Rail Service Complaint Filed Against CN

WINNIPEG - Mar 8/07 - SNS - Alberta's Great Northern Grain (GNG) filed a level-of-service complaint against the Canadian National Railway (CN) with the Canadian Transportation Agency.

The action is widely supported by smaller western Canadian grain companies and the Canadian Wheat Board (CWB). Along with Great Sandhills Terminal, Northeast Terminal, Northwest Terminal, Parrish & Heimbecker, Paterson Grain, Prairie West Terminal, Providence Grain Group, Southwest Terminal and Weyburn Inland Terminal, the CWB is seeking intervener status in the case.

At issue is a recent change made to CN's advance-product program, which GNG argues is preventing smaller grain companies and single-point shippers from securing enough rail capacity to stay viable.

"This change by CN could put our business in jeopardy," said Bruce Horner, CEO of GNG, of his 17 000-tonne capacity GNG grain terminal in Nampa. "If this continues, only very large players will be left to ship and handle grain in the West. We believe CN is failing to meet its obligation of service to small shippers and farmers."

Rob Davies, CEO of Weyburn Inland Terminal (WIT), said it was important for others in the Prairie grain industry to support this case. "We as a group of shippers, handlers and marketers of western Canadian grain stand solidly behind Great Northern Grain in its pursuit of fairness from CN. Our company has joined in this action, not because we face the same issues with Canadian Pacific Railway on our own line, but because we hope we never will."

For the 2006-07 crop year, CN eliminated opportunities to advance-book guaranteed supplies of rail cars in units of 50 (except for a limited supply of cars available through cash bids). The railway now offers only blocks of 100 cars, which must essentially be booked to one destination for 42 consecutive weeks to secure supply. This is impossible for single-point shippers and smaller companies.

Only 22% of primary grain elevators in Western Canada have a rail car spot for 100 cars or more. With only enough track for 73 cars, GNG is incapable of participating in CN's 100-car advance program, which moves at railway tariff rates, and is forced to pay cash bids to CN at over-tariff rates to secure any advance products. Advance cars this year have comprised almost 70% of CN's total railcar offerings to the Port of Vancouver. The remainder is allocated as general car supply with no guarantees provided.

"We must have flexibility in grain transportation," said CWB Chief Operating Officer Ward Weisensel. "On farmers' behalf, the CWB markets and coordinates movement of grain in many different grades, classes and protein levels, sourced from diverse locations all across the Prairies. The change CN has made to advance cars reduces efficiency in the system."

CN allocates rail cars to grain shippers in two ways:

1) Advance cars booked for the entire year, with preference given to bookings for the largest number of consecutive weeks and to those with the highest-volume shipping history with CN. Advance cars are guaranteed capacity, with $250/car penalties for default by either party. In 2006-07, advance cars are 69% of the total CN supply to Vancouver. This includes a limited supply of cars available through cash bid auctions, booked two to five weeks ahead.

2)General car supply offered weekly with no guarantee that the railway will provide booked cars. There are no restrictions on unit size and no additional charges above the posted rail tariff freight rate. During times of tight supply, the general-car program is often reduced to ensure that guaranteed advance cars are used and penalties avoided.

In 2006-07, CN completely removed its 50-car products (called "GT Secure") for yearly advance bookings and offers only 100-car units ("GX100"), which must essentially be booked for 42 consecutive weeks to secure supply. No single grain elevator in Canada is capable of shipping 42 consecutive 100-car trains to one destination. Yet this is what CN's GX100 program is asking single-point shippers to do.

Because smaller companies and single-point shippers cannot forward-book into a single rail corridor for consecutive weeks, they cannot participate in the GX100 program, except through the cash bid car market ("GT Pro"). This is a limited planning tool because the companies may not win the cars they want and, during high-demand periods, successful bids are very expensive. This creates an uneven playing field between the very large companies with multiple shipping locations and the others.

Great Northern Grain (GNG) has a 73-car loading spot at its grain terminal in Nampa, Alberta. The only way for GNG to obtain pre-booked cars in the 2006-07 crop year has been through the cash-bid process available for 50-car units, which entails an average extra cost of $4.59 per tonne but has climbed as high as $9.21 per tonne over the posted rail freight rate. By contrast, the GX100 cars, which GNG is incapable of handling, move at regular posted freight tariff rates.

This year's change in CN's advance-car program reduces efficiency in grain loading. Shippers capable of storing enough grain and loading 100-car trains will have an incentive to overcommit themselves to increase their chances of receiving cars.

During low-demand times, this means either that trains will go unused, with the shipped paying a penalty, or be filled with grain not required at port.

During high-demand times, CN will spot its guaranteed advance cars before the general allocation to avoid paying a penalty. This means grain required for ocean vessels arriving soonest may be forced to wait, causing grain to arrive at port out of order with vessel arrivals. This leads to increased congestion and potential vessel demurrage penalties, which are paid by shippers (including farmers).

The level-of-service complaint application outlines a list of specific remedies that GNG is proposing. Among them: to ensure that advance-car bookings constitute no more than 50% of the rail program in any specific corridor; to eliminate 100-car units in the advance-car program in favor of 25- and 50-car blocks (which can be combined to make 100 if needed).

Rail is the only feasible way to move the majority of grain produced in Western Canada to port and market. Half of the 45 million MT of grain produced in the West is exported, mostly overseas. Ports are located an average of 1,000 kilometers from the production area. Because almost every kernel of grain is moved to market by rail, the service and cost of rail transportation can define the profitability and competitiveness of a grain-handling company.

The main objective of a grain company is to handle as much grain in a given year as it can at acceptable margins. Because companies' costs are largely fixed, the more volume they handle at acceptable margins, the greater their profit.

Grain-handling facilities represent a major investment for grain companies. A modern primary facility costs $10 million to $15 million to construct. Average storage capacity is 15 500 MT but can range up to 100 000 MT.

In Western Canada, there are two Class One railways: CN and Canadian Pacific Railway (CPR). There are also a handful of shortlines. Because the mainline railways own and operate the lines over which all traffic must travel, they determine the car supply available for grain shippers, whether the grain originates on their lines or a feeder shortline.

CN and CPR are mostly geographically separate. In Western Canada, there are 146 grain-handling facilities on CN lines. Only 23 facilities in the West can access either railway by having access to both tracks or the ability to inter-switch traffic between lines.

Only 22% of primary grain elevators have a car spot of over 100 cars.

Grain-handling facilities          100-car spot          All facilities
 by car spot (W. Canada)            or greater

Number of facilities                    73                     337
Percentage of total                     22%
Source: Canadian Grain Commission, CWB