Ottawa has tabled long-awaited freight service regulations that include hefty fines in a move to balance the playing field between the country’s largest railways and shippers who have complained of poor service.
Amendments to the Canada Transportation Act were announced Tuesday in Winnipeg by Transport Minister Denis Lebel and Agriculture Minister Gerry Ritz.
The changes follow a five-year review of service provided to shippers such as grain handlers, miners and manufacturers by federally regulated railways such as Canadian National Railway (TSX:CNR) and Canadian Pacific Railway (TSX:CP).
Lebel said legislation gives shippers the right to an arbitrated service agreement if negotiations with the railway fail.
“We have introduced legislation that will enhance the effectiveness, efficiency and reliability of Canada’s rail system,” the minister told reporters.
“The railway-shipper relationship is vital to Canada’s economy as a whole because when shippers can move more volume this means more exports, more revenue and, for sure, more Canadian jobs,” Label said.
The Fair Rail Freight Service Act bill comes after shippers and the railways spent four months unsuccessfully trying to hammer out an agreement.
Shippers wanted the railways to pay penalties for poor service, while the railways have decried the idea of legislated rules as a costly outcome that would undermine their efficiency.
The amendments require railways to provide service contracts within 30 days of a shipper’s request. If terms cannot be reached through negotiations, the shipper can seek arbitration from the Canadian Transportation Agency.
The interest-based arbitration process will have a 45-day timeline but can be extended for up to 20 days. The agency will provide arbitrators for two years before private arbitrators are appointed with costs being split evenly between the two parties.
The arbitrator’s decision would be binding and not subject to appeal. The imposed contract would be akin to a confidential contract and have a one-year term, or longer if both parties agree.
Railways face administrative penalties of up to $100,000 for each violation of an arbitrated service level agreement. This is in addition to other existing remedies in the act.
The legislation requires approval by the House of Commons and Senate and it is not clear when the law might receive royal assent.
The government launched a review in 2008 to address issues by shippers with Canada’s rail freight service. A preliminary report found overall rail freight service was inadequate, in part because of a market power imbalance between the country’s two large railways and hundreds of shippers.
CN president Claude Mongeau denounced the legislation Tuesday, saying it puts at risk innovation and supply chain collaboration.
He added there is no evidence of systematic rail service performance problems in Canada that warrants federal government intervention.
“The objective fact is that Canada has a world-class rail system, one known internationally for efficiency and reliability — a key asset for a trading nation like Canada — and that reflects a well-functioning market for rail services,” he said in a news release.
Mongeau acknowledged that the review process was a driving factor in spurring further rail service improvements at Canada’s largest railway.
He said CN has already entered service agreements with many customers and said the improved service is inconsistent with the government’s agenda to foster economic prosperity.
“I also believe the legislation sends mixed signals to customers and suppliers around the world about the government’s approach to commercial markets in Canada,” Mongeau said.
Shippers acknowledge that service by CN and CP has improved but they fear such changes will dissipate without legislative teeth to force continued positive action.
On the Toronto Stock Exchange, CN’s shares were up 30 cents at $91.03 at midday, while CP’s shared were 47 cents higher at $100.11.