Submission to the Minister of Transport The Future of Transportation in Canada: Developing a Long-term Agenda for Transportation

Submission to the Minister of Transport The Future of Transportation in Canada: Developing a Long-term Agenda for Transportation Comments and Recommendations on Freight Transportation September 15, 2016

2 Table of Contents 1.0 Introduction 1.1 Overview of the Submission 2.0 Background National Transportation Policy 2.1 Freight Transportation and the Economy 2.2 Freight Transportation: a Derived Demand 3.0 The Canada Transportation Act Review 3.1 FMA Comments on the Review Recommendations 4.0 Developing a Long-term Agenda for Transportation 5.0 Truck transportation 5.1 Canada Transportation Act 5.2 Other Federal Trucking Legislation 5.3 Urban Freight Transportation 5.4 Port Metro Vancouver Drayage 6.0 Marine Transportation 6.1 Great Lakes, St. Lawrence Seaway, Coastal Shipping 6.1.1 Coasting Trade Act 6.1.2 Pilotage Act 6.1.3 Other Great Lakes, St. Lawrence Seaway and Coastal Issues 6.2 Ocean Shipping 6.2.1 Shipping Conferences Exemption Act 6.2.2 Container Shipping Line Alliances 6.2.3 Canada Marine Act, Port Capacity and Investment 6.2.4 Transport Canada CBSA Cooperation: Sufferance Warehouses 7.0 Air Cargo 7.1 Canada Transportation Act S. 55-86 & S. 159-169 7.2 Aeronautics Act & Aviation Security Regulations, 2012 8.0 Rail Freight 8.1 The Railway Problem 8.1.1 Railway Clauses Consolidation Act, 1851 Pre-Confederation 8.1.2 The Railway Act, 1906 8.1.3 Decision of the Supreme Court of Canada, Docket 35145 (May 23, 2014) 8.1.4 The Competition Bureau 8.1.5 Canadian Transportation Agency Decision, Case No. 14-02100 8.1.6 The Implications for a Long-term Agenda 8.2 Recent Legislative Actions 8.2.1 The Rail Freight Service Review and Bills C-52 and C-30 8.2.2 Bill C-52, the Fair Rail Freight Service Act

3 8.2.3 Bill C-30, the Fair Rail for Grain Farmers Act 8.2.4 Implications of Recent Legislation for the Long-term Agenda 8.3 Rail Recommendations 9.0 Other Issues 9.1 Infrastructure Investment 9.2 Governance Frameworks 9.3 Environmental Sustainability 10.0 Concluding Remarks Appendices 1. The Investor s Perspective on Railway Pricing Power 2. Background on Railway Constraints with Shipper Supplied Cars 3. Summary of FMA Recommendations

4 1.0 INTRODUCTION The Freight Management Association of Canada (FMA) appreciates the opportunity to submit its comments and recommendations to the Minister of Transport as the government considers the future of Canadian Transportation. The Minister has undertaken a broad review following from the final report of the Canada Transportation Act (CT Act) Review that was commissioned in 2014 and was tabled in Parliament in early 2016. FMA has been representing the freight transportation interests of Canadian industry since 1916, and so we are marking the 100 th anniversary of FMA this year. Our 90+ members include companies, both large and small, from most industrial sectors and from all across the country. The FMA member companies contribute approximately $100 billion annually to the Canadian economy and purchase approximately $6 billion in freight services by truck, rail, marine, courier and airfreight. A list of the FMA member companies can be found on the Association s website. FMA made two submissions to the CT Act Review, the first covering only rail freight issues, and the second addressing marine, trucking, and air cargo. The first FMA submission covering rail freight issues was forwarded to the CT Act Review secretariat on January 29, 2015. As the rail issues were of most concern and were most urgent, FMA decided to address the rail issues first and follow up with comments and recommendations on the other modes in a separate submission dated July 21, 2015. 1.1 Overview of the Submission While the Minister s consultation with stakeholders is broad, focusing on five themes related to trade, environment, safety, travellers, and the north/coasts/waterways, this FMA submission will focus only on freight transportation and the implications for trade. The future of freight transportation and the role of government will include policy considerations, regulation, infrastructure investment, the level of competition in the various modes. It will also have to consider the relationship between the three levels of government in Canada and the UN conventions governing the oversight of international shipping and air cargo. This submission will provide observations on these issues and will also address, in a summarized manner, the recommendations of the CT Act Review. While the legislative focus will be on the CT Act, the FMA submission will also address other federal laws that impact transportation, such as the Shipping Conferences Exemption Act. 2.0 BACKGROUND NATIONAL TRANSPORTATION POLICY An appropriate starting point is consideration of Transportation Policy. Section 5 of the Act provides the Policy Statement underpinning all of the provisions of CT Act. Section 5 states, in part: 5. It is declared that a competitive, economic and efficient national transportation

5 system that meets the highest practicable safety and security standards and contributes to a sustainable environment and makes the best use of all modes of transportation at the lowest total cost is essential to serve the needs of its users, advance the well-being of Canadians and enable competitiveness and economic growth in both urban and rural areas throughout Canada. Those objectives are most likely to be achieved when (a) competition and market forces, both within and among the various modes of transportation, are the prime agents in providing viable and effective transportation services; (b) regulation and strategic public intervention are used to achieve economic, safety, security, environmental or social outcomes that cannot be achieved satisfactorily by competition and market forces and do not unduly favour, or reduce the inherent advantages of, any particular mode of transportation; The emphasis in section 5(a) on competition and market forces to meet the objectives is appropriate and is working well in all modes except rail. For example, even though the Shipping Conferences Exemption Act (SCEA) permits shipping lines to enter into legal cartels, (shipping conferences), SCEA allows confidential contracts and there are currently enough shipping lines serving Canadian ports that there is effective competition in ocean freight services. There is also some competition between Canadian ports, and also between some Canadian and U.S. ports. 2.1 Freight Transportation and the Economy The Minister s statement in his speech to the Economic Club of Canada on April 27, 2016 sets out the context for transport as follows: I regard the Transport portfolio as an economic portfolio. I see transportation as a single interconnected system that drives the Canadian economy. This is a point of fundamental importance in looking at the transportation needs of the future. It puts transportation, especially freight transportation, in an appropriate context, i.e., as an enabler of economic growth and a vital element in Canada s success as a trading nation. In a geographically large country like Canada that is a major producer of large volumes of relatively low-value natural resources; low-cost, innovative and efficient transportation is of fundamental importance to both exporters and importers. Because of the obvious important role of transportation, the focus on the large carriers and their needs is sometimes given precedent over the needs of the users of the transportation system. Within freight transportation, this is particularly true of the Class1 railways. 2.2 Freight Transportation: A Derived Demand Economic theorists note that transportation is a Derived Demand, that is it exists to support more basic production and consumption activities. It is important that Transportation Policy reflects this reality. Actions by carriers and sometimes by government policy makers appear to overlook that transportation exists to serve the

6 needs of its users. 3.0 THE CANADA TRANSPORTATION ACT REVIEW Following from the comments in Section 2.2 above, the CT Act Review final report states as follows: If there is one conclusion from this Review that should resonate for Canadian everywhere, it is that performance of the transportation system underpins the country s trade performance, the performance of the economy and the health and sustainability of communities. The Review provides an important analysis of many aspects of transportation and makes 60 recommendations that will provide important input to the government as it considers the Long-term Agenda for Transportation. The pages given over to the modes are instructive and speak to the level and nature of the competition in each mode: Air Transport 27 pages Marine Transport 27 pages Rail Transport 73 pages 3.1 FMA Comments on the Review Recommendations FMA will not comment in detail on each CTA Review recommendation, but will summarize its views as follows. See Section 5 to 9 for specific FMA recommendations to the government. 1. Chapter 2: Governance: Recommendations are generally good. Recommendation 7 Integrated Data Platform and Multimodal Data Dashboard is particularly important. It should include trucking data as well as federally-regulated modes. 2. Chapter 3: Linking Trade and Transportation: Recommendations generally positive. Recommendation 5, harmonizing trucking regulatory standards, is particularly important. This is the only trucking regulation in the report, and FMA supports. 3. Chapter 4: The North: The recommendations are positive. 4. Chapter 5: Innovation: The recommendations are positive. Innovation is particularly important and should have a very high priority and encourage and support innovation by the private-sector carriers and transportation suppliers.

7 5. Chapter 6: Climate Change: The recommendations are positive. In addition, federal and provincial governments should be supporting and promoting alternative energy for vehicles: fuel cell for road vehicles and electrification for railways. 6. Chapter 7: Access and Accessibility: No comment. 7. Chapter 8: Rail Transport: 8.1 Freight: FMA supports recommendations 1, 2, 3. Recommendation 2, Improving Capital Cost Allowance (CCA) is particularly important to shippers, railways and private car owners and should be implemented as soon as possible. The recommendation that the CCA for both rolling stock and fixed plant be raised to match levels in the United States is particularly important and FMA supports this Review recommendation. Recommendation 4, Enhanced Supply Chain Information is vital and the government should confirm that, as recommended by the Review, that information be published, i.e. that the appropriate data in aggregated form be available to shippers and other stakeholders. Shippers particularly need data to effectively use Final Offer Arbitration in rate disputes, and to balance the information that the railways have available. Recommendation 5, Alternative Dispute Resolution Mechanisms, shippers should, at their option, retain the right to access arbitration without necessarily using the informal processes first. If the informal processes are mandatory before using the more formal arbitration processes, shipper arguments and positions are exposed to the railways prior to the more formal arbitration. Recommendation 6, Level of Service Provisions is important and FMA supports in principle at this stage, but further analysis may be necessary to ensure understanding of the subtleties. The suitable and adequate term in section 113 of the Act should be defined. Recommendations 7, Mandate of the Canadian Transportation Agency, and 8, Dangerous Goods Rail Transportation look positive from a shipper perspective but need further study. Recommendation 9, Private Crossings, No comment.

8 Recommendation 10, Harmonization of Safety Technologies with the United States appears positive. Recommendation 11, Infrastructure Funding Urban Rail Facilities, appears positive, but will need to be applied with care on a case-by-case basis to ensure that rail access to existing industries in urban areas is maintained. 8.2 Transport of Grain: Recommendations 1, 2, and 3. FMA makes no comment at this time, as this requires more analysis and review with our agriculture members, with one exception as follows. It has been noted that the government supplied covered hopper fleet for grain service is nearing the end of its economic life and that new, higher capacity cars will improve the productivity of the grain transportation system. Depending on the final decision on the Maximum Revenue Entitlement Program, the government and other grain transportation stakeholders should be working jointly to replace the current fleet at an early date. Recommendation 4: Sunset Bill C-30 on August 1, 2016: The government has not accepted this recommendation and has extended all provisions of Bill C-30 to August 1, 2017. FMA supports the government s rejection of this recommendation. Given that the emphasis in the Minister s mandate to the CT Act Review was to look at transportation needs long term, i.e., a 20 30 year time horizon, this recommendation by the Review seems out of place. In addition, the Review rationale that very few shippers have availed themselves of the extended limits to date appears to be incorrect and there is evidence that as more companies become familiar with the provision, more companies are using it. It can be used by shippers in two ways: 1) to obtain a preferred route using the extended interswitching, and 2) as leverage in their negotiations with the railway that serves their location. In the second case, there is no public data, but anecdotal evidence is that, as a surrogate for real competition, the extended interswitching on the Prairie Provinces has been effective. See Section 8.3, recommendation 3. 8.3 Passenger Rail: The Review recommendation, setting a long-term objective of separating passenger and freight rail networks, would lead to improvements for both passenger and freight operations, and should be considered in Phase 2 of the current infrastructure investment program.

9 8. Chapter 9: Air Transport: FMA generally supports the recommendations as they relate to air cargo operations. 9. Chapter 10: Marine Transport: FMA generally supports these recommendations, but will discuss with the Marine Policy Branch to clarify several issues. See specific recommendations in Section 6. 10. Chapter 11: The Canadian Transportation Agency Recommendation 1, Enhance Agency Legislative and Regulatory Authorities is positive and FMA supports. 4.0 DEVELOPING A LONG-TERM AGENDA FOR TRANSPORTATION In his speech to the Economic Club of Canada on April 27, 2016, Minister Garneau made a number of important points that will influence the current government s transportation policies. Probably the most important comment was the following: I see transportation in Canada as a single interconnected system that drives the Canadian economy. In fact global transportation is an integrated system that supports global supply chains. While this is true, the system is still operated in silos and there are many examples of this. We see the big container lines introducing 20,000 TEU ships that reduce their costs, with no thought to the implications for port and connecting rail and highway infrastructure and services. The arbitrary slow steaming by container lines to reduce fuel consumption (and reduce GHG emissions) has some positive implications, but what does it do for inventory management of cargo owners? Similarly, railways will make arbitrary changes in service levels, especially with regard to switching services, with little or no advance warning to affected shippers. A third example, involving governments, is the split in jurisdiction between the federal and provincial governments in regulating the trucking industry. While acknowledging the need for an integrated system, the system is operated by private sector companies that need to give priority to their shareholders. In some cases

10 maximizing shareholder return is in direct opposition to the need for greater integration. FMA has no specific recommendations to make on this issue, but FMA would encourage the Minister and his officials to undertake studies related on how to reconcile integration with the corporate requirements to meet shareholder expectations. Other important points made by the Minister in his April 27 speech are: - the need to improve our trade corridors to support our trade performance, - build on the success of the Asia-Pacific Gateway and Corridor Project, a successful model in breaking down silos, - the need to improve GHG emissions while meeting transportation needs, - encourage innovation and early adaptation of new technologies, and ensure that regulatory barriers are minimized, - continue to focus on ways to improve safety in all modes. FMA supports these important points. In the following sections, FMA provides its insights and recommendations for Developing a Long-term Agenda for Transportation for each transportation mode. 5.0 TRUCK TRANSPORTATION 5.1 The Canada Transportation Act (CT Act) The CT Act addresses trucking in a minor way. The only provision directly addressing trucking is section 114 (4) that requires railways hauling truck trailers to treat the transport of such equipment owned by trucking companies on the same terms and rates as such trailers that may be owned by the railway company. This provision is appropriate and should be maintained in the Act. Trucking is the universal mode of land transport and is the mode that most impacts the daily life of Canadians. While interprovincial or international trucking is the responsibility of the federal government, the regulation of trucking has largely been delegated to the provinces for practical reasons as the provinces are responsible for policing motor vehicle operation and for providing most of the road infrastructure. As noted in section 3.1 above, FMA supports the harmonization of regulatory standards for trucking as recommended by the CT Act Review. Federal government leadership in addressing this issue would be a strong indication that the government is serious about improving the interconnectedness of the freight transportation system.

11 5.2 Other Federal Trucking Legislation - Motor Vehicle Transport Act (MVTA) - Motor Vehicle Safety Act (MVSA) - Bill of Lading Act (BLA) - Transportation of Dangerous Goods Act (TDGA) FMA is not making specific recommendations related to the above-mentioned laws, but expresses concern about the inconsistency that exists in the oversight of interprovincial trucking because of the delegation to provinces. The major concern of FMA members relates to ensuring the necessary capacity to meet future demand, and this includes vehicles, infrastructure, and drivers. The Canadian Trucking Alliance in its submission to the CTA Review noted the following with regard to the impending driver shortage. The shortage will reach up to 33,000 across the country by 2020 in the for-hire sector alone, which represents a gap of at least 17% of the driving force. It will be necessary for all stakeholders to play a role in addressing this shortage. The compensation and working conditions supplied by the trucking companies, the treatment of drivers by shippers, the oversight of training and qualification by provincial authorities, the consideration by federal authorities of the skill level of commercial drivers, and the implications for immigration law as it relates to foreign recruitment of drivers will all need to be addressed to ensure that trucking capacity will be available to meet the needs of Canadian society and the economy. 5.3 Urban Freight Transportation Of particular concern is the management of freight transportation in Canada s largest urban areas. Managing trucking in urban areas is a growing problem that has not had much analysis by either academia or by governments. Of note is the University of Toronto (U of T) Civil Engineering Centre for Urban Freight Analysis, which is the only Canadian university urban freight program of which FMA is aware. In addition to the obvious supply to retailers, urban trucking also includes mail and courier services, garbage pick-up, supply to construction sites, and utility vehicles (hydro, telecommunications, etc.) The congestion and resulting delays for trucking in urban areas have a negative impact on costs, environmental degradation, and effective trucking capacity. FMA recommends that the federal government, in collaboration with its provincial and municipal counterparts, begin to address the complex issue of urban freight movement, and that federal and provincial support of the U of T urban freight program should continue. 5.4 Port of Vancouver Drayage The effective operation of Vancouver Fraser Port Authority (VFPA) is of vital importance to the Canadian economy as it is Canada s largest port and the main gateway for

12 growing trade with Asia. Both export and import container traffic depends on drayage service by the local trucking industry. The withdrawal of service by drivers (both employees and independent owner-operators) in 2014 created significant problems for users of the port and there were repercussions across the country. The split in jurisdiction between the federal and BC governments with regard to the regulation and oversight of drayage services made resolution of the dispute difficult. While the two levels of government were able to resolve the immediate work stoppage, and appointing a Truck Licencing System (TLS) Commissioner to oversee the drayage trucking industry, there are remaining controversial issues that may require further government intervention, such as the rate at which older trucks servicing VFPA must be replaced. In line with the mandate of the Review to look at the long-term needs of Canadian transportation, FMA recommends that the federal and western provincial governments continue to use the Asia-Pacific Gateway and Corridor Initiative to resolve issues such as drayage service that fall between federal and provincial jurisdiction. 6.0 MARINE TRANSPORTATION In this section, FMA will address Great Lakes and Coastal Shipping separate from Ocean Shipping. 6.1 Great Lakes, St. Lawrence Seaway, Coastal Shipping 6.1.1 The Coasting Trade Act Under sections 4, 5 and 6 of the Act, on application by a person resident in Canada.the Minister of Public Safety and Emergency Preparedness shall issue a licence., where certain conditions are met as spelled out in sections 4, 5, and 6. The Canadian Transportation Agency (Agency) is responsible for the analysis, which is primarily to determine whether or not a suitable Canadian flagged vessel is available. In addition, as foreign flagged vessels will almost always be crewed by foreign nationals, the immigration and employment laws and regulations must also be considered by Employment and Social Development Canada (ESDC) and the Canadian Border Services Agency (CBSA). For those shippers faced with the need for domestic shipping capacity when none is available, there is usually some urgency to obtain the needed vessels. While the Agency is generally able to reach a decision on such requests in a reasonably short period of time, and has expedited processes in urgent or emergency situations, the ESDC and immigration issues for foreign crews can be a source of significant delays. Shippers faced with this problem are requesting that the government consider ways to speed up the approval process on foreign crews to match the speed of the Agency process.

13 FMA recommends that the approval process for foreign crews be reviewed by the Ministers of Transport and of Public Safety and Emergency Preparedness with a view to expediting the process. In making this recommendation, FMA acknowledges the necessity of considering public security when permitting foreign crews entrance to Canada. 6.1.2 The Pilotage Act With the rapid evolution of new technology, particularly technology-based Global Positioning Systems (GPS), it is recommended that Transport Canada undertake an overall review of pilotage, the pilotage authorities, and the Act to determine if changes should be made to improve both the safety and efficiency of marine transportation in Canadian-controlled waters. 6.1.3 Other Great Lakes, St. Lawrence Seaway and Coastal Issues Ballast Water Exchange Regulations: While Canada is a signatory to the IMO convention, these regulations are primarily designed for salt water shipping. The situation in the Great Lakes is unique in terms of the Canadian and U.S. fleets that are primarily limited to the fresh water lakes. The uncoordinated nature of the regulations between Canada and the United States is of concern. The regulatory situation in the U.S. is of particular concern where the Coast Guard, the Environmental Protection Agency (EPA) and the state governments bordering the Great Lakes are all issuing regulations. The efficiency of the Great Lakes/St. Lawrence System is under threat from the uncertainty and the costs associated with meeting some of the proposed regulations. FMA has reviewed, and supports the recommendation of the Chamber of Marine Commerce that the Canadian government continue to engage the United States government with the objective of achieving a single, bi national ballast water regulatory solution for the Great Lakes/St. Lawrence System. Coast Guard and Ice-breaking: The winters of 2013-2014 and 2014-2015 resulted in severe ice coverage in the Great Lakes that taxed the ability of the Canadian and U.S. Coast Guard services to clear ice for navigation in a timely manner. While the long-term trends in ice coverage are unknown, FMA recommends that Transport Canada and the Canadian Coast Guard determine the additional resources that will need to be made available to support as lengthy a navigation season as possible. 6.2 Ocean Shipping 6.2.1 The Shipping Conferences Exemption Act (SCEA) SCEA continues to authorize legal cartels (shipping conferences) for shipping lines calling at Canadian ports. SCEA also provides for shippers and carriers to enter into confidential contracts. It is noted that the European Union (EU) ended the exemption of shipping conferences from EU competition law in 2008, consequently, shipping conferences are not legal in any EU-Canadian services, but they remain legal in other trades, of which the trans-pacific trades are the most important. It is noted that the

14 comparable U.S. law, the Ocean Shipping Reform Act (OSRA) contains similar provisions to SCEA. Given the integrated nature of ocean shipping, particularly the container trades, to and from North America, it is important that any changes to the laws be coordinated between Canada and the U.S. Despite the legality of the shipping conferences, pricing by container lines has been under severe pressure in recent years, primarily due to the growth in capacity by the container lines and recent reduction in demand. While FMA has not noted any pressure from its member companies to amend or repeal SCEA, the need to exempt ocean shipping from competition laws appears unnecessary as it is generally not working for the carriers. FMA recommends that Transport Canada open discussions with the U.S. Department of Transport (DOT) to determine if OSRA and SCEA should be amended or repealed. 6.2.2 Container Shipping Line Alliances While the shipping conferences are no longer allowed under European law, the European Commission (EC) continues to permit vessel-sharing agreements (VSAs) and other forms of collaboration among the container carriers. As Canadian, U.S. and other major trading nations laws permit some form of collaboration by shipping lines, the world's top 16 container shipping lines have recently reconfigured their strategic partnerships in four major alliances which dominate the world's main liner trades, with follow-on effects for many small liner markets. The alliances include: 2M (Maersk and MSC) Ocean Three (CMA CMG, China Shipping Company and United Arab Shipping Company) CKYHE (Cosco, K Line, Yang Ming, Hanjin and Evergreen) G6 (APL, Hapag Lloyd, HMM, Mitsui, NYK and OOCL) While shippers have been broadly supportive of traditional consortia and VSAs, many shippers are concerned that the new alliances go well beyond vessel sharing in terms of their scale and the sharing of information and data on capacity and costs. In addition, because of the increased capacity and new ships in the 20,000 TEU range, and also because of the weak demand and pricing pressure, there is an increase of merger activity among the container lines. The bankruptcy of Hanjin announced on August 30, 2016 is a strong indication of the pressures that could lead to more merger activity by the container lines. FMA recommends that Transport Canada work with European, U.S. and other nations to collect data and monitor the operation of the alliances to promote competition on the major freight lanes.

15 6.2.3 The Canada Marine Act and Port Capacity and Investment The Canada Marine Act governs the major federally owned Canadian ports and the St. Lawrence Seaway Management Corporation under the direction of separate Boards of Directors appointed by the Governor in Council on the advice of the Minister of Transport. While this approach provides a degree of independence and local control of the ports, the Act limits the ability of the Port authorities to borrow money for investment purposes. Section 7 (3) of the Act states as follows: Borrowing restriction (3) A port authority or a wholly-owned subsidiary of a port authority may not borrow money as an agent of Her Majesty in right of Canada. The ports play an indispensable role in Canada s international trade for both imports and exports and it is vital that port capacity be expanded to meet the anticipated growth in traffic that each port expects to handle. As the Review is being asked to consider long-term transportation needs, long-term growth forecasts will be required to determine appropriate investment levels. While long-term forecasts covering a 10+ year timehorizon are notoriously inaccurate, it is recommended that structured forecasting be commenced by Transport Canada for at least the medium term of say 3 to 7 years. This should, of course, cover the transportation investment needs that Canada may need to consider for all modes of transport in addition to ports. The management model for ports under the Canada Marine Act appears to be working well and FMA recommends that it be maintained. In addition, FMA recommends that the Act be reviewed to ensure that the Port Authorities have the appropriate powers to obtain funding to meet investment needs. 6.2.4 Transport Canada- CBSA Cooperation: Sufferance Warehouses To handle incoming cargo, a port facility terminal operator must have a Sufferance Warehouse license from the Canadian Border Security agency (CBSA). Access to the sufferance warehouse is regulated by CBSA while access to the port facility is regulated by Transport Canada Security. Depending on the cargo, the sufferance warehouse may encompass the entire facility (less administrative office areas). Access to the sufferance warehouse and access to the port facility may be one and the same but is subject to regulations of both CBSA and Transport Canada Security. There are inconsistencies between the two sets of regulations and in the site inspection activities of the two departments. Examples of the inconsistencies are as follows. Customers may need to inspect their incoming cargo or have surveyors review loading or unloading operations. Under TC Security, the customer or surveyor must have a port pass or be escorted at all times by an employee with a port pass. Under CBSA, the terminal must apply to the regional CBSA office for permission to allow the customer

16 representative onsite. The application must be made at least 24 hours before the projected access time and must be approved by CBSA prior to the access. Trucks and drivers picking up cargo may, under CBSA regulations, have access the sufferance warehouse /port facility without restrictions. Under TC Security, they may not access the site without a port pass and must follow all TC Security restrictions. FMA recommends that the Canadian Government instruct Transport Canada and CBSA to begin negotiations to harmonize their respective regulatory and inspection requirements and set timelines for the departments to present their proposed harmonized regulations and on-site inspection procedures to the government for implementation. 7.0 AIR CARGO FMA has considered several of the main laws, regulations, and policies, along with international initiatives under consideration by the UN Agency: International Civil Aviation Organization (ICAO), and the international airline association: International Air Transport association (IATA). In this submission, FMA will comment on the two main Canadian laws, and their relevant regulations, that impact air cargo. The first is the Canada Transportation Act, Part II, Air Transportation. The second is the Aeronautics Act, especially those sections related to air cargo security 7.1 The Canada Transportation Act, Sections 55 86, & Sections 159-169 The Air Transportation Sections of the Act, as related to carrier-customer disagreements, focus primarily on passenger complaints. As competition within the air cargo industry is robust, there are no shipper protection provisions comparable to those found in Part III, Railway Transportation. In the event of a rate dispute between a shipper and an air carrier relating to domestic transportation, Part IV, Arbitrations, Division I, section 159. (1) (a) specifically states that the Final Offer Arbitration (FOA) provisions are open to air cargo shippers. FMA understands from the Agency that there has never been an air cargo complaint, requesting resolution by FOA. FMA is not recommending any changes to either Part II or Part IV, Division I as related to air cargo services. The availability of FOA to air cargo shippers is not widely known and it would be useful for the Agency to publicize this among air cargo shippers. One of the roles of an industry association like FMA is to keep its members apprised of laws, regulations, and policies that may impact its member companies, and FMA will open discussions with the Agency to expand the publicity on the availability of FOA for shippers of air cargo.

17 7.2 Aeronautics Act and Aviation Security Regulations, 2012 In this submission, FMA will comment only on Air Cargo Security Regulations issued pursuant to section 4.71 of the Aeronautics Act, particularly the Canadian Aviation Security Regulations, 2012, and those amendments published in the Canada Gazette, Part II on June 30, 2015. These provisions come into effect on October 17, 2016. The changes announced on June 30, 2015 will allow shippers to apply to join the Air Cargo Security Program on a voluntary basis. The new regulations should improve the flexibility and efficiency of air cargo, avoid potential bottlenecks at Canadian airports, maintain an effective level of security, and bring Canadian practice in line with its major trading partners. FMA supports the changes published on June 30 and has contacted Transport Canada to assist in communicating the opportunities under the new regulations to the Canadian shipper community. FMA has no recommendations to put forward at this time and will provide feedback to Transport Canada as shippers gain experience with the new regime after October 17, 2016. 8.0 RAIL FREIGHT 8.1 The Railway Problem There are approximately 50 railways in Canada, but the rail freight industry is dominated by the two Class 1 carriers, Canadian National Railways (CN) and the Canadian Pacific Railway Company (CP). These two companies account for approximately 90% of the Canadian rail freight revenues. The fundamental problem is that there is not effective competition within the rail mode and the barriers to new entrants are so high that this situation will not be rectified through market forces. Where the fundamental problem cannot be rectified, the best that can be done is to provide a legal and regulatory regime that is a surrogate for real competition and that re-balances the bargaining power of the buyers and sellers in the rail freight market. While there is limited competition between CN and CP in a few markets (primarily intermodal) for many shippers, the rail market can be best characterized as being a dual monopoly, rather than even a duopoly. That is, each of CN and CP is the only railway available to shippers at many locations. It should be noted that this is not just a western Canadian problem, but exists in the east as well. See Appendix 1 for a comment on railway pricing power as seen by the investment community. Rail freight is not a normally functioning competitive market and this fact has been acknowledged in Canadian Railway Law for over 100 years. The following excerpts from Canadian law, regulations and regulatory decisions, confirm that point as follows. 8.1.1 Railway Clauses Consolidation Act, 1851 Pre-Confederation 1 This Act states: 1 Canadian Transportation Agency Case No. 14-02100

18 The trains shall.furnish sufficient accommodation for the transportation of all such passengers and goods as shall within a reasonable time previous thereto be offered for transportation and the party aggrieved by any neglect of refusal in the premises, shall have an action against the Company. 8.1.2 The Railway Act, 1906 2 The level of service provisions of the 1906 Act are almost identical to the comparable provisions in the current Act, including the authority of the Board of Railway Commissioners (a predecessor to the Canadian Transportation Agency) to intervene by ordering the railway to take specific action to rectify the problems. 8.1.3 Decision of the Supreme Court of Canada, Docket 35145 (May 23, 2014) This case was triggered by an FMA petition to the Governor-in-Council (the Cabinet of the Canadian Government). In its decision, the Supreme Court stated (in section 23): In certain circumstances, the railway companies were seen to have superior market power to shippers. This superior market power of the railway companies, combined with the complaints of shippers over railway service and rates, led to Parliament s efforts to respond to these concerns. (Standing Committee on Transport, Infrastructure and Communities, November 22, 2007, at p. 1). As the Honourable Lawrence Cannon, Minister of Transport, Infrastructure and Communities explained: I believe the time has come to rebalance the legislative framework in favour of shippers. 8.1.4 The Competition Bureau While the railways are not subject to Sections 78 and 79 of the Competition Act, these provisions are instructive in terms of the Competition Bureau s approach to the market dominance by a small number of sellers within a specific market. The Bureau s general approach in evaluating allegations of abuse of dominance is as follows: A market share of less than 35 percent will generally not give rise to concerns of market power. A market share of 35 percent or more will generally prompt further examination. In the case of a group of firms alleged to be jointly dominant, a combined market share equal to or exceeding 65 percent will generally prompt further examination. In the case of the rail freight market, CN and CP together control approximately 91% of the market by revenue. 2 Canadian Transportation Agency Case No. 14-02100

19 Based on 2010 annual reports of CN, CP, and the Railway Association of Canada (RAC), total rail freight revenues in Canada were $10.224 billion; CN s Canadian freight revenues were $5.630 billion; and, CP s Canadian freight revenues were $3.635 billion. CN alone accounts for 55% of the market based on revenues and CP for 36%. 8.1.5 Canadian Transportation Agency Decision, Case No. 14-02100 In this decision, rendered October 3, 2014, the Agency, in ordering CN to comply with its service obligations pursuant to the terms of the Confidential contract with Louis Dreyfus Commodities Canada Ltd., stated in section 28: The retention of these provisions (level of service) in federal legislation reflects Parliament s acknowledgement that regulatory intervention in railways level of service matters continues to be necessary. 8.1.6 The Implications for a Long-term Agenda The evidence over the past 150 years, as noted above, supports the need for continuing legislative and regulatory constraint on railways to compensate for market dominance of the carriers. The legal and regulatory burden on the railways has been significantly reduced over the past fifty years, and they have gained pricing freedom over that time, leading to much improved net revenues. As noted above, and as stated by the Honourable Lawrence Cannon, Minister of Transport, in 2007, I believe the time has come to rebalance the legislative framework in favour of shippers. 8.2 Recent Legislative Actions 8.2.1 The Rail Freight Service Review and Bills C-52 and C-30 The Rail Service Review (RSR) Panel was appointed by the Minister of State (Transport) in September 2009. This was part of the government s commitment to the shipper community made with Bill C-8. Bill C-8, amending the CT Act was passed in 2008 and was the result of the previous Statutory Review of the Act, completed in 2001. The RSR Panel was appointed in response to wide-spread and growing complaints about unreliable rail service, primarily in terms of car supply and inconsistent transit times. The Panel issued its final report in January 2011 and the government made the report public on March 18, 2011 along with its commitment to take action in response to the report. As with all previous and subsequent findings of independent investigators, Parliament, and the courts, the RSR Panel found that rail freight is not a normally functioning competitive market and stated on page 41 of their final report as follows: the Panel concludes that railways continue to have market power over some of their customers and that there are sectors and regions where competitive alternatives are lacking altogether. This railway market power results in an imbalance in the commercial relationship between the railways and other stakeholders. The Panel made eight recommendations, some of which found their way into Bill C-52.

20 8.2.2 Bill C-52, the Fair Rail Freight Service Act Bill C-52, the Fair Rail Freight Service Act, received Royal Assent on June 26, 2013. The primary purpose of Bill C-52 was to give shippers the right to a Service Level Agreement (SLA) through arbitration if one could not be obtained by direct negotiation with the railway. What C-52 does for shippers: 1. It gives all shippers the right to obtain a service agreement on Canadian traffic, covering the service elements described in Section 113 of the Canada Transporation Act. The first step is for shippers to attempt to do so by direct negotiation. 2. Should the negotiation fail, the shipper can ask the Agency for arbitration to obtain an SLA. The Agency then appoints an arbitrator to decide the matter. 3. Where the railway does not meet its commitments under an arbitrated agreement, it can be subject to fines of up to $100,000 for each violation. What C-52 does not do for shippers: 1. It does not mandate dispute resolution within a service agreement obtained either through direct negotiation or arbitration, although the section 116 complaint process is available. The shipper can, in its proposal to the arbitrator, specify the dispute resolution mechanism to apply. 2. It does not include shipper-carrier communications requiring railways to notify shippers of service changes or disruptions as a matter to be included in a negotiated service agreement, but it does specify that communication protocols can be included in the list of matters to be addressed in a service agreement achieved by arbitration. 3. It does not provide for penalty provisions in a negotiated service agreement 4. It covers only the Canadian portion of cross-border moves. 5. It allows the railways to apply to the Agency for an order declaring a matter may not be included in a shipper s submission for arbitration. While sections 113-116 of the Act (level of service provisions) provide recourse for shippers after a service failure, the objective of Bill C-52 is to provide a framework designed to prevent or minimize failures from happening. 8.2.3 Bill C-30, the Fair Rail for Grain Farmers Act Bill C-30, the Fair Rail for Grain Farmers Act received Royal Assent on May 29, 2014. It followed from an Order-in-Council issued by the Cabinet in March 2014 directing each of CN and CP to move at least 500,000 tonnes of grain per week to export positions. While the focus of Bill C-30 was on grain transportation, it contained several provisions of value to all shippers, and added new provisions to improve access to SLAs following from Bill C-52. Section 5.1 of C-30, amending Subsection 116(4) of the CT Act, addresses one of the shortcomings of Bill C-52, i.e., the need to compensate shippers for expenses incurred

21 because the railway is in violation of its service obligations under SLA or a confidential contract. The definition of expenses in the Agency regulations will be an issue in determining the effectiveness of this provision. Section 7 of C-30 provides authority for the Agency to extend interswitching limits for the regions or goods that it specifies. This amendment to the interswitching regulations allowed the Agency to give effect to the government s policy announcement to extend the maximum interswitching limit on the Prairie Provinces from 30 km to 160 km for all shippers. The interswitching regulations have been useful to shippers over many decades and provide competitive access in the absence of effective competition. Regulated interswitching is an effective surrogate for real competition. The other significant provision of C-30 relevant to all shippers is Section 8, which authorizes The Agency to make regulations specifying what constitutes operational terms to be included in a SLA achieved through arbitration. The Agency published its regulations pursuant to Bill C-30 as follows: a) Interswitching Regulations- including rates for extension from 30 km to 160 km on the three Prairie Provinces. b) Regulations on Operational Terms for Rail Level of Service Arbitration. c) Rules of Procedure for Rail Level of Service Arbitration. It should be noted that the provisions of Bill C-30 were scheduled to automatically terminate on August 1, 2016, unless the government took action to extend them before that date. While the CT Act Review recommended that the extended interswitching to 160 km in the three Prairie Provinces be allowed to sunset on August 1, 2016, Parliament extended all provisions of Bill C-30 for one year. FMA supports the government s action to extend C-30 to August 1, 2017, but cautions that, as in the past two grain crop years, the government should not order the railways to carry specific quantities of grain, as authorized by Section 6 (1) of C-30. It is understood why this action was considered necessary for the 2013-2014 crop year, but this is not a viable long-term solution when capacity problems are encountered in network business like the railway industry. We understand that the government will be considering the provisions of Bill C-30 as it considers more permanent revisions to the rail sections of the CT Act. FMA makes recommendations on these issues in section 8.3 recommendations 3 and 6, below. 8.2.4 Implications of Recent Legislation for the Long-term Agenda FMA members have considered the recent actions as described above in light of their current experiences with rail service. While some sectors, e.g., retail importers moving containers by rail, are somewhat satisfied with their relations with their rail carriers, many industry groups continue to experience problems in their relationship with their rail carriers.

22 A fundamental fact is that there is no way to increase real competition within the railway industry. With the vertical integration (i.e., the owners of the infrastructure are also the operators of the service), the entry of new competitors is virtually impossible. This means that National Transportation Policy, Section 5(b) of the Act must be the overriding policy provision for addressing the relationship between shippers and rail carriers. Subsection 5(b) states as follows: (b) regulation and strategic public intervention are used to achieve economic, safety, security, environmental or social outcomes that cannot be achieved satisfactorily by competition and market forces After three decades of deregulation of the commercial framework of railway activity, the railways have made significant gains in their profitability and have leveraged their market dominance in ways that would not be possible if there was effective competition. Changes to the CT Act in 2008, following from the previous statutory review, and the subsequent passage of Bills C-52 (2013) and C-30 (2014), have acknowledged the market power of the railways and the need to provide a legislative and regulatory framework that re-balances the bargaining power. The extraordinary actions of the government with the Order-in-Council and Bill C-30 in 2014 in response to major service problems for grain shippers demonstrated that the right balance has not yet been achieved. The FMA recommendations in Section 8.3, below, are designed to continue this trend to finding the right balance between the railways and their customers. 8.3 Rail Recommendations Following from the railways market dominance and the preceding comments, and after consultation with FMA member companies, FMA makes the following recommendations. It should be noted that FMA is not recommending legislative wording, except recommendation 1, but stating the desired result of each recommendation. It is noted that the following recommendations were made to CT Act Review Panel. The Panel included several similar recommendations in its final report. Where there is a comparable CT Act Review recommendation, we reference the CTA recommendation number. 1. Sections 113-116 of the Act, the Level of Services, or Common Carrier provisions are of fundamental importance and have been part of railway law for over a century. Section 113. (1) (b), states: furnish adequate and suitable accommodation for the carriage, unloading and delivering of traffic. Section 113 (2) states Traffic must be taken, carried to and from, and delivered at points referred to in paragraph (1) (a) on payment of the lawfully payable rate. There is nothing in Section 113 that requires the railway to specify the time to effect delivery. To provide greater certainty for shippers, it is recommended that the term suitable and adequate accommodation should be defined in the Act as follows: For the purposes of sections 113 and 114, a railway company shall fulfill its