Thank you very much, and good morning.
Mr. Chairman, I want to thank committee members for this opportunity to address you concerning the hopper car fleet, a topic of particular importance to the Western Canadian grain industry.
First, I'll provide you with some historical context, in order to explain the role that hopper cars play in the transportation system. Then, I'll attempt to answer questions that have been raised by the parties concerned since the government's announcement on May 4, 2006.
Mr. Chair, I would like to give you a very brief overview, because I think it helps to shape what has happened over the last few years. The government acquired the grain hopper cars in the 1970s and 1980s when the Crow rates were in effect. The Crow rates were maximum rates for grain movements that dated back to 1897. The government implemented the hopper car acquisition program because the Crow rates had become such that the railways could not recover their costs. In other words, there was no incentive for the railways to invest in infrastructure or equipment for grain transportation.
This issue was addressed with the passage of the Western Grain Transportation Act in 1984, which established compensatory, cost-based freight rates. The introduction of compensatory freight rates eliminated the need for government involvement in the acquisition of grain cars. By 1996 the government moved further toward a more deregulated system by repealing the Western Grain Transportation Act and incorporating the remaining regulations governing grain transportation in what became the Canada Transportation Act. In the 1996 budget the government announced its intention to dispose of the 12,400 cars that it owned.
However, the transaction was delayed for a number of reasons, including a crisis in grain transportation in the late nineties that led to the extensive reviews of the grain handling and transportation system conducted by, first, the late Chief Justice Estey and subsequently by Mr. Arthur Kroeger, a former deputy minister of transport. As a result of these reviews, in 2000 the Parliament of Canada replaced the regulated maximum rates with a grain revenue cap through the passage of the grain reforms contained in the Canada Transportation Act.
Since 2000, Mr. Chair, the railways have had a cap on the revenue that they are allowed to earn from the transportation of western Canadian grain for export. Within that cap they have the flexibility to offer better rates for larger unit trains. This approach was intended to promote improvements in grain transportation by encouraging larger trains moving to port position and in turn improving the speed with which grain moved to market. However, it should be noted that the introduction of the revenue caps included an 18% reduction in the revenues that the railways would have otherwise earned under the former WGTA.
And as you all know, on May 4 of this year the government announced that to maximize benefits for farmers and taxpayers, it would retain ownership of the hopper cars, rather than transfer the cars to the Farmer Rail Car Coalition, or FRCC.
Within that context, I would like to address three key issues that have been brought to the attention of this committee: namely, that the railways have overcharged for maintenance, that the replacement of the fleet has not been addressed, and that there are concerns regarding the future management of the cars.
As you are aware, imbedded in the revenue cap is an amount for maintenance of the hopper car fleet. The amount is based on the costs associated with maintenance of the hopper cars contained in the last quadrennial costing review, performed under the WGTA back in 1992. Since 1992 the railways have made substantial productivity gains in most areas of their operations, including maintenance.
The work once largely performed in railway maintenance shops by large work crews is today performed by a one- or two-person crew in a mobile workshop. Consequently, a gap has developed between what was imbedded in the revenue cap and the actual cost of performing the maintenance work. Some have referred to this gap as evidence that the railways have been “overcharging” shippers for regulated grain movements. Mr. Chair, the revenue caps are monitored by the Canadian Transportation Agency to assure compliance by the railways. The agency audits the railways' revenues from regulated grain movements to determine that they are within the eligible limits. The railways' actual revenues have been within these eligible caps, except that in each of the last two years one of the railways exceeded the revenue cap by a very small amount.
In accordance with the regulations, the railways repaid the excess amounts plus a penalty to the Western Grains Research Foundation. This was all laid out during the 2000 reforms and this is an established procedure.
On May 4 of this year the government introduced Bill C-11 in the House of Commons. It proposes amendments to the Canada Transportation Act, so that the agency can more closely align the costs and the revenue caps with the actual costs of maintaining the hopper cars in revenue service. Until the bill is passed, however, it will not be possible for the revenue cap to be adjusted to better reflect the actual costs of maintenance.
Turning to the replacement of the hopper car fleet, some of the hopper cars are indeed reaching the end of their economic and useful lives. However, the cars were bought over a period of about 25 years, and the majority of cars still have many years of useful life in grain service. A small portion of the fleet will reach the end of its useful life over the next few years.
Mr. Chair, it's important to note that the railways have a statutory obligation to provide an adequate supply of cars under the level-of-service provisions of the Canada Transportation Act. As I noted earlier, the government purchased the hopper cars at a time when the railways' revenues were not compensatory, and this limited their ability to invest in the cars. As we are all well aware, today the railways are on a firmer financial footing and can fulfill this statutory obligation. The railways have already begun replacing some of their grain fleet with larger and more modern hopper cars. Since the railways are responsible for replacing the cars, they are in the best position to determine when and how the federal fleet should be replaced, based on future economic conditions.
It should also be noted that the government originally purchased around 13,100 cars. The fleet now comprises about 12,100 cars, and the cars that have been taken out of service have been replaced by the railways, not by the government. Further, the federal cars represent roughly half of the railways' grain cars. As such, shippers already rely on the railways for a significant portion of the overall grain fleet. The railways are also already making use of high-capacity cars, and it is expected that this trend will continue. With larger capacity cars, fewer cars will be needed in the future than has been the case in the past.
Over the coming months, we at Transport Canada will be negotiating new operating agreements with the railways. At the same time, Transport Canada will also negotiate a refurbishment program with them. The refurbishment work on the hopper cars will include, among other things, appropriate attention to the gates and hatches that may need repair, as well as to other items that had been negotiated with the FRCC.
Going forward, we will also be implementing monitoring systems to ensure that the refurbishment work is carried out, and that maintenance is performed to the appropriate standards, to keep the federal hopper cars in good and safe operating condition. With these measures, we are confident that grain producers will continue to benefit for many years to come from the government's decision to retain the federal fleet of hopper cars.
That concludes my remarks.
Thank you, Mr. Chairman.