MONTREAL — A federal panel reviewing Canada’s rail freight service should preserve the industry’s existing commercial framework and reject a call from shippers and Liberals for more regulation, CN Rail said Tuesday.
The head of Canada’s largest railway said a market-driven environment remains vital to increased supply chain efficiency and innovation.
“To fall in the trap of reregulating is, I believe, something that could stifle innovation, raise costs and miss the point,” Claude Mongeau said after addressing the Montreal Board of Trade.
He told the business gathering that CN’s (TSX:CNR) transformation from a Crown corporation into North America’s most profitable railway underscores the importance of the review panel making the right policy choices in its final recommendations to the federal government.
A preliminary report released in October 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.
However, it said railways should be given an extra three years to implement voluntary improvements.
The panel expects to present the report by year-end.
Mongeau said it spent too much time focused on complaints and not enough focusing on the elements that could help the industry to improve its performance.
The industry’s competitive dynamic was also not part of its mandate.
Nonetheless, Mongeau said he’s confident the Conservative government will reject calls for more regulation.
Friction between Canada’s two large railways and shippers has escalated into railway customers calling for tougher regulations to improve deliveries and a watchdog to produce an independent scorecard on service.
Walter Spracklin, an analyst with RBC Capital Markets said shippers have typically complained about shortage of rail cars, especially at Canadian Pacific Railway (TSX:CP) and inconsistent service leading to late deliveries.
He said a survey of 70 major shippers released Nov. 23 showed increased positive ratings for Canadian National Railway and growing concerns of Calgary-based CP.
The federal Liberals are calling for immediate legislation to fix the service deficiencies in Canada’s rail system.
Transport critic John McCallum said shippers of almost all commodities transported in bulk have long complained that railways over-charge and under-perform. And he doesn’t see why changes should wait three years.
“It’s not a vendetta against railways but the evidence presented by this report suggests that is the way to go and we favour it,” he said in an interview.
“We think it would create a more level playing field than currently exists.”
Mongeau criticized the Opposition, which pushed deregulation of the industry and privatization of CN when it was in government. He said the change appears to be motivated by winning votes.
“We are only two railroads and it’s easy to gang up on us,” he told reporters.
But McCallum said the party is advocating regulation now because it believes it’s the right thing to do and is supported by new evidence from the review panel.
“From a policy point of view that’s entirely logical, perhaps there are more votes as well, which is an added bonus. It’s a case where the policy and the politics are in synch with each other.”
Meanwhile, Railway Association of Canada president Cliff Mackay accused the Liberals of taking a “one-sided view of the modern rail freight system.”
“Had they possessed the intellectual curiosity to read the research commissioned by the Rail Freight Service Review Panel, they would have agreed that no research was undertaken on the issue of market power,” he said in a statement.
Mongeau told the business group that CN’s rise to rail industry leader from industry laggard was one of the most profound transformations in Canadian business history.
He said the shift was the product of a compelling corporate vision, continual innovation and strong operational execution.
Once largely a company that serviced Canada, CN Rail now spans 16 U.S. states and eight provinces following C$8 billion in rail acquisitions in the past 15 years.
It market capitalization has surged to $30 billion from $2.2 billion when it was privatized in 1995. And total returns to shareholders, including dividends, has been 21 per cent annually in the past 15 years.