Decision No. 114-R-2001

March 16, 2001

March 16, 2001

IN THE MATTER OF the Western Grain Revenue Cap established pursuant to Division VI, Part III of the Canada Transportation Act, S.C., 1996, c. 10.

File No. T6650-17


INTRODUCTION

The purpose of this Decision is to inform western grain participants of the Canadian Transportation Agency's (hereinafter the Agency) decision concerning the interpretation of a number of items that are to be considered when the Agency determines a railway company's grain revenue for revenue cap compliance purposes pursuant to the maximum grain revenue entitlement provision under the Canada Transportation Act (hereinafter the CTA).

BACKGROUND

Effective August 1, 2000, a new "revenue cap" regime for the movement of western grain by a prescribed railway company replaced the former rate scale regime for such movements. As a result, the CTA requires the Agency to determine each railway company's revenue cap annually and to determine whether each cap has been exceeded by the railway company. The legislation sets out the formula to be used by the Agency in its determination of each railway company's revenue cap and lists certain items that are to be considered by the Agency when determining a railway company's grain revenue.

In a letter dated November 24, 2000, accompanied by a consultation document consisting of two exhibits (hereinafter the consultation document), Agency staff requested western grain participants to provide their comments on the interpretation of a number of items that affect western grain railway company revenue determinations. Exhibit 1 of the consultation document provided four tables: two which listed items that were to be, or not to be, included as revenue; and two which listed items that would, or would not, reduce revenue. These four tables, which will be amended in part as a result of this Decision, are attached as an appendix to this Decision.

The consultation document contained a second exhibit, Exhibit 2, which discussed the thirteen items, including a number of sub-components, that were listed in Exhibit 1. Agency staff provided some general interpretations for each and called upon the western grain participants to provide more comprehensive interpretations. If Agency staff were aware of issues related to the interpretation of a particular item, a brief summary of those issues was provided in Exhibit 2. While respondents addressed many of these items in their comments which were subsequently filed with the Agency, they also raised a number of related issues that had not been identified by Agency staff. These related issues are also discussed in this Decision.

Under the new revenue cap regime, a prescribed railway company's grain revenue cannot exceed a certain limit. Hence, it is vital for the industry to know whether a particular item constitutes revenue or not, or whether it constitutes a reduction to revenue or not. It is also vital for the industry to have relatively clear interpretations of these items. For example, if an item is interpreted by the Agency to be a shipper penalty, its associated revenues are not included when determining a prescribed railway company's grain revenue under the revenue cap regime.

AGENCY DECISION

The items listed below follow the same order and numeric sequence as that in the consultation document.

1.0 Revenue from the transportation of freight

The main source of grain revenue results from the transportation of freight. In the consultation document Agency staff provided a general interpretation of this item as follows:

Revenue from the transportation of freight: is revenue earned by the prescribed railway company from the movement of western grain as defined in Division VI of the CTA. Freight revenue from the movement of western grain is basically generated by application of rates contained in published tariffs or in confidential contracts.

The respondents found the above general interpretation to be acceptable. However, a number of issues or concerns related to revenue were raised and are discussed below.

Certain respondents raised concerns as to whether the revenue cap could be circumvented by the sale of a prescribed railway company or by the establishment of subsidiaries by a prescribed railway company. Given the power within section 152 of the CTA for the Governor in Council to make regulations specifying railway companies for the purposes of the definition of "prescribed railway companies" in section 147 of the CTA, and given accepted accounting rules, the Agency finds that sufficient means exist to deal with these situations if, and when, they arise.

Another respondent indicated that when grain originates on a short line railway which interchanges with a prescribed railway company for furtherance to destination, the prescribed railway company should claim the full revenue generated from the movement of grain from the point of origin to the final destination. However, this is inappropriate as the CTA's definition of movement of western grain requires that the movement be by a prescribed railway company. Hence, unless the short line railway company is a prescribed railway company, the portion of revenue relating to the short line movement is ineligible as revenue under the revenue cap regime. Similarly, the miles relating to the short line movement will not contribute to the determination of the length of haul.

Several respondents indicated that the Agency's list of items that are to be included in revenue should include all accounts that relate to revenue set out in the Uniform Classification of Accounts (hereinafter the UCA). While it is true that the Agency established the UCA, its purpose is primarily to set out a general accounting and reporting framework. Other factors, primarily set out in legislative provisions of the CTA, determine or provide guidelines as to program definitions. Nevertheless, the Agency recognizes its responsibility to capture all qualifying grain-specific revenues (and revenue reductions) under the revenue cap regime.

Several respondents raised two general issues: should the railway companies be allowed to charge for activities that they did not charge for prior to Bill C-34 amendments and should railway companies be able to charge for services above a historical level or base amount? The Agency notes that one of the Government's policy intent of the recent Bill C-34 amendments to the CTA is to make participants more accountable if the grain handling and transportation system is to improve. Consequently, in situations where shippers or railway companies fail to meet their obligations, penalties should apply. Revenue from penalties is not included as railway revenue under the revenue cap regime. The Agency expects that the following determinations, herein, will meet these concerns by offering certainty as to what items constitute revenue or a revenue reduction under the revenue cap regime.

2.0 Revenue from ensuring car supply

The consultation document noted that additional railway company revenue resulting from ensuring car supply would qualify as revenue for revenue cap purposes. The classic example of such a system is the United States-style "bid-car" system, where shippers pay an amount in advance to guarantee car supply. However, the question posed in the consultation document queried whether a railway company's recently-designed Advance Ordering System (hereinafter the AOS) - wherein shippers bid penalties applicable in the event of shipper non-performance, also constituted railway revenue from ensuring car supply.

The respondents were divided on this issue. The railway companies argued that the AOS was a penalty system, with the result being that any generated amounts would be excluded from railway revenue. The provincial governments were split on this issue and most shipper organizations maintained that it should be designated as a system to ensure car supply system (with generated amounts to be included as revenue) and not a penalty system.

Several reasons were provided in support of the AOS being designated as a penalty system with generated amounts being excluded from revenue. First, it is an optional system for the management of risk available to qualifying participants willing to enter into a contract with a railway company. Second, the penalties are bilateral as they apply to both shippers and railway companies. Third, the penalties apply only when applicable terms and conditions are not met. Fourth, the contractual penalty payments are intended to penalize inefficient activities beyond the railway company's control that adversely affect the use of railway assets. For example, it is an attempt to reduce phantom orderings and the breach of the commitment to ship.

Reasons were also given in support of the AOS being designated as a system to ensure car supply with generated amounts being included in revenue. Some respondents indicated that any system that requires shippers to bid for cars, regardless of whether shippers bid for a premium or for a penalty, should be considered a system for ensuring car supply. Another respondent indicated that the amount bid as penalties was essentially the price of guaranteeing car supply.

In reviewing this matter, the Agency notes that the AOS differs from a typical bid-car supply system because under a bid-car system, an amount must be paid "up-front" in order to guarantee car supply. However, under the AOS, no amount is paid provided that the shipper takes delivery of the car, as per the agreement. Given that participation in an AOS is largely optional, that the penalties apply in both directions (to shippers and to railway companies), and that penalties only apply when a shipper or railway company fails to meet its commitment, the Agency finds that the AOS is essentially a penalty system.

The Agency notes that the shipper penalty amounts related to advance car ordering differ between the Canadian National Railway Company's (hereinafter CN) and the Canadian Pacific Railway Company's (hereinafter CP) car ordering systems. CN's tariff, for the most part, sets out a flat $250/car charge to be paid by the shipper in the event of the shipper's non-performance in accepting and returning a railway car in accordance with the car supply contract. CP's tariff sets out a regime that requires shippers to bid the penalty amounts. The Agency is concerned that under the bidding system, shipper non-performance penalties could be bid up to a point that exceeds a reasonable amount that would normally compensate the railway company for its costs if the shipper did not perform in accordance with commitments under the car supply contract. The Agency therefore finds that the flat rate charge is more reasonable. As a result, the Agency finds that amounts up to $250/car, which are paid by shippers in the event of shipper non-performance regarding car supply contracts, will be categorized as a penalty and will not be included in railway revenue.

This amount represents a reasonable estimate of railway company costs incurred in furnishing railway cars to the system. The Agency finds that amounts exceeding $250/car is a source of revenue to the railway companies as it exceeds this reasonable estimate of railway company costs. Therefore, such excess amounts will be included in railway company grain revenue.

The Agency will monitor the penalties levied within the AOS and will review the AOS designation as a penalty system, if required.

3.0 Revenue from providing premium service

The consultation document listed seven examples which might constitute premium service but acknowledged that two examples, staging and additional switching, may belong in another category. The respondents directed all of their comments to the two examples in question.

Staging

The respondents were divided as whether to categorize revenue from staging, which is the assembling of cars in transit to achieve the timely arrival for loading a specific vessel in port, as an amount received from providing a premium service or as an amount received as a penalty. The railway companies argued in favour of staging being identified as a penalty while most non-railway company respondents argued in favour of it being treated as a premium service.

The main reason provided for the designation of staging as a penalty is that it represents an alternative to using normal rail operations which, for staged traffic, would certainly trigger demurrage and storage charges. Demurrage and storage charges are both identified in paragraph 150(3)(b) of the CTA as being penalties in nature.

Those who indicated that staging should be treated as a premium service noted that it is a service which is offered upfront by the railway company, and shippers agree - in advance - to pay for it. Concern was expressed that if it is not designated as a premium service (and consequently, an inclusion to revenue) that the railway company would charge for other services that did not incur fees prior to the enactment of the reform legislation.

The Agency finds that staging is a penalty because it is an alternative to using normal rail operations which, for cars requiring in-transit assembling, would trigger penalties in the form of demurrage and storage charges. Hence, the additional staging charges are an upfront charge for the railway company's agreeing to provide a less efficient gathering system, at the shipper's request. The Agency notes that shippers have alternatives to staging: as stated above, they can use normal rail operations to assemble cars in transit and pay the associated demurrage and storage fees, or they can use new terminal facilities at port to accommodate specialty crops.

In view of the above, the Agency will list staging as an item in Table 1B (see Appendix). Therefore, its revenue will not be included under the revenue cap regime.

Additional switching

The respondents were divided as whether to categorize revenue from additional switching as a premium service or as a penalty. Part of the difficulty with this issue arose because additional switching can result from two completely different situations where:

  1. additional switching is requested by the shipper, or
  2. additional switching is necessary due to shipper error or failure to meet obligations.

The Agency does not view i) above as a premium service as it does not create a faster or more efficient movement which is a typical characteristic of premium service. Nor does the Agency consider it to be a penalty-oriented, ancillary charge. Given that this type of switching represents an increased service that is requested by the shipper, the Agency finds that its associated revenue should be included as revenue under the revenue cap regime.

Accordingly, the Agency will list "amounts for additional switching, requested by the shipper" as another item in Table 1A (see Appendix), which lists revenues that are to be included under the revenue cap regime.

Regarding ii) above, the Agency finds that revenue resulting from additional switching which is necessary because of shipper error or failure to meet previously-established shipper obligations constitutes revenue from a penalty situation. Therefore, these revenues will not be included as revenues under the revenue cap regime. The Agency will list this activity (additional switching due to shipper error or failure to meet obligations) under the penalty category.

4.0 Allocating revenue for movements involving interswitching or exchange switching

The consultation document requested opinions on the best method for allocating revenues for movements involving interswitching or exchange switching when two railway companies handle the grain movement. The railway companies opposed the inclusion of any revenue for interswitching or exchange switching under the revenue cap. This issue is dealt with first, for interswitching, followed by a discussion of the appropriate method of allocating revenues. Both issues are then addressed for exchange switching.

Interswitching

Interswitching is defined as the exchange of freight cars between the lines of different railway companies pursuant to the CTA. It applies only to federally-regulated railway companies. The Railway Interswitching Regulations prescribe the terms and conditions under which the freight cars are exchanged, for example: the Regulations apply to traffic moved within a 30-kilometre radius of an interchange connecting two railways and a shipper's facilities at either origin or destination of a traffic movement. The Railway Interswitching Regulations currently provide that rates are to be established for four distance-related zones, and lower rates are prescribed for blocks of 60 or more cars.

In opposing the inclusion of revenue for the interswitching of grain cars under the revenue cap regime, the railway companies contended that:

  1. interswitching is a legislated form of competitive access and that its revenue should be treated in the same way as for another form of regulated competitive access, i.e., running rights, which is specifically excluded under paragraph 150(3)(c) of the CTA;
  2. interswitching charges are intra-railway transactions and do not constitute charges directly to the shippers;
  3. it would be inconsistent to include interswitching charges under the revenue cap when they were not included in the 1992 base year costs nor in the Agency's railway costing analysis in support of the Kroeger Review;
  4. interswitching was never contemplated when the railway-specific revenue caps were set;
  5. collecting data for interswitching movements would be very difficult; and
  6. interswitching movements are not eligible movements within the meaning of the revenue cap regime.

The Agency finds that these arguments do not justify the exclusion of interswitching revenues from under the revenue cap, noting that:

  1. interswitching and running rights are different operations and while paragraph 150(3)(c) of the CTA states that compensation received for running rights should not be included as revenue for the host railway company, the revenue will be captured as grain revenue for the line-haul railway company;
  2. while interswitching charges may be assessed against the line-haul railway company, the shipper indirectly pays for this service through his composite charge paid to the line-haul railway company;
  3. there is no inconsistency as grain interswitching did not occur in 1992, nor in 1998 to the Agency's knowledge;
  4. interswitching, which is a cornerstone of the CTA, must have been contemplated and reviewed during the development of Bill C-34 legislation. It received no special reference within the legislation;
  5. in respect of data collection, the Agency acknowledges that the railway companies may have to enhance their current systems or share data to identify grain interswitched movements; and
  6. definitions of "interswitching" and "traffic" contained in the CTA include references to both goods and rolling stock, thereby ensuring that interswitching movements make up part of eligible movements under the revenue cap regime.

A prevailing factor in the Agency's decision that interswitching revenues are to be included under the revenue cap regime relates to the fact that when interswitching is involved in a grain movement, the small portion of the movement relating to the railway company performing the interswitching meets the conditions of a grain movement: it comes from an eligible origin, it involves a qualifying type of grain, the movement is by a prescribed railway company, and ultimately, the grain moves to an eligible destination.

As for the options of allocating revenue, the consultation document proposed two options. Under Option 1, the railway company performing the interswitching services would be assigned the related interswitching revenues. The line-haul railway company would claim its revenues for the entire grain movement net of the interswitching amount paid to the interswitching railway company. Mileages would be assigned to each railway company based on the distance each railway moved the traffic. Under Option 2, the line-haul railway company would record the total revenue and total miles for the combined railway movement.

The railway companies preferred Option 2 (if it was deemed appropriate to include interswitching revenues for grain movements) while the non-railway company respondents preferred Option 1.

The Agency recognizes that Option 1 assigns a disproportionate amount of revenues (relative to miles) to the railway company performing the interswitching, and to a lesser extent, to the line-haul railway company. However, if the extent of interswitching between the railway companies is reasonably balanced, any impact would be reduced and possibly neutralized. The Agency also recognizes that Option 2 would severely inhibit interswitching as a competitive option. That is, Option 2 would require the line-haul railway company to claim the total grain revenues under the revenue cap regime while, in fact, it only receives the net amount (net of its interswitching payment).

The Agency has examined other methods for allocating interswitching revenue but finds all methods problematic. In view of the above, the Agency concludes that Option 1 represents the best method for allocating revenues for interswitched grain movements. This approach will not impair the utility of interswitching as a competitive option for shippers.

Exchange switching

For the purposes of western grain, exchange switching is a non-statutory term. It refers to a voluntary agreement between two railway companies pertaining to the exchange of grain cars in order to deliver cars to an otherwise inaccessible terminal. The exchange takes place at an agreed upon, operationally-convenient location, and fees are established by the two railway companies, outside of any regulation.

In opposing the inclusion of revenue for the exchange switching of grain cars under the revenue cap regime, the railway companies provided arguments similar to those as for interswitching. However, the Agency's findings on interswitching apply equally to the issue of exchange switching. Furthermore, grain exchange switching has taken place every year since 1984, and the latest 1992 costing review included workloads for grain exchange switching. Consequently, the railway company revenue caps include allowances to compensate the railway companies for their performing grain exchange switching. Therefore, the Agency finds that revenue for grain exchange switching must be accounted for under the revenue cap.

The consultation document made a general suggestion that the method for allocating these revenues could parallel that for interswitching. However, grain exchange switching differs from interswitching in that recordable mileages for the railway company performing the exchange switching may not exist, as exchange movements occur within yard limits.

The Agency finds the following method to be the most suitable. Each railway company should identify i) the total exchange switching revenue received from a prescribed railway company for the movement of grain for the given crop year; and ii) the total exchange switching paid to a prescribed railway company for the movement of grain for the given crop year. The net amount (receipts less payments) will then be included as a bottom-line adjustment, positive or negative, for each railway company when determining final crop year grain revenues.

5.0 Other items

Two respondents expressed concerns with this category (which appears in all four tables in Exhibit 1 of the consultation document) in that it might present a "loophole" and "undermine" the revenue cap determinations.

The main reason for this category is that it acknowledges that the grain industry is undergoing rapid changes which will likely continue to evolve in the future, and these changes may require corresponding changes in the list of items in the Agency's four tables.

6.0 Incentives, rebates, or any other similar reductions not to be included as revenue

The consultation document gave several examples of the applicability of incentives and rebates and requested participants' views as to whether incentives paid (or allowed) by the railway companies to truckers to haul grain to elevators should qualify as being outside revenue under paragraph 150(3)(a) of the CTA.

The railway companies indicated that trucking incentives or rebates paid by the railway companies should be an allowable deduction to grain revenues. Most of the non-railway company respondents indicated that trucking incentives or rebates paid by the railway companies should not be an allowable deduction to grain revenues. Both arguments were based on the interpretation of subsection 150(3) of the CTA.

Of particular importance to the Agency is the fact that the revenue cap statistics for the base year, as set out in section 151 of the CTA, do not include reductions for trucking incentives. Therefore, it would be inconsistent to allow trucking incentives to reduce revenue under the revenue cap determinations. Also, there is no indication in sections 150 or 151 of the CTA that trucking incentives should be considered as a reduction to railway company grain revenues. Therefore, the Agency has decided that incentives, or rebates paid by the railway companies to truckers to haul grain to elevators do not qualify as incentives or rebates under paragraph 150(3)(a) of the CTA. Consequently, trucking incentives or rebates paid by the railway companies will not reduce grain revenue under the revenue cap regime.

7.0 Amounts earned by the railway company as a performance penalty or as being in respect of demurrage or storage (not to be included as revenue)

7.1 Ancillary charges

The consultation document gave a brief definition of penalties, aside from demurrage and storage, and listed four situations where ancillary charges may apply. The first three were: the diversion or reconsignment of traffic, the occurrence of "no-bills", and the overloading and re-weighing of cars. Consistent with the Agency's views provided in Section 3.0 above, the reference to the fourth activity example - additional switching - should be replaced with the following:

"additional switching, necessary due to shipper error or failure to meet obligations".

The railway companies indicated that the cited examples of ancillary charges reflect penalty circumstances. Several other respondents indicated that the railway companies should only be allowed to charge for these activities if their revenues qualify as revenues under the revenue cap. Their rationale is that they were rarely charged for these activities in the past, and they view the railway company charges as an attempt to obtain additional revenue outside of the revenue cap.

Each of the four activities reflect railway company services that exceed normal railway company obligations. Furthermore, each one is triggered as a result of shipper error and results in increased railway company costs. The charges are designed to compensate the railway company for inefficient activities and administrative burden beyond its control. For these reasons, the Agency finds ancillary charges of this nature to be penalties and consequently, their revenues will not constitute revenue under the revenue cap regime. However, the Agency will monitor railway company ancillary charges applied to grain movements to ensure that they are reasonable and reflect penalty circumstances.

7.2 Demurrage

The consultation document provided a general definition of demurrage which respondents accepted. The definition was:

Demurrage: is a charge to freight cars, applicable to the shipper, which typically occurs when established time limits are exceeded for the loading or unloading of the cars. It is a penalty which is intended to penalize inefficient activities beyond the carrier's control.

Many respondents, however, complained that shippers were once allowed five days, on average, before demurrage applied. Following the implementation of Bill C-34 amendments, that time frame was reduced to two days. In both cases, the clock did not start ticking, for demurrage rules purposes, until 00:01 hours the following day. Given that the demurrage rules for other commodities, in general, are subject to the same conditions before demurrage charges apply, and given that there is no evidence to suggest that grain should be treated differently than other commodities, the Agency finds it reasonable for the railway companies to allow for the same conditions to apply to grain.

However, CN recently revised the demurrage rules for grain so that the two-day allowance period begins immediately after the placement, or notification of constructive placement, of a car. Consequently, grain has on average about 12 hours less time before the two-day allowance period begins than for other commodities. The Agency finds CN's current grain demurrage rules unreasonable and will therefore allocate an appropriate portion of CN's grain demurrage charges to be grain revenue under the revenue cap regime.

7.3 Storage

The consultation document provided a general definition of storage which respondents accepted. The definition was:

Storage: is a charge to freight cars, applicable to the shipper, which typically occurs when the in-transit movement of cars is stopped and the cars are "stored" for a certain time, before continuing their movement towards the destination.

Except for comments relating to staging which were addressed above, there was no additional feedback on this topic.

8.0 Running rights

No comments were submitted on running rights.

Paragraph 150(3)(c) of the CTA states that a prescribed railway company's revenue for the movement of grain is not to include compensation for running rights. The Agency interprets this to mean that the prescribed railway company who acts as a "host" to another railway company is not to include compensation for running rights in its grain revenue statistics. However, the Agency is of the opinion that the prescribed railway company performing the line-haul over the host railway company's tracks must include the gross revenue for the movement in its grain revenue statistics.

9.0 Industrial development funds (IDF)

This reduction to revenue is referenced in subsection 150(5) of the CTA. There were eight sub-components to this topic, and each are discussed below.

9.1 Definition of a "prescribed railway company"

Section 147 of the CTA provides the following definition of "prescribed railway company":

"prescribed railway company" means the Canadian National Railway Company, the Canadian Pacific Railway Company and any railway company that may be specified in the regulations.

At present, only CN and CP are prescribed railway companies. There was no issue with this definition.

9.2 Definition of "contribution"

The consultation document gave a general definition which was accepted by everyone. The definition was:

An industrial development fund contribution for the development of a grain-related facility to a grain handling undertaking is: any assistance or tangible benefit that can be valued in money such as cash, property or services provided by the railway company.

9.3 Definition of "for the development of a grain-related facility"

The respondents' views of how to interpret this phrase fell into two categories. The railway companies indicated that this phrase should include contributions for both physical and non-physical development. The other respondents indicated that the phrase should only include contributions that are for physical projects because a broader definition would open the door to contributions not intended by the legislation.

To date, more than 95 percent of the IDF contributions relate to projects that are physical in nature. Historically, the typical rail capital project involves the construction of new sidings, or extensions to existing sidings. The Agency finds it reasonable that IDF contributions "for the development of a grain-related facility" be restricted to projects of a physical nature.

9.4 Definition of "grain handling undertaking"

In the consultation document, it was noted that the definition of grain handling undertaking appears to encompass licensed operators at a primary, terminal, or processing elevator licensed under the Canada Grain Act. The Agency asked whether it should also include i) operators at unlicensed facilities, such as at processing plants, dehydration plants, plants for specialty crops and various processed grain products, and ii) any other party with whom the railway companies have a working relationship or dealings with respect to the movement of western grain.

The respondents' views fell into three groupings: some supporting licensed operators only, others supporting both licensed and unlicensed operators, and the railway companies which supported all three categories. A key fact that was noted by some respondents was that western grain movements not only originate from facilities operated by licensed operators, but also from facilities operated by unlicensed operators. The Agency does not find it reasonable to extend the definition to include virtually anyone involved with the movement of western grain.

The Agency finds that for the purposes of subsection 150(5) of the CTA, the definition of "grain handling undertaking" should include licensed operators at primary, terminal or processing elevators, licensed under the Canada Grain Act, and unlicensed operators at grain-related facilities such as seed processing plants, dehydration plants, facilities for the shipment of specialty crops and various processed grain products. A grain handling undertaking's facility located at port must be predominantly grain related.

9.5 Definition of ownership of undertakings

The consultation document provided a definition of ownership which was basically accepted by all respondents. The definition was:

Ownership: could refer to direct or indirect ownership, majority or minority equity interests, non-voting equity positions, and may include beneficial ownerships.

Currently, neither CN nor CP own any grain handling undertakings.

9.6 Inclusion of past years' contributions

Exhibit 1 of the consultation document noted that the amortized amount of IDF contributions applicable to a given crop year would consist of:

  1. contributions made during the given crop year which are fully applicable to (or fully amortized within) the given crop year, plus
  2. the amortized amount of contributions made during the given crop year which are to be amortized over a number of years, beginning with the given crop year, plus
  3. any amortized amounts for PAST years' contributions (from a date yet to be determined) which are amortized over a number of years, and which carry forward into the given crop year.

The respondents were divided on whether, or how, past years' IDF contributions should be recognized by the Agency. The railway companies were in favour of including past years' contributions; representatives from the governments were split on this issue; and shipper organizations were generally opposed.

Several respondents indicated that they were not in favour of the railway companies receiving a reduction to revenue for any IDF contribution, regardless of whether it was made in the past, present, or in future years because the farmers have no control over it, and it was suggested that the system was being rationalized at the farmers' expense. Hence, those respondents felt that subsection 150(5) should not have been included in the CTA.

Some of these respondents also acknowledged that given subsection 150(5) is in legislation, IDF contributions since August 1, 2000 must be recognized, however, they disagreed with the inclusion of past years' IDF amounts, i.e. component iii) above. Some respondents suggested that the Agency would be making the legislation "retroactive" by including past years' IDF amounts.

In total, about half of the respondents disagreed with the inclusion of past years' IDF amounts. The main argument was that past years' contributions were made based on their economic merit at that historical point in time, and allowing past years' contributions as a subsection 150(5) credit would provide an additional, unexpected "secondary benefit" to the railways. Others suggested that as the Bill C-34 provisions took effect on August 1, 2000, the inclusion of past years' contributions might contravene the intent of the CTA. Other respondents indicated that, in their opinion, the railway companies are already receiving sufficient returns to fund their own investments.

The railway companies maintained that the amortized amounts related to past years' contributions should be included under subsection 150(5) of the CTA.

The Agency finds that IDF contributions, for the most part, relate to the extension of sidings at existing elevators or the construction of new multi-car sidings at new high-throughput elevators. In each case, a more efficient grain handling system results. Shippers benefit from IDF contributions as shipments move in larger blocks, triggering lower rates through application of multi-car block discounts. It is important to note that contributions made in the past result in efficiencies and savings that continue to occur today and into the future. Therefore, in the Agency's opinion, subsection 150(5) was included in the CTA in recognition of the related efficiencies and savings that benefit shippers, and in order to encourage a continuation of IDF contributions.

IDF contributions are essentially investments of a physical nature and consequently, should be treated in a parallel manner to other railway company capital investments. Capital investments are unique in that their benefit spans a number of years and their associated cost is typically amortized over the corresponding period in order to match the benefit to the expense. This is a standard treatment according to accepted railway accounting and costing principles.

This standard is reinforced in the wording of subsection 150(5) of the CTA. That is, the provision refers to the "amortized" amount of contribution, which implies that contributions are capital in nature. In determining the reasonable amortized amount of IDF contributions in accordance with subsection 150(5) of the CTA, the Agency finds that it would be inconsistent to spread the costs of any new contribution made today over a future time period while, at the same time, ignoring the amortized costs of past years' contributions whose benefits extend to today and into the future. In this respect, it is important to recognize that these historical contributions form part of a railway company's ongoing, as well as future, operations.

In conclusion, the Agency finds that the amortized amounts of contributions for a given crop year under subsection 150(5) of the CTA includes amortized amounts relating to past years' contributions.

9.7 Eligible interval for recognizing past years' contributions

In the consultation document, three start dates were proposed: 1992 - the year of the last Railway Costing Review; August 1, 1994 - the date that rates based on the 1992 Costing Review first took effect; and August 1, 1995 - the date of the repeal of theWestern Grain Transportation Act.

Few comments were received on this issue. The railway companies preferred the two earlier dates while the non-railway company respondents preferred the August 1, 1995 start date.

The Agency finds August 1, 1995 to be the most appropriate starting date for recognizing IDF contributions. This date coincides not only with the repeal of the Western Grain Transportation Act, but also, for the most part, with the introduction of IDF contributions.

9.8 IDF accounting

The consultation document noted that past years' IDF contributions would require a certain amount of monitoring and accounting adjustments under certain circumstances. Respondents agreed with this requirement and the Agency will monitor and make accounting adjustments when necessary.

10.0 Recognizing amounts paid by a railway company for interswitching or exchange switching

This topic was discussed under item 4.0 above. This section was put into the consultation document to make it clear that if a railway company pays an amount for interswitching or for exchange switching related to grain, it will receive a credit for this payment.

11.0 Dispatch

The consultation document provided a definition for dispatch. The definition, as shown below, has been revised slightly to match the definition in subsection 150(4) of the CTA.

Dispatch: represents a payment or allowance given by the railway companies to shippers in return for the loading/unloading of cars before the expiry of the period agreed on for loading or unloading the grain.

Amounts so paid or allowed by the railway company for dispatch do not reduce revenues.

12.0 $10,000 per mile payments for discontinuance in operation of a grain dependent branch line.

In the consultation document, it was indicated that the annual $10,000/mile payments to municipalities or districts upon the discontinuance of operations of grain-dependent branch lines should not reduce revenues for revenue cap purposes.

There was no disagreement with this proposal. The Agency thus deems that the three payments to municipal or district governments upon the discontinuance of operations of grain-dependent branch lines do not reduce revenues under the revenue cap regime.

13.0 Performance penalties paid by the railway companies

The consultation document provided a basic definition of performance penalties paid by the railway companies. The definition was acceptable to all parties, except for CN which proposed a change in wording. The definition was reviewed by the Agency and the term "performance measures" was revised to "performance standards". The revised definition appears below:

Performance penalties paid by the railway companies: are a charge to freight cars, applicable to the railway company, when previously-established, and mutually agreed-upon performance standards are not achieved by the railway company. In such cases, previously-established, and mutually agreed-upon charges apply.

These amounts do not reduce railway company revenues.


APPENDIX

TABLE 1A: INITIAL REVENUES

SHALL INCLUDE:

ITEM COMMENTS
REVENUE FROM THE TRANSPORTATION OF FREIGHT earned by the prescribed railway company from the movement of western grain as defined in Division VI of the CTA. Freight revenue from the movement of western grain is basically generated by application of rates contained in published tariffs or in confidential contracts.
Amounts received by the railway company for ENSURING CAR SUPPLY The amounts above $250/car that a grain shipper pays under Advance Ordering Systems are deemed to be grain revenue.
Amounts received by the railway company for PROVIDING PREMIUM SERVICE  
Amounts received by the railway company for PERFORMING INTERSWITCHING or EXCHANGE SWITCHING  
Amounts for ADDITIONAL SWITCHING, requested by the shipper  
OTHER ITEMS, as they arise, if deemed to be appropriate. A portion of CN grain demurrage charges has been deemed to be grain revenue

TABLE 1B: INITIAL REVENUES

SHALL NOT INCLUDE:

ITEM COMMENTS
INCENTIVES, REBATES, or any other similar reduction paid or allowed by the railway company Ref: CTA Paragraph 150(3)(a)
Any amount that is EARNED by the railway company and that the Agency determines is reasonable to characterize as a PERFORMANCE PENALTY or as being in respect of DEMURRAGE or for the STORAGE of railway cars loaded with grain Ref: CTA Paragraph 150(3)(b)

NOTE: The railway companies' Advance Ordering Systems for car supply are, to a certain extent, designated as a penalty system.

Amounts for ancillary charges such as for reconsignment of traffic, "no-bills", and overloading and re-weighing of cars reflect penalties.

Amounts earned by the railway company for STAGING
Amounts for additional switching, necessary due to shipper error or failure to meet obligations
Compensation {received by the railway company} for RUNNING RIGHTS Ref: CTA Paragraph 150(3)(c)
OTHER ITEMS, as they arise, if deemed to be appropriate.  

TABLE 2A: REDUCTIONS TO REVENUES

THE FOLLOWING ITEMS REDUCE REVENUE:

ITEM COMMENTS
INDUSTRIAL DEVELOPMENT FUNDS (IDF)

"...if the Agency determines that it was reasonable for a prescribed railway company to make a contribution for the development of grain-related facilities to a grain handling undertaking that is not owned by the company, the company's revenue for the movement of grain in a crop year shall be reduced by any amount that the Agency determines constitutes the amortized amount of the contribution by the company in the crop year."

Ref: CTA Subsection 150(5)

NOTE: The amortized amount of IDF contributions applicable to a given crop year consist of:

  1. contributions made during the given crop year which are fully applicable to (or fully amortized within) the given crop year, plus
  2. the amortized amount of contributions made during the given crop year which are to be amortized over a number of years, beginning with the given crop year, plus
  3. any amortized amounts for PAST years' contributions (August 1, 1995) which are amortized over a number of years, and which carry forward into the given crop year.
Amounts paid or allowed by the railway company for INTERSWITCHING or EXCHANGE SWITCHING performed by another railway company.  
OTHER ITEMS, as they arise, if deemed to be appropriate.  

TABLE 2B: REDUCTIONS TO REVENUES

THE FOLLOWING ITEMS DO NOT REDUCE REVENUE:

ITEM COMMENTS
" ...amounts paid or allowed as DISPATCH by the railway company for loading or unloading grain before the expiry of the period agreed on for loading or unloading the grain." Ref: CTA Subsection 150(4)
Amounts paid by the railway company to municipalities or districts (at $10,000 PER MILE) resulting from the discontinuance of operations of a grain-dependent branch line listed in Schedule 1 of the CTA  
Amounts paid by the railway company as a PERFORMANCE PENALTY  
OTHER ITEMS, as they arise, if deemed to be appropriate.  
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