flights if all the other entities in the system do not perform up to standards. ATAC and our association are fully aligned with respect to that system. We would be happy to share with you a copy of our report which outlines what the framework would look like.
With respect to your second point about competition, I agree 100%. As airlines, we want additional competition in the Canadian airline sector. It’s difficult for all the airlines to do that when, again, we have a system whereby a significant amount of the fees that passengers pay are those third-party fees and charges that go into your ticket price. We all want to see a more competitive system so that we can provide better service to passengers no matter where they live in Canada.
Mr. Carey: No economist would ever suggest that competition doesn’t drive efficiencies and improve customer service and reliability. Competition is what Canada was founded on. Unfortunately, according to the OECD, we are falling down in terms of our global competitiveness. Any competition pays dividends to Canadians.
Senator Loffreda: Mr. Morrison, to continue the discussion we started, would you not agree that the government’s priority is also safety and that the list of exceptions would be just as stringent, if not more stringent, regarding passenger safety if they were to come up with that list? Could you elaborate further as to what extent the proposed changes to the Air Passenger Protection Regulations increase airfares? Many Canadians are already struggling with increased airfares across Canada. How do you see that impacting these fees?
Mr. Morrison: Thank you for the question.
On your first question vis-à-vis safety, do I hope that the government recognizes the absolute importance of safety? My answer is I really hope so. We’ll see that in the regulations that come out that define what those circumstances will be. I’ve personally spoken with Minister Alghabra on this point. Just as sometimes we have differences of opinion, we raised the idea, for example, if a Canadian airline was located in Bangkok and there was suddenly an unanticipated mechanical deficiency or defect, what would happen there? That flight would have to be delayed. Would that airline be held financially liable for compensation? The minister said, “Well, just get another plane.” That comment sort of took us aback because, of course, that’s just not always realistic in that sense. So I think we do need via that regulatory process to have a good discussion as to what exactly those safety exemptions would be. We do hope the government will put in place a fairly clear and robust list.
With respect to airfares and the APPR, again, any time you add additional input costs to any business, whether airlines or anything else, there will likely be an impact on the price that customers pay. In this case, Bill C-47 writ large, with an increase in the security charge, with the new levy that airlines may need to pay vis-à-vis claims that go to the CTA, with increased compensation requirements potentially for increased penalties and fines, these are all adding to the burden that airlines have already had to face over the past couple of months from other entities. At some point, something has to give, and unfortunately, that will likely result in an impact on passenger fares.
Senator Loffreda: Thank you.
[Translation]
Senator Dagenais: My question is for Mr. Brazeau.
Mr. Brazeau, you told us that Canadian rail freight rates were the most cost-effective. I would like you to give us more details on the competition from American railways. Given the current exchange rate for U.S. dollars, how can the U.S. attract business from your members?
Mr. Brazeau: Thank you, Senator Dagenais. There is competition with some American railways, whether it’s south of Winnipeg, south of Lethbridge or in Vancouver. Options are available for shippers.
American railways only have a network of less than about 100 kilometres, and very few employees — fewer than 100 employees. For us, it’s also about ensuring that competition remains market-based, not regulatory-based.
The same regulation doesn’t exist in the United States. Canadian railways can’t interswitch at a regulated rate in the United States, because that does not exist. We’re asking for a level playing field.
Our request is designed to ensure that Canadian railways can compete on a level playing field with American railways. The proposed regulations will hinder this competition.
Senator Dagenais: Thank you, Mr. Brazeau.
[English]
Senator Pate: My questions are again for you, Mr. Morrison. I have two questions.
The reporting has been that for Air Canada in particular, passenger revenue is now comparable to what it was pre-pandemic, yet we’re not seeing a decrease in costs. You may have answered this. You gave a number of examples of other costs that have gone up. If there is something else, I invite you to add that as well.
Secondly, going back to the whole issue of complaints, media reporting is that the rates of complaints have gone up threefold in the past year. One of the concerns is that that backlog is not being addressed in an adequate way, in part, obviously, because of resources with the transportation body. What other issues are at play here in terms of why the complaints, in your opinion, have gone up so significantly? How does that relate, if at all, to the issues you’ve been raising about the European Union regulations?
Mr. Morrison: Thank you for the questions.
On the first question, are we seeing airline revenues going up? Yes. We have been seeing that since the lifting of pandemic restrictions, which were quite severe in Canada compared to many other countries. The ramp-up period has been much steeper, which is one of the reasons we faced disruptions last summer. We are seeing traffic return to close to pre-pandemic 2019 levels. That’s good news. It’s something we want to see, and frankly, we want to build for, which again is why we have been calling for such things as improving airport infrastructure to deal with what we hope will be increasing growth.
With respect to the complaints, particularly the backlog at the CTA that you cited, although we don’t know their exact source because the CTA doesn’t make source information public, we do know that much of that is still from last summer as well as from the holiday period, and everyone has acknowledged that there were challenges and issues in both of those time periods.
I can say that travel is improving. Just as a quick example, you cited Air Canada. Over the holiday long weekend in May, a week and a half ago, Air Canada reported that for the unofficial start of summer, its flight completion rate was 98.7%; and its on-time performance, which is defined as a flight arriving within 15 minutes of its scheduled time, was at approximately 90%. Those are numbers we hadn’t seen last summer, so things are getting better.
The CTA, first of all, has no time requirement to respond to a complaint, but airlines do. Airlines have 30 days. The CTA has nothing, so they are still dealing with many of those backlogs from two very unique circumstances.
I will say that one of the elements from the legislation that we do support is facilitation of the claims backlog process by the CTA because no one wants to see that backlog — of course not passengers but neither airlines. If we can look at ways, be it technological or process-wise, to speed up the efficiency of the claims process, we would be more than happy with that.
Senator Pate: In terms of litigation, I don’t think you had an opportunity to really describe the sorts of issues that are going to litigation beyond the one example you gave of Portugal, I believe.
Mr. Morrison: Unfortunately, I’m not a lawyer and, frankly, I would probably need a law degree to go through those 50-plus, close to 60, cases that the European courts have adjudicated on. Frankly, it includes everything, whether weather or bird strikes are considered exceptional circumstances. There is a long list and, frankly, you would probably need a European lawyer to go through it all in a comprehensive way. Again, that’s not the type of system we want.
The other challenge with the European Union, I might add, is although obviously similar to Canada, a passenger would first file a claim with the individual airline in the EU. If the passenger disagreed with the assessment, they would have to navigate through a system of 26 different countries in terms of their appeals process, where one is not the same as the other. At least in Canada we do have a centralized forum vis-à-vis the CTA. It’s a much more complex system in the EU than I think most realize.
Senator Pate: Part of the reason I’m asking is because the European Union is not known as a particularly litigious locale, whereas, for instance, south of the border is, but they have fewer consumer protections. I’m curious as to the correlation there.
Mr. Morrison: Absolutely. When EU261 was first introduced in 2004, the idea was that at some point there would be reforms to it that would put in place greater clarity and assurances as to what some of those circumstances were. That never happened, given the politics of the EU. As a result, the courts have been very busy there over many years, and again, that’s not a situation we want here.
[Translation]
Senator Forest: I have a question for Mr. Brazeau.
It’s important for any business to have the profitability it needs to reinvest in and modernize its infrastructure. This measure could perhaps weaken that position. Do you think our two Canadian champions, CN and CP, have that availability? The profitability of these companies seems excessively high when we look at the results, including those for the fourth quarter, which are valued at over $1 billion in each case.
[English]
Mr. Brazeau: One of the benefits of having two strong, financially healthy Class 1s in Canada is their ability to continue to reinvest at significant levels back into their network, so a couple of things about that. Rates are low in Canada today because competition is very strong between CN and CPKC. In fact, competition is also strong between the railways and trucking. Grain first gets to market by using trucks, and then when they get to the grain elevators, most major grain elevators have access to both the CN and the CPKC lines. So there is competition. The trucks can go this way or the trucks can go that way and end up on the CN or the CPKC line. That’s why rates are low. I come back to this. It was mentioned a couple of times by some of my colleagues that we have the most competitive rail freight rates in the world. It’s because we have two strong, financially viable Class 1s that are able to reinvest and compete with each other and are therefore able to offer the lowest freight rail rates in the world. I think that’s something that we should be very proud of, and that’s something that the shippers can benefit greatly from.
We want to continue to do that — reinvest in the network. If there’s one thing this government could do, it’s to create more incentives for more investments back into our supply chain infrastructure. One example is the Port of Vancouver. Loading grain in the rain is a challenge. It’s a significant challenge in Vancouver. Yet, just south of there in Seattle and Portland, they load grain in the rain. If we solve that problem at the Port of Vancouver, our capacity and efficiency will go up even higher, and that will mean that grain can get to world markets faster as well. We need more investments and more partners to do it together, and the railways will continue to do that within the supply chain.
[Translation]
Senator Forest: The message I got was that the government should maintain its infrastructure at the same level and that improving it would have a positive impact on the grain industry and rail transportation.
However, what I was trying to understand is what impact this pilot project will have. CN has revenues of over $1.4 billion, and CPKC has revenues of $1.127 billion, and that’s just in the fourth quarter alone. I’m trying to put into perspective how this can have such a significant impact on the profitability of these companies.
Mr. Brazeau: Thank you for your question.
[English]
When the pilot project — the same project — took place from 2014 to 2017, thousands of carloads were shifted to the U.S. That’s what we’re saying. If we are not able to have a level playing field — the same rules in the U.S. and the same rules in Canada, because that doesn’t exist in the U.S. — it will erode some of the business south. It will have an impact on jobs within the railways. It will also have an impact on jobs at the Canadian ports. Again, based on the Emerson report and based on the data and the information that was gathered from 2014 to 2017, it was sunset for all the right reasons.
We’ve said, “Show us evidence that things have changed since 2017.” I recognize that the world has changed, and I recognize that climate change is becoming critical, so we all need to invest more in our infrastructure. We all need to invest more in our Canadian supply chain.
[Translation]
Senator Forest: Thank you.
Senator Gignac: Mr. Brazeau, I understand that this extended interswitching provides a bargaining chip for grain shipping. You mentioned the negative impacts this could have, such as a deterioration in the handling service and transit times. You said in your opening remarks that the direct impact will be higher freight rates due to the additional assets required to transport the same volume. That sentence struck me, especially in the context of inflation and supply chain problems. Do I understand correctly that this will have an impact on the rest of the economy?
Could you explain a little so I can understand better? Thank you.
Mr. Brazeau: Thank you, Senator Gignac. Since we’re talking about a system that will be put in place that will increase the time, resources and staff required, this will entail additional costs that we’ll have to absorb at the going rate, and the revenues collected are at market prices. All of this influences profitability. For these reasons, it will increase costs for shippers and the time it takes to move goods from origin to destination. All these aspects reflect the economic reality and the reality of the economic impact on shippers.
Senator Gignac: I understand the impact on the distance between 30 kilometres and 160 kilometres. However, there aren’t really any American railways that will compete in the Prairies. Am I wrong?
If we’re talking about a distance of 500 kilometres, would that change things?
Mr. Brazeau: It changes after 160 kilometres.
Senator Gignac: Could you be more specific?
Mr. Brazeau: If you look at the distance between Winnipeg and the border, Lethbridge and the border, Vancouver and the border, it falls within 160 kilometres. That’s going to open up the market even more to U.S. railways. As I mentioned, we saw the impact between 2014 and 2017. We lost revenue and customers because they went to U.S. ports.
Senator Gignac: There’s no counterpart for you on the U.S. side, as you mentioned?
Mr. Brazeau: Exactly, the same opportunities don’t exist in the United States for Canadian railways.
[English]
Senator Duncan: Again, my question is for Mr. Morrison, and a response in writing is fine. You previously mentioned ATAC, the air transportation association representing the smaller carriers. You represent the larger carriers. The smaller carriers have asked for a reprieve, if you will, with regard to the pilot flight and duty time regulations because of fatigue risk management, specifically. This issue specifically applies to the smaller charter carriers. Again, an answer in writing is fine, but I’m wondering if the national carriers have considered lending their support to ATAC’s position on fatigue risk management as it affects those smaller charter aircraft. They’re the ones that service the rural and northern parts, particularly, of our country, and they are very much affected by this.
Mr. Morrison: Thank you, senator, for the question.
We have not had that conversation with ATAC on that particular issue, but we would be happy to follow up with them, and we will get back to you in writing. I know the issue of flight duty times has presented especially some smaller carriers with some challenges, in particular with respect to labour supply, and in particular last summer when, of course, the entire system was ramping up. It has presented some challenges, but we’ll have that conversation with them and respond back.
Senator Duncan: Although I’ve spoken about competition and the benefits, there is also a greater need for cooperation in our country. I appreciate your cooperative approach. Thank you.
Senator Loffreda: My question is for the Canadian Canola Growers Association and Mr. Carey. You’ve all gotten a lot of air time, but you, I guess, have missed a few. I just want to know if you have any further comments on your assessment and on the impact of Bill C-47 on your industry that you weren’t able to address thus far. Do you have any major concerns? Do you have any concerns on the issues you’ve heard here this morning or any counter-arguments to the regulations in Bill C-47 and the impact it will have on your industry?
Mr. Carey: Yes, I appreciate that.
The budget writ large on the BIA, specifically interswitching is the primary focus. Of course, there are things in the budget around the Canada water agency, very supportive of changes to the Advance Payments Program, interest rates. We’re the largest administrator of that, so we’re deeply impacted by those decisions.
Again, I don’t want it to appear as if we’re in opposition to our railways. That’s not the position we take. About 20% of the revenue is from grain. We’re simply in a position where the world has shifted, and we would like the opportunity to allow interswitching. We talk about climate change and these sorts of the things. It’s cost prohibitive to move grain by truck after about 250 kilometres, so we don’t want people driving trucks everywhere. Most of our farmers are actually hauling their own grain, so they have a local place they want it delivered to. We’re not shippers, so all the negotiation happens between the shipping companies. They are all included in our coalition of rail shippers that support our position for the most part.
I would suggest that when it comes to the importance of this, we all have bills come due. Most of us have salaries, so you know when our paycheque is going to come in. October, November, December is when farmers get paid for the entire year, essentially, for the most part. It’s when they’re delivering their grain. Farmers deliver their grain based on global market prices. They’re price takers. Canola is a publicly traded commodity on the Chicago Mercantile Exchange. What happens, if a farmer is told the grain elevator is full, they can’t deliver this week or next week or the following week, the farmer has no revenue coming in. That is really the primary concern that we bring to the interswitching discussion, just around more tools that we have available for the timeliness for those grains to be delivered is critical.
I might ask Steve if he has any closing comments as it relates to interswitching.
Mr. Pratte: As far as some context and character for this conversation we’ve had this morning, although there might be a theoretical use of this, there are going to be functional limitations to actually those using it and the numbers of cars using it. When you look back at the 2015-16 year, as my colleague said, it was less than 1% of all tonnage from Western Canada moved. In 2016-17, it was around that as well. Really, the whole industry has become much more efficient over the last two decades, with the movement toward unit trains, so trains of 135 or 150 or more cars. By functional constraint, there are really only five places on the Prairies that can handle unit trains. When almost 80% to 90% of all bulk grain is moving in unit trains, even though it’s on the books as a tool and an option, there are some functional and engineering limitations on its use. I do appreciate all the comments this morning, but I want to give that kind of flavour. There are some practical implications of geography and engineering that will disallow its use even though it is theoretically there as a regulation.
Senator Loffreda: Thank you for those answers, Mr. Carey and Mr. Pratte.
Mr. Morrison, we briefly touched on the complaints issue. If we go back to November 2022, there was a backlog of 27,500 complaints. I do know that the Canadian Transportation Agency has increased capacity to address those complaints with additional funding and internal processing efficiencies. Why the increased complaints? We do know there was COVID and a lack of resources. Many industries have experienced that, but I think it’s far behind us at this point in time. What is the trend, and when will that backlog come back into line? Do you see it coming back into line? Do you see complaints in the future decreasing? It is a major issue.
Mr. Morrison: Thank you for the question.
The best way to address a complaint system is to have an air travel system in which there are no disruptions or delays in the first place so that there are no complaints. That is why we’ve been calling for a strengthening of the overall air travel system, so that we can actually not have passengers having to go to the CTA in the first place.
Why are we seeing that increase in complaints to the CTA? I think, first of all, there was still a lag from the summer of 2022. We can talk at another time, perhaps, about some of the causes for that, but, clearly, that was a significant disruptive event, and then, of course, over the holiday period where we had a very unique weather event which did impact the entire North America air travel system. We saw a significant increase in complaints as a result of that weather event over the holidays.
You asked if we will see, essentially, a levelling off or a decrease. Again, I can’t speak to that, but if I were to look into my hypothetical crystal ball, I would suggest that because we have seen travel overall improve since the start of the year — I mentioned the numbers from Air Canada over the May long weekend are promising as we head into the busy summer season — I would hope that we would see a decrease in that number. Again, part of that will rely on the CTA to clear the backlog that was there. As you correctly said, they have recently received some resources to do that.
I hope we will see that backlog decrease, but again, the best way to ensure that we don’t have a backlog in the future is to put in place a system in which passengers don’t have to go through that system in the first place.
Senator Loffreda: Thank you.
The Chair: To the witnesses, thank you very much for your comments, answering the questions and the statements that you’ve made. It’s been very informative and enlightening. Please submit your written response through the clerk, and you’ve also said that you had some documents you would like to share with the committee.
Honourable senators, I’d like to inform you that our next meeting will be tomorrow, Wednesday, May 31, at 6:45 p.m. to continue our study on the subject matter of Bill C-47.
Before adjourning, on behalf of the entire committee, I would like to thank the entire support team for this committee, those in the front of the room as well as those behind the scenes. Thank you all for your work which contributes enormously to this committee being able to do its work vis-à-vis the budget. Canadians are following very closely.
(The committee adjourned.)