Canada Maritime Canada Maritime ConferenceConference

Comments on the Rail Service Comments on the Rail Service ReviewReview

Remarks ofRemarks ofBob BallantyneBob Ballantyne

Montreal, September 15, 2010Montreal, September 15, 2010

Why A Rail Service Review?

Why not a: Truck Service review Ship service Review Airfreight Service Review?

There is a more fundamental question:But first…

AboutAbout CITACITA

Founded in 1916 Founded in 1916 National association for Canadian shippersNational association for Canadian shippers 120 + members and trade associates120 + members and trade associates Membership consists of purchasers of Membership consists of purchasers of

transportation services from all industrial transportation services from all industrial sectorssectors

CITA members purchase over $4 billion CITA members purchase over $4 billion annually in transportation & contribute annually in transportation & contribute over $100 billion a year to Canada’s GDP. over $100 billion a year to Canada’s GDP.

CITA MissionCITA Mission

To actively promote a more To actively promote a more competitive and cost-effective Global competitive and cost-effective Global freight transportation system serving freight transportation system serving Canadian industryCanadian industry

i.e. We’re lobbyists!i.e. We’re lobbyists!

Is Rail Freight a Normally Functioning

Commercial Market?

The Investor’s View 1

We eliminated Trans-Canada and reduced some other Utilities Holdings, and replaced them with CN Rail and CP Railway.  While railways carry higher cyclical exposure, we are more comfortable with their ability to pass input costs through to their customers given the barriers to competition and the fuel efficiency advantage over competing transport services.  A company's pricing power is much more of a focus than it has been in recent years, as we expect this to be the case for the foreseeable future.

 (Page 36, PH&N second quarter report, June 30,

2008)

The Investor’s View 2

Attractive Competitive Environment The railroad competitive environment is arguably

the envy of most industrial sectors, boasting limited competition and steep barriers to entry. …. with CN and CP both enjoying a comfortable duopoly that prevents excessive competition

This position is further sweetened by the fact that rail remains the only cost effective alternative for several freight categories…

(Raymond James Financial Inc. report to investors, May 2009)

The Competition Bureau The Abuse of Dominance provisions of the

Competition Act (Sections 78 and 79) as used by the Competition Bureau are instructive.

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.

The Rail Freight Market

In the case of the rail freight market, CN and CPR together control 94% of the market by revenue.

Based on 2008 annual reports of CN, CPR, and the Railway Association of Canada (RAC), total rail freight revenues in Canada were $9.957 billion, CN’s Canadian freight revenues were $5.632 billion and CPR’s Canadian freight revenues were $3.814 billion. CN alone accounts for 57% of the market based on revenues and CPR for 38%.

CITA’s On-Time Service Rating

SCORE 2009 2008 2007 2006 2005

EXCELLENT >= 191% - AIR FREIGHT AIR FREIGHT -LTL

AIR FREIGHT

GOOD 171% - 190%

LTL

COURIER

TL

COURIERCOURIER

MARINE

AIR FREIGHT

TL

COURIER

TL

ACCEPTABLE 131% - 170% AIR FREIGHTTL

LTL

TL

INTERMODAL

LTL

COURIERMARINE

POOR <= 130%

MARINE

INTERMODAL

RAIL

MARINE

INTERMODAL

RAIL

LTL

RAIL

MARINE

INTERMODAL

RAIL

INTERMODAL

RAIL

Rail Freight Service Review

With the passage of Bill C-8 in early 2008, the government undertook an independent review of rail service

Phase 1: Consulting studies Phase 2: Stakeholder consultation and

development of recommendations

Submissions to the Review Panel

Submission deadline April 30, 2010 Approximately 140 submissions

received by the Panel The following comments are based

on the CRS Submission

Coalition of Rail Shippers

CITA chairs the Coalition

17 Industry Associations – member companies account for 80+% of CN and CPR Canadian revenues

CRS recommended four “Core Principles” for the panel when considering more detailed recommendations from various stakeholders

CRS Core Principles

Performance Standards Focused on Core Elements of Railway service

Ongoing Independent Monitoring of Railway Service

Consequences for Non-Performance Negotiated Dispute Resolution Processes

Review Panel – Next Steps

The Panel has issued its preliminary thoughts on the possible direction of its recommendations

Expects to publish a preliminary report by the end of September

Final report to the Minister of Transport by year end

Investors and Railways

Investors may like railways’ pricing power,

But it attracts regulation and other government actions, e.g. LCV

trucks now allowed in 7 provinces

Is exercising monopoly power really in the long-term interest of railway investors, or is it:

Short term gain for long term pain?

Thank YouThank You

Questions, comments, Questions, comments, debate?debate?

www.cita-acti.cawww.cita-acti.ca