(Adds comments by Canadian National, forest producers)
OTTAWA, May 16 (Reuters) - The Canadian government said on Tuesday it planned to maintain a revenue cap on western grain that Canadian National Railway Co and Canadian Pacific Railway Ltd haul for export, a move farmers praised.
The rail firms oppose the cap, formally known as the maximum revenue entitlement (MRE). It dates back to 2000 and aims to balance the market power of the rail industry with that of farmers and grain companies, which in many areas rely on one rail company.
"We're going to maintain the MRE ... It's a good thing," Transport Minister Marc Garneau told a news conference.
Ottawa will tweak the system to give the railway companies more reasons to invest in rail cars to move grain, he said, an announcement that Canadian National welcomed.
Reuters first reported on Monday that the cap would stay. Railways say it reduces their incentive to invest in grain hauling.
Farmers say the cap controls costs when they deliver grain. Railways are critical to moving crops the vast distances from western grain elevators to ports in British Columbia and on the Great Lakes.
The Western Canadian Wheat Growers said the measures outlined in the bill should boost competition and capacity.
"We see all of this as positive and hope it ensures improved service of railways," said Daryl Fransoo, the group's director.
Maintaining the revenue cap is contained in draft legislation on modernizing Canada's rail transportation system. The ruling Liberals have a majority in the House of Commons, which means the legislation will be adopted.
Canadian Pacific said it was studying the bill. In a note to clients, RBC Dominion Securities Walter Spracklin said the bill was "a mild negative for railroads."
Shares of Canadian Pacific closed down 1.5 percent while Canadian National stock slipped 0.8 percent.
The draft legislation would also allow shippers of grain and other commodities such as lumber to seek financial penalties in service agreements with railways.
The Forest Products Association of Canada said the bill would help keep costs under control.
"Most of our mills are in rural and northern communities and have few options on how to get products to market," said head of the association Derek Nighbor.
The bill, which Ottawa hopes will be adopted in early 2018, would also extend limits on interswitching, the transfer of cars from one railway's line to the line of another. The measure is designed to boost competition from U.S. carriers such as BNSF Railway Co.
Rail companies are now obliged to transport hopper cars a maximum of 160 km (100 miles) to another firm's tracks. Under the new rules, that distance would be extended to 1,200 km in some circumstances. (Reporting by David Ljunggren; Editing by Andrea Ricci and Lisa Shumaker)