EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, June 15, 1995

.1109

[English]

The Chairman: Order.

We have with us today the Secretary of State, Fernand Robichaud. He'll be talking about the Feed Freight Assistance Task Force.

We had some problems last night in terms of having to be at a vote. We worked through last night and met with Alan Bergman, president of the North Dakota Farmers Union. It was impossible for him to stay this morning. I met with him last night and he gave me a copy of his presentation. There's a lot of information in it relative to the railway situation in North Dakota.

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So that the information is on the record and available for all members to have access to it, I'd like to table that document, and the staff of the committee can make it available to members. Is that okay?

Some hon. members: Agreed.

The Chairman: Mr. Robichaud, go ahead.

[Translation]

Hon. Fernand Robichaud (Secretary of State, Agriculture and AgriFood, Fisheries and Oceans): Thank you, Mr. Chairman. I think you have a copy of my opening remarks. However, I do not want to take up too much of your time since you know how to read as well as me. So I will simply go over the highlights without reading word for word.

Thank you for this opportunity to report to the committee about the Feed Freight Assistance Program, as well as about the progress of the taskforce.

There are 16 members on the taskforce, and they are in the process of preparing a draft report based on their first round of consultations.

I understand from the taskforce chair that the group will be holding a conference call next week to finalize that report and that it should be ready for me shortly after that.

I expect this document to recommend a method of allocating the money contained in the adjustment fund between the affected provinces, namely the Atlantic provinces, British Columbia, Northern Ontario, Eastern Quebec and the Territories.

So, while I can't talk to you today about the contents of the report, since I don't have it yet, I can tell you about the process that led to the taskforce meeting today. I can also set the stage of the taskforce's second round of consultations. Those public meetings will begin before the end of June.

[English]

In comparison to task force that have gone before, the FFA Task Force is working extremely well. It's working under a very tight timeframe.

I have asked the group to deliver its final report before the provincial and federal ministers' meeting in August. This means that over a period of three months the task force has had to produce two reports and hold two rounds of consultations.

The industry has asked for a quick, upfront process to get the adjustment fund to work and to work as soon as possible. That is what we're doing. The process is on track. You'll find the comments of the chairman of the task force, Jean-Paul Arsenault, who's very happy with the group. He's right; the group has been working well.

We have representation from the federation of agriculture of each affected province, including the vice-chair, who probably many of you know, Jake Janzen from the B.C. Federation of Agriculture. We also have representatives from the feed industry and the processing industry.

In the days that followed the budget, of course, industry commented. When I refer to industry, I refer to producers and the whole industry. As a result of very informal consultations after I had met with the people, we made a few changes based on the recommendations we had heard from the people out there who were going to be directly affected.

First of all, the original termination date of October 1 for the FFA was thought by people in the industry and by people affected to be the worst time to cut it off. It wouldn't give them sufficient time to adjust. So we did extend the termination date to December 31.

Some changes were in the process of being put into effect. The federations of agriculture from Labrador and Newfoundland saw some problems with those changes. They said that maybe, because the program would be terminated this year, we should overlook that. This is what we're doing. We did not put into effect the changes that were to come into effect April 1.

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We also earmarked $10 million from the national adaptation fund - that is, $1 million a year for ten years - to be added on to the adjustment fund of the FFA. We did that because right after the budget there seemed to have been some misunderstanding that the $62 million was going to be used for adjustment purposes only.

The $62 million was to subsidize the rates for the duration of the program. If you look at how much money would be used this year, it's $13 million to the end of December. That would be subtracted from the $62 million, which would come down to $49 million, so we went to get $10 million to bring it back up to $59 million. In most instances that was very well received.

That is what the task force is working on. That's the number you have in there.

In meeting with the different groups, I found out very soon that the splitting of a pie of that amount of money would not be easy. I see the chairman is smiling; he probably knows very well the proportions of the task.

I asked the task force to first look at how the money would be shared. Some of the players were saying they couldn't start talking about how they were going to use it if they didn't know how much they were going to have per region.

That's what the task force started in Halifax on May 8. They finished up their last meeting on May 29. They received thirty written or oral submissions. What they heard and what they are trying to choose between today are two options: using past provincial usage of the FFA to determine shares of the funding, or targeting more money to those provinces where it could be more difficult to absorb the loss of the subsidy.

In other words, it's historical share versus the hurt factor,

[Translation]

the hurt factor, in other words, how badly people would suffer from losing this program.

[English]

I know the groups in B.C., Ontario, Quebec, New Brunswick and P.E.I. presented briefs recommending historic share based on a multi-year average that could include the last two, five or ten years. I know coalitions of farm and commodity groups from Newfoundland and Nova Scotia made very strong cases for having the fund split on the basis of hurt.

Newfoundland presented the task force with a request for a $35 million compensation package, compared with the approximately $8 million they would receive under historic allocation. Nova Scotia argued for a 25% share, up from its five-year average of 16%. In both cases, sectors in these provinces believe they don't have the necessary infrastructure and grain production capability to absorb the higher cost of transportation. The territories feel their best years are ahead and would like their 1% share doubled to recognize that they are in a development stage.

With two provinces asking for three-quarters of the fund and the others looking for nearly 70%, you realize just how difficult the sharing of this allocation is going to be. If the fund were split according to the provincial shares recommended in the submissions we have received, we would overspend it by $30 million.

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Before I go into the second round of consultations, I just want to take a few minutes for an issue that came up through my meetings with the different groups after the budget, and that is the relative value of the adaptation measures put in place in response to the elimination of the FFA versus the WGTA.

As you know, the elimination of those subsidies is a budget decision. It is based on a notion of equity that is assumed to be broader than individual programs. In other words, the government is trying to ensure that all regions of the country are treated fairly.

In order to meet the targets, budget measures were taken that in the aggregate were seen to be fair at the regional level. If looked at in isolation, some concerns can be raised about the FFA package.

I've talked to farm groups and to producers in Atlantic Canada since the budget, some several times. I've also met with several ministers of agriculture. I've heard their concerns and seen their calculations, and you probably have as well, because I believe you have met with a group from Nova Scotia about the transportation of grain.

This is the kind of information the task force received in the first round. Their concerns are real and we'll certainly look at them. We are going to look at them fairly, head-on and in good faith. We are carefully reviewing the assessments that were presented to the task force by the farm groups.

We got a sense from the community in general that they understand these packages are addressing different needs. As one of the members put it, they were looking for ``rough justice'' - a sense that farmers are being treated fairly during this transition period, no matter which part of the country they live in.

[Translation]

During the second round of consultations, which will take place over the summer and which will look at how the money should be distributed and used, I expect we will see more individual involvement. The consultations that have just concluded were fairly technical and were really about getting a consensus on the two options I mentioned to you.

During the second round, the task force will be asking the industry for ideas on how the adjustment fund may best be used to develop a competitive regional and provincial agricultural industry that is not dependent on grain transportation subsidies.

I have also asked the task force to canvass industry to find out where marketing and trade regulations may be getting in the way and where they may be streamlined. I have further asked the group to develop recommendations focussing on restructuring and on adjustment initiatives.

I do not expect them to find easy solutions, but there will probably be several suggestions. It was made clear in my meetings with the various groups and with the task force that the federal government was open to all ideas on how the adjustment fund might be used.

[English]

I must stress that we are wide open to suggestions as long as they support the long-term viability and the long-term competitiveness of the sector. What I don't want to see is money being used as a subsidy in lieu of a subsidy, in other words we just continue until there's no money and that's it. After that, there are no adaptation measures.

We'll have to wait and see what kinds of recommendations the task force comes up with. In the first round they already received some propositions from different groups from different areas.

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We also want to look at, for example, the regulatory framework to ensure access to competitively priced feed supplies, while at the same time developing broader long-term structural solutions. For that we'll need input from different associations like ACOA and Transport Canada. We'll also have to work very closely with the provinces.

We'll certainly want to develop partnerships with the provinces and with the sector. Of course, with more limited resources, the emphasis will be on developing partnerships.

[Translation]

Mister Chairman, I am confident that, during this second round of consultations, which will be regional in nature like the first one, we will come up with ways to distribute funds from the adjustment fund.

We will certainly not resolve all the problems and meet every challenge. The task force is being asked to come up with recommendations on how to use the available adjustment fund over the next ten years.

Ladies and gentlemen, as soon as I receive the report of the task force, I will be pleased to make copies available to you once the minister has read it.

I apologize for not having introduced Mr. Richardson, who is with me today. He will be able to answer your technical questions for which I cannot provide an answer. I am open to your comments and questions. Thank you.

Mr. Chrétien (Frontenac): I have three questions I would like to ask, but first, I would like to thank the Secretary of State for his dedication to the agricultural community in the past. As the Opposition's agricultural critic, I have noted Mr. Robichaud's dedication in the past and I thank him for it.

Mr. Robichaud, could you tell me who is representing Quebec on the task force?

Mr. Robichaud: Mr. Serge Lebeau of the Union des producteurs agricoles et Ms Laurence Couture of the feed industry, Mr. Chrétien.

Mr. Chrétien: Mr. Robichaud, I would like to describe to you a situation, which may well become pathetic. Looking at extremes helps understand better the more common cases.

You are very familiar with the Magdalen Islands. Exceptionally, in the past, the region was given a special quota for egg production. In the summer, the Magdalen Islands experience a shortage of eggs because of the large number of tourists and, in winter, a slight surplus given the reduction in population.

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This particular farmer, who is a real exception, has a huge quota. He has over 20,000 laying hens. With the end of the grain transportation subsidy, the price of his feed will rise by $50 a ton. This represents a 16% increase in the cost of raw materials, in one blow.

I wonder whether you have looked at, or intend to look at, the case of this producer on the Magdalen Islands, who will obviously not be able to handle the cut. Will it be more cost effective to import eggs or feed in the Islands? That is the question. The quality and freshness of imported eggs are not as good, and the Madgalen Islands should have their own egg supplier.

Mr. Robichaud: I quite understand what you are saying, Mr. Chrétien. Unfortunately, this is not the only region to be affected. A somewhat similar scenario was described for Newfoundland. The situation is also the same in British Columbia, for producers on Vancouver Island, and for certain producers in the Northwest Territories.

I am sure that the task force will hear representations by these people describing their problem during the second round of consultations. The problem is a very serious one and it will have a major effect on them. Perhaps they will be able to help us come up with a solution. I must tell you that we are open to everything. The aim of the process we have launched is not to come up with a universal solution for all regions and provinces in Canada, but rather to find a way for each of the regions to come up with solutions, in the context of the adjustment program, that are specific and that respond to the particular needs of areas such as the Magdalen Islands, Nova Scotia, Cape Breton and Newfoundland. There are no easy solutions.

Mr. Chrétien: My third question will be a bit tougher. Last Thursday, we had before us the President of the Quebec UPA. He was worried about the inequity between farm producers in the East and in the West when the transportation subsidies are abolished. According to his calculations, which I checked and found correct, in the context of the abolition of the WGTA, the federal government is giving the West the equivalent of 3.4 years of the present subsidy, while it is giving the East, that is the Maritimes and part of Quebec and Ontario, the equivalent of 2.7 years of subsidy. Is there no way of increasing the eastern share so that each region has the equivalent of approximately 3.4 years of subsidy? I'm not asking for a reduction in the West's share, because the people there do not think they have enough. If they do not have enough in the West, just think what it means to the East which has only 2.7 years of subsidy.

I have one more question. It has to do with an additional concern on the part of producers in Quebec. People really would like the money allocated to the West under the WGTA to go only to those producers affected by the abolition of the Act. They would wish that grain producers not affected by a reduction or loss of the subsidy under the WGTA do not receive compensation. Do you understand what I'm saying?

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These are the concerns of Laurent Pellerin, the President of the UPA, which I share as well, of course.

So, there are two issues: the inequity between the 3.4 years for western producers and 2.7 years for eastern producers, and assistance only to producers affected. This type of concerns is shared throughout the East, including Quebec. We would not wish money paid to producers who are not affected by the disappearance of the feed grain transportation subsidy.

Mr. Robichaud: In response to your last comment, you will have to wait for the recommendations of the task force. Once industry has been consulted, we will have to wait for the recommendations of the task force to find out how everyone will be affected. As I mentioned earlier, we are very open. There is no single solution or remedy.

I mentioned the matter of inequity briefly. I have heard the arguments made by people from Quebec but also from other regions, including Nova Scotia. Of course, it depends on the number of years and the figures we use in establishing the contribution of the FFA over the years. This year, based on the figures for 1995-1996, had we made the adjustments that were registered in the system, we would have spent 14.6 million dollars. If we figure 15 million dollars out of the 60 million dollars available over the adjustment period, we get a ratio four. According to the figures and the average you use, the ratio you end up with may be significantly different.

Mr. Chrétien, I am very much aware of the matter of equity you raise. We will take it into consideration, of course, but I remind you that the amounts available are the result of a budget decision, which we must respect. It will certainly be possible to see what sort of problems will arise, what sort of adjustment mechanisms will have to be put in place and how certain groups may be able to take advantage of other existing programs. The amount of money in the adjustment program was a budget decision. However, I will keep what you have said in mind.

[English]

Mrs. Cowling (Dauphin - Swan River): I thank you for coming before our committee.

I believe it's on page 3 that you indicate the original October 1 termination date for the feed rate assistance has been extended to December. This pulls me back to the question Jean-Guy Chrétien asked about the inequities in the system.

With respect to fairness, the Atlantic provinces I understand also have the GRIP program and the NISA program. Is that true?

A witness: Yes.

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Mrs. Cowling: So if there are in fact inequities in the system, and if in fact those producers should fall below, I should think a protection device should kick in for them.

Mr. Robichaud: I would think there are some mechanisms, yes, but the argument is still being made. This is what I was saying to Mr. Chrétien. It is certainly dependant on what numbers you use. Some people can make that argument.

Mrs. Cowling: That's right.

Mr. Robichaud: Certainly we should keep that in mind. There are some mechanisms of protection for them in some cases.

Mrs. Cowling: I just wanted that to be on the record, because that's my understanding as well.

Mr. Robichaud: You were saying that the termination date was changed - this was in the very initial meetings we had with different groups - and that it would not give them sufficient time, as it was a very short period. As to the consultation process that we wanted to go through, it was sort of short too. This is why we moved it to December.

This is also why we're asking the task force to come up with recommendations. It's so we can go to the ministers in August. After, we'll have some time to work through the details, or the nuts and bolts. So come January 1, there will be a mechanism there to access the adjustment fund.

Mrs. Cowling: I have just another question. This committee has been listening to a number of witnesses from across the country with respect to a deregulated environment. Have you heard through your task force members that perhaps it wasn't part of the mandate for great changes in that particular area of the country with respect to diversification and moving into other products?

Mr. Robichaud: I have not been present at the meetings or in the process as such.Mr. Jean-Paul Arsenault conducted the meetings.

Tom, I think you've been to most of them. Would you have any information?

Mr. Tom Richardson (Director General, Farm Income Policy and Programs, Policy Branch, Department of Agriculture and Agri-Food): Mr. Chairman, with the livestock industry that's affected by the program, I don't think there has been the same kind of discussion about diversification, or niche marketing, that I think we're hearing from grain producers in the west.

People have talked about being in a situation in which they're perhaps having to compete in a North American type of market for basic hogs, let's say. Perhaps they'll need to look at niche marketing.

I think we're a ways from looking at that. I think probably we'll hear more about that in the second phase. In the first phase, we're really trying to focus on the allocation question.

Mr. Hoeppner (Lisgar - Marquette): I would just to follow up on what Mrs. Cowling was saying about GRIP and NISA. Won't the grain producers actually get the benefit out of it, because their prices will rise?

Mr. Robichaud: I don't really follow you there.

Mr. Hoeppner: Taking the subsidized grain coming from the west into the Atlantic provinces, would you tell me that your grain growers, that industry, should get better prices, and it will be your livestock industry that really will get hurt? Isn't that so?

Mr. Robichaud: It's the livestock industry and also the poultry industry.

Mr. Hoeppner: You were talking about grain marketing in terms of GRIP and NISA, weren't you?

Mrs. Cowling: Yes.

Mr. Hoeppner: There's no protection for the livestock industry, I don't think, or do they still have some programs in Atlantic Canada?

The Chairman: No, we don't.

Mr. Hoeppner: To me, it looks as though the grain industry would get a benefit from it because it will keep the subsidized grain from coming in, or it will be a higher price and that should also improve your local prices.

Mr. Robichaud: This is what I suppose the task force will be looking into and discussing with some producers. At the very first, when we met in Fredericton - I think it was right after the budget - one of the grain producers from the area was saying that he was seeing a way of producing more grain. We would move to a greater percentage of sufficiency in New Brunswick because the subsidized grains would not be moving in. So that would open a market for them.

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But the question was about what would be the effectiveness and the cost of production. Because we relied on the subsidy for so long, we did develop the expertise in grain production that probably we should have had. We just turned automatically to this program.

In Prince Edward Island, though, a lot of effort has been put into producing a feed. I believe they are, of the Atlantic provinces, at a greater degree of sufficiency than any other province. Maybe the chairman could enlighten us, but I heard it was 80% self-sufficient. It was on the protein side that they were deficient.

Some are certainly looking in that direction toward producing our own. But there again, depending on the land base, you have some areas that will definitely not be able to produce, like Newfoundland in some cases, Nova Scotia, and as we also mentioned, Vancouver Island.

Mr. Hoeppner: Thank you, Mr. Robichaud.

Here's the other question I had. I was amazed at how you could move $1 million around from here to there. Does the budget not affect that at all, or do you have surplus funds to do that? You were taking $1 million out of a fund and moving to the feed freight assistance program.

Mr. Robichaud: Yes. The fund, as you remember, is the $60-million adaptation fund that was announced by the minister. This is a national fund. These moneys could be used for adaptation purposes. This was deemed to be a very worth while use of the fund to supplement the figures we had given. Since there has been some kind of misunderstanding, we wanted to rectify that from the very first.

Mr. Hoeppner: Where do you get those sector funds from?

Mr. Robichaud: From the $60-million annual adaptation fund. Some $1 million per year, for 10 years, will be devoted to the adaptation phase.

Mr. Hoeppner: Is it a wise move? You're dealing with the railways, but the railways will have to become more efficient. Or do you truck in a lot of grain? I would imagine it's mostly by rail.

Mr. Richardson: It's rail, water and probably some rubber, but mostly rail.

Mr. Hoeppner: Because this is what has been our problem in the west, the efficiency that the railway system should have captured in the last years hasn't been there because of subsidies. I'm wondering whether we're extending the life of these people remaining inefficient by giving them this extra subsidy.

Mr. Robichaud: When you say we're giving them this extra subsidy -

Mr. Hoeppner: It does not go to the farmers, this $60 million, so they will still be depending on the railways to bring the grain. If they had to go a different route, maybe the railways would sharpen up a little bit.

Mr. Robichaud: We're counting on the process we're going into right now just to see how we can best use those funds to have access to different sources and to provide them with good, competitive prices. A lot of suggestions have been made and will certainly be looked into. They're talking about an infrastructure to handle grains, growing more grain, and accessing other sources of grain. Of course, they are also looking, as you were saying, for the transportation cost, because of competition, to come down a bit and offer them more competitively priced grains.

Mr. Hoeppner: Would you then agree with me - I've said it for a number of months while being on the transportation committee - that the seaway has to become more efficient? Isn't that one way of getting your product to you at a lesser expense? You will have to import stuff because you won't be able to grow all of it.

Mr. Robichaud: No, definitely.

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Mr. Hoeppner: The seaway should be cheaper than rail.

Mr. Robichaud: There's no doubt that any way that would improve the cost of transportation will certainly be of advantage to the producers in Atlantic Canada, be it seaway or otherwise, because we'll certainly benefit from a cheaper, more competitive source of grain.

Mr. Hoeppner: What access do you have to American grains? Is there a way of accessing the foreign market in the U.S? I don't think oats are grown in that area. I think it would be mostly corn and -

Mr. Robichaud: The Nova Scotia people were asking for access to American corn, which is not a problem. But the problem with accessing American corn is that the transportation subsidies don't apply to American corn. So without the subsidies, it's not viable to bring it in.

There are some quantities that are coming in to Atlantic Canada from Quebec and Ontario. Of course, some American corn is coming into Ontario and Quebec. The producers have asked, especially the Nova Scotia producers, to look at what we will be looking at.

Mr. Hoeppner: It seems only logical to me that we in the west could export grain into the U.S. a lot cheaper if we had direct access. You could access the corn, probably, and save a lot of the transportation costs. I think we have to look at both ways to make that circle complete.

Mr. Robichaud: This will certainly come up in the second round of the consultations, because some of the people in Atlantic Canada were definitely looking in that direction.

The Chairman: Thank you, Mr. Hoeppner.

I have a few questions, Mr. Robichaud. Now, I've said this before, but I guess I haven't said it on the record. It relates to the department. I found it absolutely incredible that a decision of this magnitude was done without an impact study having been done first.

As a representative from the Livestock Feed Board of Canada told me, with this kind of a decision, we could lose animal agriculture by default in Atlantic Canada. That being said, we can't turn back the pages of time. Is the department now doing any kind of impact analysis so that we can flag those areas we perhaps should be addressing by policy initiatives at a later date, beyond the task force report itself?

Mr. Robichaud: Mr. Chairman, we will be waiting for the report of the task force. As you are very well aware, the members of the task force are very knowledgeable. They are from different provinces. They are from all areas of the country, except the prairie provinces. But they are people who are in the industry.

I think a lot of questions will be looked at. We'll certainly follow up on the questions and the recommendations, of course, and on the questions that could be raised in that process.

The Chairman: I agree with what you say, Mr. Robichaud, on that point. But there is a difficulty and a broader question. In the brief on page 6, you state, ``In other words, our government is trying to ensure that all regions of the country are treated fairly''.

Yes, we are, in fact, doing that. There is a broader question, though, in terms of the economic hit that rural Canada has taken, which is maybe disproportionate to that of other industries in the country. There's also the question in terms of our GATT obligations.

I was in Washington this week and it seems to me that, in the United States, in terms of our farm policy, they are not going to go any further than the very minimum, if that, in terms of their GATT obligation. Especially on the transportation side, we seem to be going far beyond our GATT obligation.

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We have the FFA task force on the one hand and we're doing other things relative to the west. My question relates to what's happening in the broad picture, the national policy perspective.

Let me give the example of my own farm. To feed my beef cattle, I will now find myself competing with a beef producer in Manitoba at a further greater-than-$21 Crow benefit additional cost in transportation or lower price in the west; I believe it is a loss of $16 in my area of feed freight assistance. So I'll find myself at a further barley feed disadvantage of $37.

When the Minister of Agriculture from Manitoba was here he was saying that we're going to expand hog production. I hear other ministers saying that the hog market is great in Japan. We're going to increase our numbers of hogs.

We're in hogs in Prince Edward Island and we're already going broke.

Mr. Secretary, my question is how we are going to look at this big picture and pull the components together and ensure that in Manitoba they're not driving us out of business in Prince Edward Island or in Quebec or some other place. What I'm asking is, have we got a handle on the big picture?

I agree 100% with what you're saying about the FFA. We have expert people on there, but are we looking at the issue in isolation to the big picture as a whole, relative to agriculture totally in Canada and relative to what other countries are doing in terms of GATT?

Mr. Robichaud: If I had all the answers to those questions, I could probably make a lot of money and play the market and all that.

To try to comment on what you were saying, the people on the task force are people from the milieu. Because of their background and profession and because in some cases they are producers, they will certainly look at the total picture. This will come out in their recommendations, which of course will be brought to my attention and to Minister Goodale's attention and will certainly contribute to inciting me and the minister to look at the global picture.

I need not go into the vision of the minister, because he came to the committee and put it to you. From what I have read and from what I know from the minister and from what I know of his outlook, he is certainly looking at the total picture.

At the same time, we're not saying that everything will be easy, because it will not. We are going through very difficult times.

The Chairman: Let me come at it in another way. We've already talked about it in relation to the WGTA aspect of the question. As we go down this road - and it's an uncertain road - there needs to be consistent monitoring of the impact on producers' competitiveness with each other within and between provinces.

The primary producers need some assurances that if there is a problem and there is a greater-than-expected impact and there need to be other program initiatives, then the government is going to stand with them and just not send back the excuse: ``Well, we've got a deficit because there are certain programs that are green under the GATT agreement''.

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As I indicated earlier, we went farther than GATT on the transportation side. But are we going to contribute to the farm community, maybe with allowable green programs, to put them in a more competitive position vis-à-vis the U.S. or whatever? Are those possibilities in the cards?

Mr. Robichaud: The possibilities...?

The Chairman: Is the government willing to look at other green programs, look at monitoring the situation, and to stand by producers should there be greater impact than expected?

Mr. Robichaud: The minister will certainly keep his ear to the ground, because the minister certainly has a responsibility towards the community and he certainly has shown he's concerned with everything that's happening, not only here in Canada but all over the world.

You'll remember the minister was quite active when we were at very first elected through the GATT negotiations and he really went on a marathon to make sure the Canadian agricultural community received all the protection we could muster. I remember very well there was a lot of effort, a lot of concern. I would say this concern will certainly be there.

We will certainly listen to the people about how they are affected, and any reaction from the government at that time will have to be based on just how severe the impact is and what means we have at our disposal.

To say to you, Mr. Chairman, look, no matter what happens, we'll be there.... You wouldn't believe me. Nobody would. I wouldn't be in a position to do it anyway.

We will certainly keep our ears to the ground, to make sure all the opportunities and all the expertise are at the disposition of the community and we can make every effort to make sure they survive and they come out of this period of adjustment, we come out with a viable industry. This is the object of the consultation process for the FFA program.

The Chairman: Any other questions, anyone? Then just a last one on the marketing aspect. Maybe it will come in the second phase of the task force. One of the interesting things in the east of Quebec is the price of product in that area, although we're a deficit area in red meats. The price of product is really Toronto less transportation. It would seem if we're a deficit area it should be the other way around.

Maybe there are some things we as an industry could be doing in marketing. Is that side of the question going to be looked at?

Mr. Robichaud: As I was saying, Mr. Chairman, we have no preconceived solution or report, and this we've made clear to the task force. They should go out there, make recommendations, and call it as they see it. This is why the majority of members of the task force are from the industry. We will certainly look at whatever they come up with and react to the recommendations and their comments accordingly.

The Chairman: No other questions?

Certainly, Mr. Secretary, we thank you very much for coming forward with the presentation and answering our questions.

[Translation]

Mr. Robichaud: Mr. Chairman, I thank you

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[English]

The Chairman: To begin, we have a joint presentation by CP Rail System and CN North America. I would like to welcome here, from CP Rail System, Axel Conradi and, from CN Rail, Sandi Mielitz.

I apologize personally for jeopardizing your schedule somewhat due to a change in my own, and I certainly thank you very much for trying to accommodate us. I wanted to be here in person for your presentation, because I will admit that I sometimes give the railways a rough time and if you have any difficulty with that I would like to hear about it.

Welcome. We are looking forward to your presentation.

Ms Sandi J. Mielitz (Vice-President, Grain & Western Canada, CN Rail): If you don't mind, I will start and then pass to Axel Conradi for further comment.

.1210

We have delivered to the subcommittee a copy of the written submission made to the finance committee reviewing Bill C-76. With your permission, today we would also like to make a brief presentation to you.

It is not often that CN and CP make a joint submission at a forum such as this. Normally we are strong competitors who frequently have very differing views. In this case, however, we are talking about fundamental changes to the entire regulatory framework within which we transport grain in western Canada. We recognize this subcommittee felt sufficiently strongly about the import and impact of these changes to decide to hold substantive public hearings. Both railways share grave concerns about the uncertainty and inequity of the proposed framework, particularly during the five-year transition period. It is the commonality of general concern between CN and CP that has led us to decide to make a joint appearance today.

Mr. Conradi and I have coordinated our comments. I will lead off with an overview of grain and grain transportation markets and our vision for the future. Mr. Conradi will then summarize our specific comments on the transportation reform measures contained in Bill C-76.

I don't believe western Canadian agriculture has ever had the strength and diversity of opportunity it has today and will have for at least the next five years. Common agricultural policy reforms in Europe and the GATT agreement are truly having a positive effect on world markets. Subsidies are decreasing, over-production is reducing, and prices are strengthening.

The world grain market demand outlook is also exceptionally positive. In particular, strong economic growth in both China and India is expected to generate significant increases in world demand as people in these countries increase their meat consumption. Markets for all major Canadian grains - wheat, barley, canola, oats, and specialty crops - have rarely looked better, with prices expected to strengthen or remain at high levels.

The outlook for grain processing in western Canada has also never been this bright. Investments in livestock production are rising rapidly. All major canola crushers have expanded their plants, and Cargill has just announced a major new facility.

Smaller processing projects are also under way. In fact, CN is currently working with no fewer than 24 different groups, looking at investments in everything from seed cleaning to oats processing.

When we speak to our customers in the United States, our bullishness and optimism are very much shared. They too are making and planning investments and will be very strong competitors. How fast and how well Canada is able to respond in the next few years will very much determine our long-term market shares and prosperity.

If we succeed, the demands on our transportation and handling system will be enormous. In fact, the major western Canadian grain companies have issued a joint vision for the future which indicates that by the year 2005 our handling and transportation capacity will have to double. Not only do we have the potential to export more grain and grain products but the diversity of grains, grades, products, and specification sales we will need to move to market will increase rapidly.

To win, Canada needs a strong competitive transportation system, one in which the owners are prepared to take business risks and invest. In our written submission we provided a chart showing rail rates and handling costs paid by farmers from Lethbridge to Vancouver compared with those for Shelby, Montana, to Portland, Oregon. That is the very last page of our written submission. It illustrates clearly that Canadian rail rates are not a problem in international competitiveness. Handling costs, however, the tariffs charged by primary elevators and port terminals, are more than doubled in Canada compared with what they are immediately south of the border.

We currently have a total distribution system that is not well geared for the future. Not only are handling costs high, but our system is more supply pushed than demand pull driven. Our industry-managed car allocation system is not efficient and not market responsive.

Coordination in the industry is not what it should be. Often the wrong product is moving through the system at the wrong time. We have too many small elevators and too many branch lines, and levels of taxation on transportation, as well as on handling facilities, are uncompetitively high.

.1215

On this point I should mention that we noted in the subcommittee paper on the focus of the discussion for these hearings that the issue of transportation and competitiveness was raised.

In addition, we have one or two hand-outs with graphs showing the relative taxation levels for railways in Canada versus in the United States and rails versus trucks. We can pass those out to you afterwards.

As the numbers of types of grains, grades, and products multiply, the logistics of moving car lots from many small points to meet the ever-increasing demands of shippers in a complex variety of markets will be overwhelming. Concerns have been expressed that if grain rail movements are regulated by the same regulation as that provided for all other movements, then the railways will not compete and rail rates will be subject to large increases.

We offer the following points for consideration.

First, unlike other major western commodities - such as coal, sulphur, and potash - grain begins its transportation journey in a truck. Frankly, most farmers are not as captive as they think they are. Approximately 80% of CN and CP's delivery points are within 35 miles of another railway. Grain is, in fact, far less captive to the railways than coal or sulphur movements.

Farmers have expressed the concern that having so many small players will dilute their market power to deal with the railways. We would point out that Saskatchewan Wheat Pool vies as the largest or second-largest single customer that either CN or CP has. Only six grain companies handle more than 85% of the business. We can assure you that such customers are critical to both our success and our survival and have significant influence on the service we provide.

Grain companies often point to grain rail rates immediately south of the border in the northern plain states, expressing the fear that western Canadian rail rates will rise to the same levels. They are overlooking two critical factors.

First, handling charges in Canada are sufficiently high that any increase in rail rates starts to place the Canadian system at uncompetitive levels compared with the U.S. system immediately south of the border. I would point out, as an aside, that between 500,000 and 750,000 tonnes of grain are being trucked across the border now.

Second, the U.S. rail regulatory regime is very different from NTA. U.S. shippers have none of the competitive access powers that Canadian shippers have on rates and routing imposed on them. In fact, there is a considerable amount of independent statistical evidence to show that since the passage of NTA 87, there has been substantial downward pressure on Canadian rail rates.

Finally, western farmers now have many more options to choose from. They can deliver grain by truck, not just to a rail head, but also to processors and feedlots either in Canada or in the United States. Grain products of higher value do not always move by rail. Both railways will need to keep their rates competitive to ensure that farmers will continue to choose rail as a mode to move their grain to market.

I would like to conclude my remarks by summarizing the railways' perspective for the future direction of the western grain transportation system.

We believe the same regulations should apply to grain transportation as apply to all other commodities in Canada.

We support a rationalized branch-line network that consists of a significant network of high-density feeder lines.

We encourage producers to use large, high-throughput...[Inaudible - Editor]...and therefore increasingly lower costs inland, terminal fed by commercial trucking.

We believe as much grain as possible should move in multi-car blocks from inland points. Shippers and carriers should be permitted to negotiate car allocation using market tools such as a bid system for a portion of the fleet.

Both shippers and carriers must develop customer-driven logistics to work toward a just-in-time system of railcar movements, decreasing grain car cycle times and delivering grain based on customers' needs.

Finally, we believe the best way for the system to evolve is to rely on competition and market forces as the agents of change.

Now I would like to ask Mr. Conradi to summarize our views on Bill C-76 and other transportation reform measures being contemplated by the federal government.

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Mr. Axel Conradi (General Manager, Marketing-Grain, Heavy Haul, CP Rail System): Mr. Chairman, we very much appreciate the opportunity to share our views on grain transportation reform with your committee. I do stress ``our'' views, since what I'm about to say reflects a shared CP-CN perspective on Bill C-76, not just on Bill C-76, but also on some of the other transportation reforms currently being contemplated by the federal government.

Those reforms are raising many questions about the future of western Canadian agriculture and grain transportation. You no doubt have some, and we'll be more than pleased to field those in a moment. But to get the ball rolling, I thought I would share with you, first of all, our views on the transportation reforms that are in front of us all.

The initial intent of Bill C-76, to begin putting grain transportation regulation on the same footing as that of other grain commodities, is to be applauded. We are, however, concerned about how this bill sets out to do this and what the consequences of that might be.

In a nutshell, we have three principal concerns about Bill C-76 as part of the larger transportation reform package. First, Bill C-76 inappropriately mixes market-driven and administratively based regulatory principles. Second, Bill C-76 perpetuates legislative uncertainty. As a consequence, adjustment and investment decisions to make the grain transportation system more efficient and market responsive are likely to be delayed by all participants in the system. Thirdly, by itself Bill C-76 leaves unresolved other critical issues that must be addressed before the workability of the change package of which Bill C-76 is part can be determined.

Let me address each of these concerns in turn. I will deal first with the inappropriate mix of market-driven and regulatory-based regulatory principles.

Bill C-76 has taken the Western Grain Transportation Act cost-based freight rate scale, adjusted it to deal with a number of issues, such as port and route parity, and then deemed that scale to be a maximum-rate ceiling. Otherwise stated, statutory freight rates set at a level intended to ensure the viability of the grain transportation system have been turned into a maximum rate scale, below which competition will apply.

To stimulate competition further, the various shipper protection provisions of the National Transportation Act, such as confidential contracts and final-offer arbitration, are also extended to export grain movement. These conditions have applied for some time on the railway's Canadian and cross-border grain business.

Bill C-76 also freezes the maximum freight rate scale for the 1995-96 crop year at the previous year's level and lowers that scale by $10,000 for every mile of railway track abandoned.

Finally, Bill C-76 eliminates the Western Grain Transportation Act's costing review provisions. Under those provisions the railways' cost of moving grain was calculated every four years. This had the effect of lowering grain freight rates to reflect railway productivity gains, thereby passing those gains on to the farmer.

In a market-driven environment, companies respond to the pressures of competition by raising and lowering prices with changing market conditions. They also use productivity improvement, i.e., lower costs, as a means of cushioning the effects of competition. Bill C-76 does not allow railways to raise their prices, only to lower them below their costs. This largely removes railway price or freight rate differentiation as a direct response to either changing markets or as a means of encouraging greater grain movement from more efficient points.

The 1995-96 rate freeze also has the effect in advance of passing on to farmers much, or perhaps all, of the productivity savings the railways can generate over the next several years. This is in addition to the risk of another recosting at the end of the transition period.

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Such a mix of regulatory- and market-based principles is singularly inappropriate. It most certainly does not apply to other commodities moved by the railways, and it most definitely does not apply to our competitors for grain movement: trucks, seaway carriers, and U.S. railways.

We are concerned that, for the next five years at least, we might very well have created a grain regulatory environment that offers neither the responsiveness of a market-driven system nor the stability of the previous administratively driven WGTA regime.

Let me now address legislative uncertainty.

Bill C-76 calls for a review to be conducted in 1999 on the effects of the act ``on the efficiency of the grain transportation and handling system'' and on the sharing of efficiency gains as between shippers and railways.

The statutory review provisions of Bill C-76 also instruct the minister to determine whether or not repeal of the bill's transportation provisions will have a significant adverse impact on shippers. Finally, the minister is given authority to repeal those provisions by Order in Council.

Repeal would place grain transportation under the National Transportation Act, 1976, as is the case today for all other commodities moved by the railway. Failure to repeal the transportation provisions of Bill C-76 would make permanent what was intended to be a five-year transition regime.

Otherwise stated, the fundamental flaws of Bill C-76 may govern grain transportation for a very considerable period of time. Then again, they may do so only until the year 2000.

In one way or another, we will not know what the grain legislative environment will really be for another five years. That is a long time, given, in particular, the 2005 timeframe for realization of the vision for the Canadian grain and oilseed industry, which we endorse. That vision, developed by the industry under the auspices of Minister Goodale, states that Canada will have the world's most efficient, viable, and competitive production, transportation, handling, and marketing structures, capable of delivering to our customers what they want, when they want it, where they want it, in both raw and processed form.

To illustrate the uncertainty issues, we cannot help but wonder whether, as a result of the statutory review in 1999, there will be another railway recosting and rate rebasing of the cost-based maximum-freight-rate scale for grain movement.

In the face of such uncertainty, can we justify productivity-enhancing capital expenditures? Should we continue to contribute capital to the grain companies for construction of sidings at new or expanded grain elevator facilities? Should we or shouldn't we lower some freight rates in order to encourage greater efficiency? Or will our freight rates be lowered twice, once in response to markets and the shipper protection provisions of the National Transportation Act and then again by a recosting?

One thing is certain: the normal market risk of the railways' grain business has just been compounded by increased regulatory risk and inequity of regulation between Canadian railways and our competitors.

Let me now talk a little bit about the issues that are not addressed by Bill C-76.

In a market-driven environment, companies, in addition to differentiating their prices both up and down, also respond to competition by deploying assets more efficiently. Bill C-76 leaves to subsequent government initiatives, on which the railways are being consulted, vital asset management issues.

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The future of the government-owned hopper cars, which constitute the railways' base fleet for grain movement, is to be resolved by the end of this year. The same applies to the equally critical question of car allocation; for example, how railway cars get used.

Today car allocation is the responsibility of the Grain Transportation Agency and the Canadian Wheat Board, whose transportation role is also under review. We believe in the interests of more efficient grain transportation it is time to move to a direct shipper-railway, market-driven car allocation system.

Finally, the regime to govern railway rationalization will not be known until amendments to the National Transportation Act (1987) are completed, also later this year.

Until these vital issues are resolved, as railways we do not know what ability we will have to provide viable, customer-responsive, and cost-effective service in response to the more competitive environment engendered by Bill C-76. In other words, will we be provided with the tools to get the job done for farmers, or will we be saddled with restrictive regulations?

In conclusion, the Canadian grain transportation and handling system is confronted with major challenges arising from more competitive international grain markets. It must adapt and become more efficient, flexible, and customer responsive. Bill C-76 is part of the response to those challenges, but it is a flawed and in our view incomplete response. It perpetuates regulatory uncertainty. It will not encourage the realization of the grain industry vision developed under the auspices of Minister Goodale.

Improved market responsiveness, greater efficiency, and needed investment by all system participants will likely be slow in coming under this legislation. System improvement will be slowed accordingly. The maximum rate ceiling proposed by Bill C-76 is unprecedented and fundamentally incompatible with the pro-competitive aspects of this legislation, particularly the shipper-oriented provisions of the National Transportation Act (1987).

Until such time as current government consultations on the future of government car ownership, car allocation, the transportation role of the Canadian Wheat Board, and a new line rationalization regime are completed, it is impossible to know whether grain transportation regulation will produce a workable regime that integrates both price and service issues.

That said, Bill C-76 does nothing to encourage railways to be the constructive partners we want to be in a needed change process. Its message to railways is this: we expect you to compete, but we can't give you pricing freedom except to reduce your rates below your costs. We may or may not allow you to use your assets to encourage more efficient shipping practices, lower your costs, and differentiate your service from that of your competitors. Five years from now, we will see what kind of competitive trim you are in; what contributions you have made to improving the circumstances of the industry of which you are a part. Based on our assessment of your competitive trim at that time, we will then determine whether you should have more of the same regulatory diet or whether changing the diet to that of the National Transportation Act will have an adverse impact on your customers.

CP and CN want to be positive contributors to an efficient, flexible, and customer-responsive grain transportation system. Based on what is contained in Bill C-76 and the many related issues that have yet to be addressed, we are concerned we may not be allowed the tools to do the job. We can do the job in an administered system or a market-based system. Let's decide which one of those we want and then get on with building the future.

The Chairman: Thank you very much. We do appreciate the direct way you've laid out your position.

Mr. Chrétien.

[Translation]

Mr. Chrétien: I have only two short questions and then I will have to leave.

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First, I would like to ask about the rate ceiling. You stated that the ceiling, as determined by the government in Bill C-76, is not high enough. That doesn't surprise me. I expected no less.

Tell us, first of all, what would be the ideal ceiling as far as you're concerned?

Secondly, will the fact that you must cut $10,000 for a mile of track abandoned be sufficient to persuade you not to abandon branch lines? Obviously, if you are now loosing $11,000 per mile, you will save $1,000, but generally speaking, will this have the effect of stopping you from abandoning branch lines?

[English]

Mr. Conradi: When you start talking about rate ceilings, you have to ask yourself what is the logic underpinning and supporting them. The current provisions of the National Transportation Act - the shipper provisions I referred to, final-offer arbitration, competitive line rates, and so on - are the provisions that are intended to ensure that shippers who do not have a lot of competition are protected.

Those provisions, in our view, have provided shippers, since the National Transportation Act was reviewed and brought in, with the protection they were intended to have.

The obvious first answer to your question is that you don't really need a rate ceiling, because the natural functioning of competition, in addition to those shipper protection provisions already in place, is more than adequate to get the job done.

The second comment I have is that if you were going to look for some economic logic for a rate ceiling and you were concerned, as some shippers have certainly stated to this group, that railways are monopolists, then you should try to come forward and establish a rate ceiling based on some monopoly level of pricing.

I can assure you that it would be substantially greater than the WGTA cost-based rate ceiling, which reflects our costs and is intended as a minimum level of compensation to ensure the long-term viability of the grain transportation system.

[Translation]

Mr. Chrétien: Let me stop you there. You talk about fair competition. As you know, there aren't many national railways. I only know of two: CN and CP Rail.

I remember quite clearly that in the past, sanctions were imposed on the big sugar refineries because they had been in collusion to increase prices artificially. More recently, some parmaceutical chains have been found guilty, following a class action, of having secretly worked together to increase prices.

As far as I'm concerned, the government has the right to determine a rate ceiling. Of course, the ceiling is perhaps too low. If you can prove it, we might be able to increase it.

[English]

Mr. Conradi: I'm not sure what more I can say.

Ms Mielitz: I'll respond from a slightly different perspective.

If you look at the statistics of what has happened to railway revenues per tonne-mile since the National Transportation Act was implemented in 1987, there's a clear downward trend on the graph.

The additional rights and powers given to shippers in 1987 have had an effect.

In fact, the major issue that stimulated the whole review of the National Transportation Act and whether or not changes should be made was railway viability, because frankly, what was happening was that our revenues were going down faster than we could get our costs down. Both of us were experiencing significant losses in the early 1990s.

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The issue of whether or not we compete, or any issue of collusion, is not the critical factor here. In fact, as I alluded to in my remarks, if you were to look at the other bulk commodities out west, which are perhaps the best example, most comparable with grain, and actually relate them to shippers one could consider more captive than grain shippers, such as coal mines in northern British Columbia or sulphur producers in the foothills of the Alberta Rockies, where there are long distances between the two railways and major production that cannot easily move by truck to another railhead, rates in those areas have been more competitive than in the regulated grain industry.

So we would argue that the most flexible and effective system is one that has the right balance between shipper and carrier in terms of power but does not place artificial ceilings on rates and allows the marketplace to perform.

[Translation]

Mr. Chrétien: Will the $10,000 per mile be enough to stop you from abandoning less important lines?

[English]

Mr. Conradi: It is a disincentive. Normally what happens when you don't have those kinds of provisions - and that provision is unique to grain - is you simply get on with rationalizing the system and the benefits that accrue from such rationalization inevitably get shared with your shippers through the functioning of the marketplace. So this is an attempt somehow to force that sharing in a fashion that is certainly not an encouragement to rail line rationalization.

Ms Mielitz: I would add that the impact is not just on the railways. It is indeed on our shippers. Our shippers also have too many elevators, small ones dotted along all those lines, and it is very difficult for them to rationalize their networks if we are not rationalizing ours.

I would add to that a perspective that says from CN's point of view we do not see Draconian rationalization at all. We see a significant number of grain feeder lines left, lines that will have high volumes and be very healthy. There is a segment, though, that is uneconomic. Frankly, I believe we should be encouraged to take action to eliminate them and encourage high-throughput facilities with the grain companies on the stronger lines that are adjacent.

Mr. Conradi: I would just add to Ms Mielitz's comments. We do see the grain-dependent branch-line network for the most part as an integral and very important part of our business. They serve a very critical function, and that is as gathering systems for the supply of grain and the critical volumes we need to keep our business viable. Without a healthy branch-line network, we are not going to be a healthy railway.

Mrs. Cowling: Thank you for coming and making your presentation to the subcommittee. I attended a number of the transportation talk meetings a while back, so I certainly understand the mood of the farmers in my constituency and across the west.

Is it your intention as railways to improve your financial viability by increasing rates, or costs?

Ms Mielitz: I think the issue of railway viability, and the one that came to the fore on re-looking at the National Transportation Act, was one that was focused on giving us greater freedom to reduce costs. It was not focused on giving us greater freedom to raise rates. There is truly an issue in grain of a system that could become lower-cost with some rationalization. So I think there is an intent in the legislative change, and certainly in the mind of CN, that some rationalization needs to go on. But I do not believe we are focusing on increasing rates to improve our rail viability. I think what we're looking for is the flexibility to respond in the marketplace.

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If BNR trucks are raiding us, then we need to respond. But if we are in a circumstance where today's rates are the ceiling and the only thing we can do is respond downward, then we start to lose the flexibility to compete well. That's what's concerning us.

Mr. Conradi: I think the response to your question, Mrs. Cowling, is that we felt that a number of things have to happen if Canadian Pacific is going to become financially viable, and certainly our returns of recent years are not at the right level. I believe you've heard from some witnesses who say that.

First, we believe our input taxation levels have to come down to levels that more closely reflect what is happening to our competitors. I will distribute some material prepared by the Transportation Association of Canada that shows that our input taxes, as Canadian railways, as a percentage of our revenue, run generally around 14%. Those of American railways and Canadian and American trucking companies run around 8%.

So we are more heavily taxed, and in our view it flows from the false perception that somehow railways can just pass on their costs. Governments have been quite quick to move on taxing us in the belief that when it's a hidden cost, it too can somehow be just passed on to shippers.

So taxation certainly is an issue. We have long said that we must improve our labour situation, the type of work rules and compensation and security packages that we have with our workforce. Yesterday's rulings are a step in the right direction.

We also have been quite frank in saying that we must continue to improve our own productivity and lower our costs and invest in those types of measures.

Canadian Pacific, for example, has announced this year a program to purchase 80 new 4,400 locomotives, first power locomotives, at a cost of $200 million.

So that has to happen. But we have also said that there must be public policy changes that recognize and will assist railways in that direction. We are fearful that some of what we're seeing in Bill C-76 isn't going to allow us to get on with it.

Mrs. Cowling: I find that somewhat interesting, because you're very strong against the fact that we shouldn't have put maximum on those rates. But if in fact we're developing a sense of trust between the railways and the farmers, then it's difficult for me to understand, if in fact you aren't going to raise the rate, why you would be so concerned about the maximum rates.

Let me give you an example to which, coming from where you do, you might be able to relate.

One of the areas in our network that we had serious concern about was Peace River. When we saw the rates, particularly the prices, particularly for wheat, in the early 1990s, we started to wonder what was going to happen to that production.

When we looked ahead to the discussions, to the changing of WGTA and eliminating the subsidy, our question was, will those farmers still want to grow grain to move to market, or frankly, is their bottom line going to be so bad that they will either go out of production or invest in alternatives that have nothing to do with rail movement? We have a lot of grain that comes from the Peace River area.

Our question was, should we be looking at discounting the rate for wheat in the Peace River area to keep the farmer in production? If we're left in a world where the ceilings are today's rates, how do we look at adjusting for those kinds of circumstances and sharing in some of the risks?

I ask this because if you remember from transportation...[Inaudible - Editor]...at that time prices were awful. The farmers were saying that the railways don't share in any of these risks, that they just charge their rate every year, no matter what their net is or what the grain prices are.

We believe we should be more flexible both up and down as we need to be to respond to market conditions, but it can't be all one way, or we'll go out of business.

We're concerned that on one hand we're going to be constrained from doing the right thing to respond to serious situations because there's no quid pro quo for us.

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Mr. Conradi: First of all, what we're concerned about is that what was a regulated rate has been frozen for a year and then deemed to be a ceiling below which competition will apply. It's that combination we have a problem with.

We did not have difficulty of any great consequence with what was the old WGTA freight rate scale. We felt its contribution margins were not quite adequate, and we have had debates about that issue for some considerable time with our customers; that by and large, as a rate scale, it was capable of getting the job done. You will have noticed, if you participated in the earlier joint hearings of this committee with the transport committee, in essence we have been able to keep the rate level constant in real terms ever since the WGTA came in. That is an indication of the railways' improving productivity.

So it's not the rate scale per se that is a problem. The problem we have is that it took what was our costs, froze them for a year, and then deemed them to be a maximum below which competition would apply.

Mrs. Cowling: I have another question, and it's about grain movement. How much of your traffic is grain revenues?

Mr. Conradi: CP is about 25%. It varies from year to year, obviously, depending on market changes, but it's roughly 25%.

Ms Mielitz: Ours is 20%, and again the biggest factor is weather: is there a great crop out west or not?

Mrs. Cowling: Is grain your biggest customer?

Ms Mielitz: For us, no. Intermodal would be larger than grain.

Mr. Conradi: Grain is our single largest commodity.

Mrs. Cowling: And does this include the $800 billion subsidy under the WGTA?

Mr. Conradi: The revenues I spoke of, the 25%, included all our grain revenues, including what we received from the government.

Mrs. Cowling: So that's included in that. If that's true, then how much have you returned to the system because you have had a revenue side to it? How much have you contributed back into the system for those farmers? I'm saying upgrading branch lines, hopper cars, and adding to the fleet. What has been your contribution to help the system? We're looking at both sides of this.

Ms Mielitz: Our most recent direct contribution was that in July we start receiving delivery of 1,000 new hopper cars. They are a new higher-cubic car, bigger than we've ever had before, and they will enable us to carry much higher payloads. A thousand cars are about $75,000 to $80,000 a crack, so you can see the mathematics. That's $80 million we're spending this year.

In addition, we have continued, just as CP has, to invest in motive power; new engines to carry the grain to market. There has been a significant amount of investment over time. One side of it is investment. Our rail lines are generally in good shape. The older, smaller lines are not, but the question has been there for a very long time: how long they will survive. But the feeder lines that have high volumes are in good shape and our main lines are in good shape.

The other side of it is again, if you go back to those rates, they really haven't moved. Yet if you look at inflation over that period, it has gone up. We've managed to find the cost savings to offset that inflation.

Mr. Conradi: Another way of responding to your question is this. Certainly since the WGTA came in and grain was made a profitable business for the railways, we have basically got that job done for the farmers. We have done it at rate levels that are today, in real terms, exactly where they were ten years ago.

So the grain is moving. It is getting to market. It is being sold. And it is moving at rate levels essentially the same as they were ten years ago.

You don't do that without also, as Sandi has indicated, reinvesting in the business. And we have reinvested in the business. We have filed reports every year, as required by the Western Grain Transportation Act, indicating what the reinvestment levels were. In our case, we have purchased even more hopper cars in the last several years than Canadian National has.

So that is the real answer: we're getting the job done for farmers, and we're doing it today at the same levels, in real terms, as we were doing ten years ago.

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Mrs. Cowling: I find that somewhat contradictory, particularly when we're looking at a system of branch-line abandonment. I've asked what you have contributed to the branch lines. Has there been any contribution on your behalf to the branch-line system? I've asked this because we're taking a look at the system from the farmers' perspective, people I represent who are worried. They ship their grain out of Peace River, Swan River, or wherever it might be, and they set up a business there. I want to know how you contributed to that branch line to be sure it would be viable, because in my view we're looking at abandoning branch lines and somewhere someone hasn't kept up his side of the deal. Have you contributed to the branch lines?

Ms Mielitz: On your first question, regarding the branch lines, I think the light-density, unrehabilitated lines have always been in question and the step function that anybody required to upgrade those lines, given the volume that was on them.... I'll speak candidly: I don't think it would have been a good thing to put those kinds of costs into the cost base; it would not have made sense.

So there is a group of lines that we have submitted to the review for the fall, and I think most farmers on those lines expect some pretty bad news and we have to bite the bullet and go on with it.

Beyond that, there are a few other lines where the volumes are going down but they will not necessarily be in bad shape.

The question is where the investment of the future is going with the new rationalized network of elevators. Those are the lines we would like to be on. Where are the volumes going to be? Those are the lines we want to be on.

So what we're focusing on are the lines where the volumes are going down and farmers aren't delivering to them as much.

Again, I really stress that I think there has been an overreaction in the prairies to the degree to which there will be branch-line rationalization. There is no question that there will be some, but it is not going to be Draconian. We understand that people out there are really concerned.

Mr. Hoeppner: I appreciate meeting both of you again. As you said, you expected to be roasted, so I guess we could go ahead with it.

I was amazed by your opening statement, and it made me feel good when you projected opportunity for farmers for the next five years. Do you remember the 1970s, 1972, when we saw grain prices jump from $2 a bushel to $5 and $5.50? I was going to make a comparison. In 1972 I had a guideline whereby I liked to switch my machinery every five years, if it were possible. In 1972, I bought a new John Deere combine, the biggest one, a 22,000; it took 10,000 bushels of wheat. In 1978, I switched it; this cost $55,000, and it took about 10,000 bushels of wheat. In 1983, when we got the WGTA, I switched again; it took 30,000 bushels of wheat. Last year, in 1994, my boys switched - because I couldn't afford to switch in 1988 - and it took 50,000 bushels of wheat.

How can we continue to be your shippers if this doesn't stop? Something is wrong somewhere, and I'm just wondering how we can get around it.

One thing I would like to question you on is, what has the increase in taxes been to you from 1983, let's say, until 1993 or 1994?

Ms Mielitz: Let me respond to the first part. We both might have to go back and answer your question on the increase in taxes later, unless Axel has the answer. I don't have it.

You're absolutely right that the price-cost squeeze that farmers have been in since the 1970s has been very severe. What I was really trying to get at, I think, is that if you look at the last five or ten years, when it has been extremely tough, and you look ahead to the next five years, we really do have opportunities and I think even you have sensed more optimism and more options. Farmers are doing more things; they've started to chuck the basic grow-wheat-at-low-prices option and they're doing other things. When you look at supply-demand projections for prices, it doesn't matter whether you talk to Sask Wheat Pool, Cargill, or the Wheat Board, there's a stronger outlook ahead.

Mr. Hoeppner: But that was true in the 1970s, too.

Ms Mielitz: Yes.

I think what we're saying is it looks good and let's get on with it: let's develop those markets; let's invest; let's respond to the new customers; let's not stay with the wrong attitudes and feeling constrained, not taking risks, and not putting bucks into the system. That was the real message behind that.

.1300

Mr. Conradi: I think there's one fundamental that is different now from what prevailed in 1972. It is that there is a GATT agreement; and I think Canada and the United States are going to be the two big winners from GATT. What really destroyed grain prices subsequently to 1972 was the international subsidy wars. So there's a fundamental difference in the structural underpinnings of grain markets as a result of GATT.

Mr. Hoeppner: Our anti-combines legislation is so weak in Canada. Just take fertilizer over the last six months. They knew grain prices were starting to edge up, so fertilizer prices have gone up 50% to 60%. There has to be some kind of cap here, or something that regulates this, because no matter how much opportunity we have to diversify our markets, we're going to get nailed again.

I'd like to read you a little statement that comes from a legal counsel, and I want you to respond to it. This is to a shipper. This legal counsel had reviewed the National Transportation Act. It says very plainly that CN and CP Rail have effectively declined to compete with each other through CLRs, and as a result the provision is largely inoperative in Canada.

Ms Mielitz: I'll take a crack at that one.

Just because you don't see the routing go into place doesn't mean that in negotiations with the shipper it hasn't had significant effect. The threat of final-offer arbitration, the threat of a competitive line rate, has been something both of us have taken very seriously. Again, if you go back to the statistics on what's been happening to rail revenues, our rates haven't been increasing. They've been decreasing steadily since 1987.

Mr. Hoeppner: I'd like to follow that up with a comment on final-offer arbitration. He said that according to subsection 52(1) of the National Transportation Act of 1987, the railway has the ability, on a submission for final arbitration, to submit its final offer after having fully reviewed the shipper's final offer, a significant and unfair advantage in the final-offer arbitration process.

Ms Mielitz: Think about grain in this context. There's a legislative ceiling on the rate right at today's levels. We're now giving shippers the opportunity to bring forward final-offer arbitration cases. So either their rate or ours must be chosen...knowing they're protected by a ceiling at today's rates. If you think about the risk to us versus the risk to the shipper in that environment -

Mr. Hoeppner: Yes, but you're asking us to remove the cap, and that's what worries me. If you have the advantage, according to this statement, where are we ever going to have the competition?

The Chairman: Mr. Conradi, do you want in too?

Mr. Conradi: Yes, I do.

I think the National Transportation Act review commission has acknowledged exactly what Sandi has said. The primary use of both final-offer arbitration and CLRs has been in the negotiating room. Final-offer arbitration I'd like to refer to as a sort of hydrogen bomb over the negotiating table, because it forces both people to be reasonable. Therefore if you as a shipper want to take a railway to final-offer arbitration, you have to be a little worried about the provision you have just mentioned.

At the same time, if we are going to be reasonable, we're going to be worried about tabling a position in a negotiation that isn't ever going to lead to the situation, because we don't know either, until the last minute, what the shipper is going to put down on the table. So the fear of what numbers might be tabled in front of an arbitrator is shared equally and is equally powerful.

Mr. Hoeppner: This statement says, though, that you have the opportunity to view the shipper's offer, that the carrier has that kind of an advantage.

Mr. Conradi: Yes, but we don't know what that offer is going to be until very late in the game, and one hopes we will have been negotiating for some considerable time before we get to final-offer arbitration. So the fear of what it is that the shipper might table and of the fact that we then have a very limited period to respond to that is not inconsequential.

Mr. Hoeppner: I would like to be in your position, though, if I had to go to final arbitration.

Ms Mielitz: Let's come back to the essentials, though. Final-offer arbitration is really a scary thing to go into. When push comes to shove, neither the railway nor the shipper wants to go through it, and that's why you've seen so few of them.

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It acts effectively as pressure for the two of us to come to some agreement, because to have somebody flip a coin or decide, and potentially you'll be forced to take the other person's rate, puts substantial positive pressure on reaching conclusions.

Mr. Hoeppner: What I gather by this is that the arbitrator has to pick the one that's closest to the base.

Ms Mielitz: No, just one.

Mr. Hoeppner: Shouldn't it be that way?

Mr. Conradi: I personally think it should be scary and should scare both of us.

Ms Mielitz: Yes.

Mr. Conradi: And that's its principal value.

Quite frankly, I think that far more important than talking about the details of arbitration is the fact that in the overwhelming majority of cases what results in a deal is a normal commercial negotiation reflecting the workings of the marketplace, and that final offer is a last resort.

There's an awful lot of competition out there, and it's largely competition that is setting freight rates, not the fear of final arbitration or the possible use of competitive line rates. Those are fall-back provisions from the normal functioning of the marketplace, which by and large is getting the job done.

Mr. Hoeppner: Would you say, though, it's a good vehicle in case you can't get a settlement?

Mr. Conradi: I think that provision has worked as was originally intended.

You asked a question about taxes. We will get back to you on the growth, but it has been a growth industry.

Mr. Hoeppner: Yes, I know. That's why I asked.

Mr. Conradi: Today there's about $1.15 worth of fuel tax in the rate base for grain movement. If you go back to the beginnings of the WGTA, it was inconsequential. We can get you the numbers of how our fuel taxes have risen over the years, but they've definitely grown dramatically in the last ten years.

Mr. Hoeppner: Can you break that down by provinces?

Mr. Conradi: Yes, we can get you that.

Mr. Hoeppner: I know that Manitoba has given you a bit of a break on it -

Mr. Conradi: Yes, they have.

Mr. Hoeppner: - and we would just like to know.

This question might not be relevant, but I want you to clarify this statement:

The 1995-96 rate freeze has also the effect that in advance of passing on to farmers much or perhaps all of the productivity savings that the railways can generate over the next several years....

What are you really saying by that? Are you saying that maybe the WGTA gave you increases that were too great at times and that there wasn't enough scrutiny in the process of setting rates?

Mr. Conradi: No. What we are saying there is that our productivity performance over the last several years, as reflected in the fact that grain freight rates have essentially remained constant in real terms, has been about 1% to 1.5% a year, a steady productivity improvement.

If you look at the rate scale that the National Transportation Agency initially indicated would apply for 1995-96 - which was subsequently not applied, but the 1994-95 rate was applied - and if you take the differential between those two and multiply it by roughly 30 million tonnes in projected WGTA volumes, then you come up with about $60 million. You would get $60 million from railway productivity gains if these continued at a level of 1% to 1.5% per year.

The Chairman: I should imagine that's a...[Inaudible - Editor], Jake. We're running short.

Mr. Hoeppner: It had better be, or else.

The Chairman: The Reform Party is causing difficulty today again.

If I could ask a couple of questions in terms of the maximum rate ceiling, what keeps coming to us is, why can't you be competitive under these rates?

Sandi, in your response to a question you talked about possibly looking at discounting in the Peace River area, which would be your share of keeping them in the grain business there. My question before you said that was on manoeuvring without a maximum ceiling. You're saying that without a maximum ceiling you would have better flexibility.

Would that mean decreasing rates in one area in order to do as you suggest you might want to do in the Peace River area, or could it also mean leaving rates high in one area so as to compete with Burlington Northern, say, in another?

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Ms Mielitz: It's very hard to predict what the market forces, prices, and competition would be like over time. We are suggesting that to respond to competition we are now exposed to and we weren't before, or if prices go low, we want that business; we want to preserve it; and the pressure will be on us to decrease rates to do that.

On the other side, we do need some flexibility for quid pro quo. I see no reason why that needs to translate into one region of the prairies, or one commodity moved by farmers, being consistently picked on. I think you'll see changes over time as the marketplace unfolds.

I use the Peace River example because I think the farmers producing in the northern part of the prairies have been the ones most concerned. They're farthest from U.S. rail and therefore have the fewest competitive options. Believe you me, when they decide to return their land to forage and produce livestock and move meat, we won't get much action out of that. If we are not providing them with rail rates that give them a reasonable alternative of doing other than meat production, we're big losers.

So what I'm trying to suggest is we want the opportunity to respond; and yes, that will mean some flexibility on the up-side, but not outrageously. We don't view it as something that is going to end up persecuting one region or one commodity so no other....

The Chairman: Axel, is there anything you want to add?

Mr. Conradi: No. I think market responsiveness means you respond to changing markets; and that can be changes in your customer's marketplace, it can be changes to reflect modal competition, whether from the seaway, from truck, or from other railways. If you are allowed to adjust to changing markets, the rates are going to go both up and down.

Under the current ceiling, yes, of course you can compete. Anybody can lower rates; and with a ceiling of course you can always lower your rates. But our concerns are that if your only freedom is down and you don't have the ability to manage your assets because of all these unknown issues we talked about in our opening remarks here, our ability to manage the business and keep it viable is not going to allow us to compete.

Competition isn't only freight rates. Competition is also the ability to get the job done. That means your ability to use your assets and get a return on those assets so you can reinvest in cars, locomotives, and the quality of the service you provide.

The Chairman: I see this as the nub of the question, to a certain extent, in overall management and control of the system.

The example you used, the Peace River, is a valid one. But by the same token you could also lower rates in one area in order to try to attract business from Burlington Northern - increase them from another - and really in effect what you are doing yourself within your railway network is cross-subsidization of the system, is it not? Isn't it better to have that done in the public domain, from a general public perspective and general industry perspective, than from specifically a corporate perspective?

Ms Mielitz: Is it cross-subsidization or is it a matter of us trying to work with our shippers to reflect what different shippers can afford?

When you have industries that might have intense world-wide competition and extremely low margins, our freight rates are generally lower than industry's. I'll give you a great example: chemicals moving where there's an issue of highly hazardous products. There are large profit margins, but yes, they need to move by rail and hazardous issues relate to them.

I would say what you're trying to do is work with the shipper to make him competitive in his market. If there are, in the case of grain, certain grains where the profit margins are much higher, and other areas or grains where people are going out of business, we should be responding to that rather than trying to have the same rate across the board, no matter what the circumstances, so somebody falls off the table while somebody else is doing extremely well. I think we should be flexible.

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The Chairman: That sounds all well and good when you're talking from the interest of the farmer, but it can be utilized in another way in the interest of your business. Somebody said earlier - I don't know which one it was - that where the elevators are going to be is of concern to you. That's one of the concerns we've talked about as a committee, in that obviously there is no overall road map of where we're going, but maybe there should be.

In terms of your own interests, with freight rate flexibility and no maximum rates you could engineer the system with freight rates basically to designate which branch lines would close and which lines would attract business. Could you not? That's the concern from the public side.

Ms Mielitz: Axel, do you want to take a crack at this?

Mr. Conradi: A lot of things are going on in the marketplace. It's not all rail, and I think you will see much of the same thing happening in terms of what shape the network might take. If we did nothing, then you would see grain companies making elevator decisions and larger facilities, lower-cost facilities, who are going to end up shaping the system in the same fashion as we are likely to do, because ultimately what's going to determine where the grain network will go is which areas are good grain-growing areas and produce volumes that can justify a healthy system and also justify a large high-throughput elevator. So the system is naturally going to evolve in that direction anyway.

The other issue is that if you look at the marketplace, railways are in essence in many different businesses. It's not unlike operating a department store. There are some lines of business where you're getting a better return than in others and where the attractiveness and the value of your service to the customer are different.

What we're saying is that we believe the functioning of that marketplace is the most efficient means to determine rates and the movement of product, because it is market responsive, rather than trying to do that through regulation.

I guess the key message in our submission here is that what we're concerned about in terms of the environment we're dealing with right now is that it will be neither of those, that we fear that quite possibly it's going to give us the worst of both worlds.

Ms Mielitz: I'd like to pick up on the issue of whether the railways can play God in terms of what network is left. I'll offer a couple of thoughts.

One goes back to the issue of cross-subsidization. If you have the same rate everywhere for everybody, no matter what the underlying costs are, then frankly, I think you have cross-subsidization of inefficiency. That's a consideration on the other side of this that really is serious.

The other side is that we need this business. There's an assumption here that the railways really don't care and they just push farmers out of business. We need that business. When we look at rationalizing lines, our first question is, if that line was gone or that elevator was gone, where is that grain going to go? The first question is, is it going to go anywhere or is it simply going to go locally to a feed mill or into livestock or into processing?

The second question is, if the farmer is going from a three-tonne truck and now he's going either to truck commercially or to buy a larger rig himself, once he gets on the highway with that he could go a lot farther. Whether he ends up going 25 miles to the next CN point or 30 miles to the next CP point, it opens up a lot more competition in the system, and this is something we're very conscious of. The farmer is not totally powerless here. He has options that he can exercise, and we're very conscious of it.

The Chairman: But at the moment his option seems to be to.... You're going to get the business, unless it goes for feed or unless it goes south. All you need to do is to look at the road map of the west to see that the farmers' options are limited and the volume will be down; probably with you, in any event.

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About tracking that business, short lines are an issue, and it's one we're looking at. Are you prepared to consider incentive rates at the interchange point on a short line, as you do for elevator companies? It amounts to the same thing, does it not?

Mr. Conradi: I don't think so. As you saw from our vision, which Sandi talked about, as we see the system evolving, the real efficiency you're going to get is going to be in the interface between railways and high through-put elevator facilities. That really is, in our view, where the system needs to evolve.

On the question of short lines, I think there is a room for short lines in the grain system, but what we need is short lines that are going to be competitive. Essentially, as gatherers of grain, short lines are going to be competing with trucks. A lot of work has been done, not by the railways but by the Senior Grain Transportation Committee, that suggests in most instances the most efficient feeder system is going to be track to large, high through-put elevators.

The Chairman: I want to let you in here, Marlene, but I have to deal with this one because it's one problem we may have with the elevator companies themselves.

In whose interests are they operating in closing down some lines that have potential for short lines? If you're sitting in the corporate boardroom of one of the pools, grain companies, then certainly from their perspective, if they are going to build a high through-put elevator on a main line, they don't want a short line operating that is drawing grain through the smaller elevators.

We have a lot of competing interests here. The primary producer...we have to be concerned about that particular interest as well. As for this committee, in fairness, the farmers are not exactly the biggest voice on the GTA committee or on the industry committee at the moment.

Sorry, Sandi.

Ms Mielitz: It's quite all right.

I just want to reiterate that we do believe there's a role for short lines, but we are far from sure short lines should be subsidized. For example, the Central Western Railway, which started life operating a line we wanted to abandon...and they've done a good job operating. Don't get me wrong; they've provided excellent service to the elevators on that network. But we provide them with a division of $1.50 a tonne, which is their pro rata for the mileage they move in total of the miles to the west coast, which is the closest port for them. In addition, they receive an $8.50 per tonne subsidy.

The total freight rate is in the order of $18 to $19. Does it make sense for a movement of 60 miles to us - and we're taking it the rest of the way to the west coast - to be paying that order of magnitude of subsidy? I think we would say, no, draw the line; let's look for the least-cost system here. In many cases it may be short lines, but the short lines have to have enough volume on them to make it on their own and make a bottom line. We see those kinds of short lines potentially being partners.

I'll add one other thought with that. We have been concerned as well about our own cost structures and our labour agreements and why we are so expensive on those lines. One of the things we've managed to do in northern Quebec is to take our entire structure in northern Quebec and negotiate with our rail unions an internal short line where we have significantly changed the work rules, reduced our costs, and made us, operating the network, equally as efficient as the short lines. So with external partners and internal partners there's a future to do the right thing here.

Mr. Hoeppner: On the short lines, I'm astounded here to hear comments that they get an $8 a tonne subsidy plus $1.50 from the railways. That's $9.50. We heard testimony that was their total cost. They must surely get something from the farmers.

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Ms Mielitz: All I am saying is that we give them a division that's equal to their prorated mileage plus the amount that the government has been giving them. That is now built back into the cost base. It's equal to $8.50 a tonne.

Mr. Hoeppner: Have we a vote coming up, Mr. Chairman?

The Chairman: We are all right until 1:35 p.m. We have to leave at 1:30 p.m.

Mr. Hoeppner: I suggest we ignore that.

The Chairman: It wouldn't bother me a bit.

Mrs. Cowling: I have a very brief question with respect to your proposal on CN. You indicate in your proposal that you are looking at investments in everything from...[Inaudible - Editor]...and oats processing. In my view, we are now getting ourselves separated from delivering grain. We are also starting to get into the part of looking after the production and being really involved in it. That frightens me somewhat, because if we take a look at history, that was one of the situations we faced many years go and that's what encouraged farmers to bring forward cooperatives and the pools and the UGGs so they wouldn't be left at the whim of the railways.

Because our time is short, I'm not going to be able to wait for the answer to this, because it's going to take too long to answer. But I want to know what your vision is. If in fact we get into a wholly deregulated regime, do you intend to take over the complete industry of moving grain, and storing and cleaning it as well? For sure, then, I think there is a problem as to where we are going.

Ms Mielitz: I should have been clear in what I said. We're working with companies who want to locate on our lines, finding sites for them. At the same time, in certain circumstances we will contribute the track into their plant, but that's all. We're not investing in the industry itself. We're simply working with them to locate on rail and helping them with the rail costs.

Mrs. Cowling: Great.

The Chairman: In the first remarks, Sandi, you said:

Shippers and carriers should be permitted to negotiate car allocation using market tools such as a bid system for a portion of the fleet.

Can you explain that?

Ms Mielitz: Let's get at the crux of the issue. The crux of the issue comes when you have a peak movement. What we've been seeing as the non-board grains have been increasing in their proportion in the prairies. Immediately post-harvest, we have been seeing that more and more grain wants to move to market as fast as it gets into the farmers' bins. So you end up with, for example, in the forecasts for the coming year or last year, 60% to 70% of the grain wanting to move in the first three to four months after harvest.

In a situation such as this, I don't think it makes sense to anybody that we should have a railcar fleet whereby you can move all the grain that's produced in the first four to five months of the crop year and then the railcars sit there for the other seven months. So when you have that kind of high demand, you need some way of determining who gets a car and who doesn't. That's tough.

In the past we've found with the GTA that their allocation was based on sales, so if you could prove you had a sale, then you could get a car. When cars were in short supply, everybody ran out to get sales to show that they had more sales than the next guy in order to try to get cars, and in fact the situation got worse.

Then they decided that was not a good way to ration in peaks and they said, ``We'll do it on the basis of history. Whatever you had as an average in the past five years as a shipper is what you'll get next year''. When you have such a changing marketplace as we do right now, with farmers growing vastly different grain than they did before, history is not a great guide to who is making the sale on the new growing crop to the new growing market.

Our proposal has been that you would take a portion of the cars only. For example, we have a fleet of 14,000 to 15,000 cars in those peak periods. You might take 2,000 or 1,000 of those cars, and at the margin allow for an option for those cars. So if a shipper has the choice that he can either get a car under the normal allocation system, whether it's based on sales or history or whatever the formula is...or if he's really got a sale where he pays terrible penalties if he doesn't get a car, where the demurrage is very bad or he is going to lose a long-term customer he's trying to cultivate, then he can actually bid in an auction to secure a guaranteed car.

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We are quite willing to commit that we would have a base-level fleet available for that marketplace. In other words, we are not trying to do this so we can then take the fleet down to something very small and force everybody to have very high prices on an auction. What we are trying to do is to figure out the fairest way to dole out what is a scarce commodity. I think in any system you will have those kinds of peaks.

Sorry. It was a long answer.

The Chairman: That's fine. Mr. Hoeppner and I will balance each other off if we're not there in time.

Would that system be -

Mr. Hoeppner: This is more important than the vote, as far as I'm concerned, Mr. Chairman. But that's up to you.

The Chairman: Would that bid system be similar, then, to the certificate of transportation of Burlington Northern and the one operated by the CP Soo Line?

Mr. Conradi: That's essentially the type of system we are talking about.

The Chairman: Alan Bergman, from the North Dakota Farmers Union, talked about this last night, although he couldn't do it at committee, and he had some concerns about it.

One thing I didn't understand was whether the bid price is above the transportation price. How does that work?

Mr. Conradi: The system we operate in the United States allows for the bid price to be both below and above the prevailing tariff rate. So it works both up and down.

The Chairman: About making the best utilization of the feed fleet, according to the Canadian Wheat Board advisory committee evidence, the Canadian Wheat Board grains have substantially better turnarounds than do the open-market and on-board grains. Is that true, and if so, why?

Ms Mielitz: I'll start to respond and then Axel can join in.

Generally what you find is the grain that has the largest volume moving through the system tends to move through the most efficiently. So certainly the turnarounds are better on wheat, for example, than they are on specialty crops.

The other issue is that often on the smaller grains there's only one vessel you have to time that movement to, so fewer options are available for that particular shipment being rifled through the system to make a specific vessel. The Wheat Board can look at the volume of no. 1 hard red spring moving to Vancouver, and if one vessel falls back they can substitute another vessel and keep going. So I would say the major reason for that is just the sheer volume, which gives you more flexibility to operate the system.

Mr. Conradi: I would agree with that. If you look at canola, for example, no. 1 canola, which moves to Vancouver in very substantial volumes and is poolable, as are the Wheat Board grains at the port - the turn times for that commodity, which is also a high-volume commodity, are right up there with the board grain.

So the two key factors are sheer volume and whether or not they are poolable at the port.

Mr. Hoeppner: As you know, I've been quite vocal about the backtracking. This committee said no more backtracking. It's still going on, and I wish I knew who the culprits were. I think I have a good idea.

What is there to stop this situation from arising again if we as farmers do find out we can truck into the U.S. or we can truck somewhere else? If you're short of tonnage, why couldn't you get into bed with the Wheat Board or with the grain companies and make some extra miles by backtracking?

Ms Mielitz: Backtracking will basically disappear on August 1. The fundamental reason why it has occurred is that when the shipper was paying 50% or less of the total freight rate, it ended up being so cheap to go to Thunder Bay, relative to a normal freight rate, that the cheapest way for the shipper to move the grain was to pay half the rate to Thunder Bay and then move it south from there. But as I say, I think the issue is largely dead.

Mr. Hoeppner: Couldn't you have stopped that?

Ms Mielitz: Only by offering rates that were less than 50% of the normal freight rate.

Mr. Conradi: The shipper tells you where to take the product. I can tell you if we had tried to stop that, Mr. Hoeppner, you would have had us in front of this committee in no time flat.

I basically agree with Sandi that with the subsidy gone, backtracking is toast. It's not going to happen.

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Mr. Hoeppner: Yes, but we have lost tremendous sales in canola. You could have picked up the canola business. You could have picked up the barley business, because ships have been sitting for as long as a month waiting for barley, which is the highest-priced business.

Ms Mielitz: We fought in 1983 and 1984, when the WGTA first came in, to be allowed to make that movement direct to keep the costs out of the system and to keep the car cycles down. We asked the NTA if we could not be allowed to do that. We said that we would keep the records on what of that grain is going down that way that qualifies for the subsidy into Thunder Bay so the subsidies could be paid appropriately. We were denied that by the National Transportation Agency.

Frankly, that was the common-sense answer to that problem.

The Chairman: The Auditor General has indicated in his review of the NTA that there wasn't a lot of common sense at the NTA. I wish we'd had that information a week ago.

Mr. Hoeppner: Well, someone wants you to go in the other direction. That's what I'm saying. Who's in - [Inaudible - Editor]?

Mr. Conradi: Our customers, because it was in their economic best interest to move the grain in that way, because it cost them less to do it in that way than to go because of the subsidy.

The Chairman: The system allowed them to do it. I think you are aware that we made a recommendation over a year ago that it be disallowed, but it didn't happen.

Just two quick points. There's some concern about how the movement of grain through the U.S. will draw down Canadian volumes. I think the Andrew Elliott study said this. It's up to 10 million tonnes. That volume going to the U.S. will, in fact, have an impact on decreasing our efficiencies within Canada.

What's your response to that? Are you concerned about volumes moving south, and what kind of impact will it have on the system?

Secondly, a concern has been expressed to us by quite a number of groups, actually, that you've put only something like 500 miles between the two railways into the branch-line abandonment committee.

Mr. Conradi: We've done a great deal of work, as have at least two of our customers with whom we've actually shared our information, on first looking at whether grain might go out theSt. Lawrence or down the U.S. river system.

It's interesting. Both our customers and ourselves reached the same conclusions on this, and that is that the St. Lawrence gateway should remain competitive to most markets that are today served off the St. Lawrence: basically, the North Atlantic, Mediterranean, and Persian Gulf markets.

I think you will see some flow down through the U.S. river system to eastern Mexico, Colombia, Venezuela, the Caribbean. I think you will see just the economics of routings, including ocean freight, result in some grain, but not overwhelming volumes, going out the U.S. river system. Our estimates suggest maybe half a million tonnes a year.

Looking west, at whether grain is going to go out Vancouver or out through Portland and Seattle, the key issue there, in our view, is port capacity and largely grain elevator capacity on the Canadian west coast. We are quite concerned that we are very close to capacity and for much of the year are at capacity.

There are a few things we can do, and we're as committed as anybody, because we want to take grain all the way to Vancouver. It's in our best economic interests to do that. We're certainly committed to working with our customers to increase the capacity through Vancouver, in particular. But we are concerned that their absence of adequate capacity could force the grain out through Portland and Seattle.

Ms Mielitz: We would have generally the same analysis.

I will just flag that, right now, if you look at the competitiveness of the Mississippi River system versus the seaway, the seaway generally looks very strong. But there are two factors there. One is the U.S.-Canada exchange rate. If we start to see a stronger Canadian dollar, then that will start to favour that southern route.

The other is that movements of grain in the States are also very strong. The export outlook is good. Therefore, barge rates on the Mississippi are high.

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But we would have the same conclusion as Axel, that it's the grain destined for immediately south of the gulf which, if you had those other two conditions slightly changed, might go down the Mississippi River.

The Chairman: What about the limited miles of track for abandonment?

Ms Mielitz: I think a major concern we had about that process was that the decision was taken right out front that we should look at not only the railway costs and the elevator costs but also the road impact costs. In fact, the whole study or review is designed to be able to take that element of the road impact costs into the equation as well.

We are not objecting to having the road impact costs as part of the equation. What did concern us very significantly, though, was that nobody had determined how road impact costs were going to be calculated and there are precedents for a wide range of different ways, with very different outcomes for road impact. We were very concerned that we would put in branch lines that would factor in a very high road impact cost; that the determination of the committee would be that those lines could not leave the system. There's nothing we can do to compensate for road impact issues, so we would be left stuck with lines we didn't know what to do with, not having the equation to subsidize highways or roads in the provinces.

So we have brought that forward. They are now working on methodology. We'll see what happens from there.

The Chairman: So it may be a problem of process.

Mr. Conradi: Yes. Just how road impact might be dealt with could have a significant bearing on the final results, and that is a concern.

I should add that while we don't know what the new rationalization rules might look like under the National Transportation Act, I think pretty much everyone is aware there is an attempt here to simplify and not come up with a process that requires a huge amount of number-crunching and analysis, subject to assumptions here, there, and everywhere.

There was some feeling to the effect of, by all means, let's put some lines forward to accommodate that process. In CP's case we put forward all our boxcar and light steel lines into that process. In our view, that is more than enough to deal with that process itself; to serve the needs of the Robson process.

But the feeling is we hope - and we won't know for a while - at the end of the day we're going to come up with some simplified means of dealing with line rationalization, so why get into having a whole lot more lines being subjected to very intense scrutiny and analysis when we hope we are going to be dealing with something a good deal simpler in the future?

Mr. Hoeppner: I'm just wondering about branch lines. I have a cost of grain depending on branch lines from CP in 1992, and you probably could tell me why this is. I see the Empress-Bassano route costs about $1.65 per bushel per mile to move. The Lloydminster-Wilkie route is 104 miles, much the same distance, and you have $0.31. It is five, almost six times the cost in one of the branch lines as compared with the other for the same distance.

Mr. Conradi: To get to a specific line-by-line comparison you'd have to get into real detail. But the single biggest factor in the change is cost; volumes on the line, more than anything else.

You're probably looking at our branch line ranking map. If you don't have one, I have one here in my briefcase I would be happy to leave with you. We show it at all the farm shows we participate in. It's very much a public document and it does show volumes by the lines as well.

In essence, if you look at the relationship there between the cost per tonne of moving the grain and the volumes on the line, there's a very close relationship between them. It's the single largest determining factor.

Mr. Hoeppner: I was just looking at the grain areas. I know the areas. They're pretty good grain-producing areas. So I thought the volumes would be much the same.

The other thing I'm looking at is the Carman-Elm Creek line. That's only about 15 miles. The cost is 4c. It is also a very highly productive area.

Mr. Conradi: Again, it's the volumes actually on the line that are critical.

Mr. Hoeppner: So you're telling me people are trucking the grain away from those areas to other elevator systems?

Mr. Conradi: I'd have to look at the details on each individual line before I could really comment and tell you -

Mr. Hoeppner: There is an elevator at Elm Creek.

Mr. Conradi: Yes, Elm Creek is a very good high through-put facility.

Are you looking at our branch-line ranking now? Is that where you -

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Mr. Hoeppner: This says, ``1992 CP cost of grain dependent branch lines''.

The Chairman: We would appreciate getting a copy of that.

Mr. Conradi: I'll leave it with you.

Mr. Hoeppner: It would help us if you could give us how these are costed - a rationalization of elevators, short lines, and so on. That's important to us.

Ms Mielitz: It really is low volume, primarily. Think about going out with a train and picking up 50 cars and bringing it back and you've had the cost of the locomotive and the train crew and the fuel versus that same train going out and picking up 80, 90, or 100 cars. The cost per tonne really does change when you have the larger volume. So that is one of the major factors on that.

Mr. Hoeppner: One thing that we haven't dealt with I have to put to you. In southern Manitoba we call it ``the sleepy R''. We see so much unproductivity because of labour. Where is that going to go? I see trains sitting for days sometimes, idling, waiting for the next crew.

Ms Mielitz: We sometimes wish that you farmers had blindfolds on and didn't watch so closely.

Mr. Hoeppner: We watch - and I'll tell you that I, as an MP, get that information too.

Mr. Conradi: The reference was to ``the sleepy R'', so I think I'd better respond, Sandi.

Some of our employees don't say ``sleepy R''; they say ``cheapy R'' because of the wages they profess we pay.

I don't think there's any question we're going to get better. Recognizing that on CP alone we're talking about 250,000 carloads of grain a year, that's an awful lot of carloads. So you're always going to have some stories of cars that sit around for a period of time.

How are we trying to get around some of that? There are a number of initiatives and I know many of them are the same kinds of things as the CN is doing. Right now, for example, we have got over 24 lines that we're running on what we call 8-hour block loading, where you let the elevators on that line know a week ahead of time that you're coming in on Tuesday at such-and-such a time and dropping the empty cars off and will be coming back ten hours later to pick them up. We've dramatically increased the number of lines on which we are providing that kind of service, and we're investing right now in some computer software that will allow us to get those numbers up even higher.

That kind of an 8-hour block service works on most lines. It basically works on lines where you already have good high volume. So there will always be a few lines where you don't have the same volume where the most sensible service to the elevators and the farmers in that area is going to be dropping the cars off and coming back several days later. There's going to be a mix, but it's going to change much more in favour of the fast turn-around time.

Mr. Hoeppner: From talking to the elevator agents, I gather the problem is the labour contracts. Sometimes a crew has to be taxied 120 miles to come back to the train because the other crew has run its 8 hours, and they're taxied back. That, to me, is a big problem.

Ms Mielitz: I don't think we should say there's no problem and I don't think that's what Axel was saying. It's something we really have to work at over time. To go from the traditional labour-management situation that we have now to something where all employees, labour and management, are working as a team is a tough thing in the railway industry.

The decision that was made yesterday will help us a fair amount in the kind of flexibility that we need in order to use crews better.

For example, one of the things we have managed to negotiate is that train crews can now go much farther before they have to stop and change off. We'll be able to run from Saskatoon to Edmonton with one crew, rather than stopping off, that kind of thing. We're fighting hard. We're making progress. It isn't easy and it isn't going to be fast. There's no easy answer to that one.

Mr. Conradi: I might add that our grain industry customers have many of the same problems with respect to labour. It is not easy to turn around a situation that has been with you for decades -

The Chairman: It's going to take willingness on all sides.

Mr. Conradi: Yes.

The Chairman: On behalf of the committee, I'd like to thank you both for what I think was a fairly informative and direct discussion, and also for your indulgence in coming today. I appreciate that very much.

This meeting stands adjourned.