UPDATE 2-Canada bill to impose penalties for rail service failure

* Bill establishes shippers have right to service contacts

* Penalties up to C$100,000 per violation could be imposed

* Shippers, railways had failed to agree on a template

WINNIPEG, Manitoba, Dec 11 (Reuters) - Long-awaited federal legislation unveiled on Tuesday would force Canadian railways to reach service agreements with shippers that request them and could impose penalties on the railways if they fail to meet their obligations.

The bill, unveiled by Transport Minister Denis Lebel and Agriculture Minister Gerry Ritz at a press conference in Winnipeg, seeks to address complaints by grain handlers, miners and shippers of commercial goods, which want better service from the country's big railroads: Canadian National Railway Co and Canadian Pacific Railway Ltd.

Under the legislation, the railways will be obligated to respond within 30 days of a shipper requesting a service contract. If an agreement cannot be reached through commercial negotiations, arbitration would be available to a shipper to establish terms of service.

"There is an imbalance in the shipper-railway relationship," Lebel said at a news conference attended by shipping groups, but not railways. "(A government-appointed panel) recommended the use of service agreements as a tool to enhance clarity and predictability and reliability on rail service."

The new provisions provide incentives to shippers and the railways to negotiate commercially, and give the Canadian Transportation Agency the power to issue a fine up to C$100,000 ($101,000) for each violation of an arbitrated service level agreement.

Canada's biggest railroad, Canadian National, has warned that additional regulation could make the system less efficient. CN Chief Executive Claude Mongeau said there is no evidence of systemic problems moving freight by rail in Canada that warrant the government's move.

"I am troubled by the government's decision to introduce service legislation that is inconsistent with the facts underscoring improved rail service," Mongeau said in a statement. "...Canada should not put the commercial framework of its rail system at risk through unnecessary and overly burdensome rail regulation."

Lebel acknowledged that rail service has improved recently.

Canada is one of two big global producers of the soil nutrient potash, mined in Saskatchewan and moved to port by rail, and is also the world's third-biggest wheat exporter, with about 30 million tonnes of Western Canada grain hauled each year.

The railways also ship large volumes of coal and industrial and consumer goods.

Shippers have long said they are at a disadvantage dealing with just two dominant Canadian railroads, compared with the United States and other countries that have more competition for rail business. In addition, Canadian commodities, especially grain, are heavily export-dependent and rely on the railways to move to ports.

"Any legislated backstop that we can get is going to strengthen our ability to negotiate commercial agreements," said Jean-Marc Ruest, vice-president of corporate affairs for Richardson International Ltd, one of Canada's biggest grain handlers. "Up to this point, we've had a hard time doing that."

Representatives of shippers and railroads spent four months in a government-sponsored committee this year trying, but ultimately failing, to develop both a template for service agreements and a dispute resolution process that could be used commercially. Those talks followed a sweeping review of the country's rail freight system that began in 2008.

The result is that the government is having to impose a framework through the new bill, that must be passed by the House of Commons and Senate.

Shares of CN and CP were up slightly in midday trading in Toronto.