Statement to the Standing Committee on Agriculture and Agri-Food Concerning Grain Transportation: The Hopper Car Fleet

Statement by Mr. Neil Thurston, Director, Rail Economics of the Canadian Transportation Agency

Room 371, West Block, Parliament Buildings
Ottawa, Ontario
December 2, 2004

(check against delivery)

Thank you. Good morning, my name is Neil Thurston. I am the Director of the Rail Economics Directorate of the Canadian Transportation Agency. With me is Jim Riegle who is the Manager of the Grain Division of that Directorate.

We thank you for inviting the Canadian Transportation Agency before your Committee to speak about the Agency's role regarding the economic regulation of railways involved in the movement of western grain.

I have a short statement explaining the Agency's role, some work we have done and are currently doing for Transport Canada on the hopper car issue and what responsibility the Agency will have if and when the hopper cars are disposed of by the federal government.

The Agency has a mandate under the Canada Transportation Act (the Act) and other federal Acts to administer the economic regulatory provisions affecting all modes of transport under federal jurisdiction.

From a western grain rail transportation perspective, the Agency:

• resolves complaints between shippers and railways concerning rail rates, service and other matters,
• administers the railway Revenue Cap regime, and
• undertakes studies upon request by the Minister of Transport

The Revenue Cap

Now turning to the revenue caps - the Agency annually determines the Revenue Caps for both Canadian National Railways (CN) and Canadian Pacific Railway (CP) and their respective revenues derived from the movement of western grain. The policy was implemented on August 1, 2000 and replaced the old policy of rate regulation. The new policy provides for a Cap on total railway revenue for western grain movements to off-shore export points and to Thunder Bay/Armstrong for Eastern Canadian domestic markets. Grain is the only commodity carried by the railways that has a Cap. Railways and shippers negotiate specific freight rates for western grain movements under this Regime. The railways keep one proviso in mind during negotiations - that the revenue to be generated from all movements is not to exceed their respective revenue caps.

The Caps are derived using a formula set out in section 151 of the Canada Transportation Act. Each year, the Agency is required to determine the Revenue Caps and grain Revenues by December 31st for the Crop Year which closes on July 31st.

Inputs into the formula include a Base Year average revenue/tonne and an Inflation Index, tonnage and a small adjustment for changing average lengths of haul, the latter three items for the year in question.

You might ask how can the railways operate under this Regime if they don't know what their respective caps are until after the close of the crop year. Think of the Regime as a mechanism that regulates the average revenue/tonne earned from all movements.

As long as the average revenue/tonne for the year in question is less than that given by the legislative Base Year figure adjusted by the Inflation Index that is determined in advance of the Crop Year, the railway will remain below its cap.

The Inflation Index

I should say a few words about the above-mentioned Inflation Index. We determine that Index by April 30th each year for the upcoming Crop Year commencing on August 1st. We hold a consultation session in Winnipeg each year in March with grain industry participants including farmers and their associations, grain companies, the Canadian Wheat Board, the railways and federal and provincial government officials. At that session, we present our preliminary determination and seek comment, input and acceptance of our calculations prior to a formal determination.

The Index simply reflects a composite of the forecasted prices for railway labour, fuel, material and capital purchases for the upcoming year. While forecasting things like future fuel prices can be very difficult, the process that we follow has resulted in acceptable results. Over the past 20 years since we have conducted this exercise, our composite forecasted Inflation Index has been, on average within 0.2% of actual figures. The input that we receive from participants at the consultation session has greatly assisted in achieving this result.

Since the 2000-01 crop year, the Inflation Index has risen only 1%.

Railway Revenue

Our work under the Revenue Cap Regime also involves the determination of railway revenue from western grain for the Crop Year in question. This calculation is made at the same time as we determine the Revenue Caps. The legislation sets out the revenue items that are to be included and excluded from the calculation. This is not to say that it is cut and dried. Each year, interpretations and new issues arise requiring decisions to be made as we make the annual determination.

For the first three crop years under the Regime, the railways have not exceeded their respective caps. The gap between actual revenue and the combined caps has grown significantly over the three years, rising from about $6 million the first year to almost $24 million last year. In other words, shippers have benefited since the railways have not earned all of which they were allowed to earn under the Regime over the past 3 years.

We are in the process of determining the Revenue Caps and Revenues for the Crop Year just ended. These determinations will be made before December 31st.

Government Hopper Cars

As you know, the Federal and two Provincial Governments as well as the Canadian Wheat Board supply grain hopper cars to the railways for the movement of western grain. The ownership costs of these cars are not included in the underlying costs that were used in the development of the Revenue Cap formula. However, the cost to maintain this equipment by the railways is included in these underlying costs.

Earlier this year, Transport Canada requested that Agency staff determine an estimate of the amount per car for maintenance of the Government of Canada hopper cars that would be embedded in the combined CN and CP revenue caps for Crop Year 2003-04. We estimated this amount to be $4,329/car. It is derived from the 1992 cost base and reflects railway maintenance practices at that time.

I won't go into describing the details behind the estimate - suffice to say that we arrived at the figure through analysis of railway costing and grain revenue data consistent with established publication/methodologies.

Post Disposal of Hopper Cars

In the event that the federal government sells or leases its fleet of hopper cars, section 151 of the Act requires the Agency to make adjustments to the Inflation Index to reflect the incremental costs incurred by the railways in acquiring cars following the Government's disposal of the cars. In short, the Agency is required to incorporate an adjustment to the Inflation Index to capture incremental costs incurred by the railways if they buy the rail cars or lease them from a 3rd party.

Over the past year, we have been asked by the Farmer Railcar Coalition (FRCC) to estimate this adjustment assuming various scenarios for the disposal of the cars. To this end, we have met with the FRCC on a number of occasions and discussed matters with them. But we have not been able to identify what exactly will happen - basically at this point there are too many uncertainties. The language of the Act does not clearly specify that downward adjustments can be made. As well, uncertainties exist regarding the final terms and conditions attached to any disposal.

In determining the revenue cap each year we act as a regulatory tribunal - like a court - where we hear from all sides on the facts. We consider what the law means when a particular interpretation issue arises. Then we issue a decision. We can't issue decisions on hypothetical questions or answer questions when we are not in possession of all the facts.

Current Maintenance Costs

Just before closing and on the topic of current hopper car maintenance, various figures have been placed on the table regarding what it might cost currently for the maintenance of the hopper car fleet. Transport Canada has requested the Agency to develop an estimate of the railways' current costs of maintenance as part of its due diligence review of disposal options. We are currently working on this request.

Dispute Resolution Mechanisms

I have not mentioned anything about the dispute resolution provisions found in the Act which can be used by parties to resolve matters regarding rail service and rate complaints. We can provide a separate description of these provisions if you wish. I would like to mention, though, that the Agency offers a Mediation Service to assist parties in finding solutions to disputes without having to trigger a formal application to the Agency under the Act. This is often a preferred mechanism for resolving disputes between parties. Mediation is quick and inexpensive and allows parties to take ownership of their own solution. We have participated in a number of highly successful mediations involving western grain rail service issues and are prepared to assist on any matters which remain at issue today.

Thank you for your attention.