UPDATE 1-Ottawa should scrap railway grain revenue cap -study

(Adds other recommendations, background, transport minister
comment)
By Rod Nickel
WINNIPEG, Manitoba, Feb 25 (Reuters) - Ottawa should phase
out over seven years its cap on the amount of revenue railways
can earn transporting grain, a study for the Canadian government
recommended on Thursday, a move long urged by railways and
opposed by farmers and grain handlers.
A review of Canadian transportation laws, aimed at
modernizing the system, recommended that Western Canadian grain
movement become more "commercially grounded."
Canada's two big railways, Canadian National Railway Co
CNR.TO and Canadian Pacific Railway Ltd CP.TO , move most of
Western Canada's wheat, canola and other crops to the United
States or ports.
Farmers and grain handlers say keeping the revenue cap is
necessary because of limited railway competition in Western
Canada. Railways are critical to moving crops the vast distances
from western grain elevators to ports in British Columbia and on
the Great Lakes.
Grain movement slowed dramatically after the huge 2013
harvest, causing the then-Conservative government to impose
minimum grain volume requirements on the railways.
But critics of the revenue cap say it makes hauling grain
needlessly complex, and gives railways greater incentive to
prioritize other commodities. Last year, Ottawa fined both major
railways for earning too much revenue from grain.
The Liberal government, elected last year, made the 286-page
report public on Thursday. Transport Minister Marc Garneau said
he would carefully consider the findings.
The report also recommends that railways be allowed to set
aside up to one-third of their rail car fleets to allow shippers
the option of paying premiums to guarantee supply and service.
It also suggests the government not renew extended limits on
interswitching, the transfer of cars from one railway's line to
the line of another railway.
That move was meant to introduce competition from U.S.
carriers such as BNSF Railway Co BNISF.UL , but critics said it
was unfair.
CP spokesman Martin Cej and CN spokesman Mark Hallman said
the railways could not immediately comment.
The Western Grain Elevator Association, whose members
include Cargill Ltd CARGIL.UL , Richardson International and
Viterra Inc VILC.UL said it needed more time to review the
report.
Ottawa implemented the grain revenue cap in 2000 after it
eliminated a subsidy for grain movement by rail called the Crow
Rate. The cap applies to revenue the railways earn by moving
grain from the Western Canadian crop belt.