Decision No. 161-R-2013
DETERMINATION by the Canadian Transportation Agency of the 2013-2014 volume-related composite price index required for Western Grain Revenue Caps pursuant to Part III, Division VI of the Canada Transportation Act, S.C., 1996, c. 10, as amended.
 The Canadian Transportation Agency (Agency) is required to determine by April 30, 2013 the Volume-Related Composite Price Index (VRCPI) for crop year 2013-2014 commencing August 1, 2013 and ending July 31, 2014.
 In this Decision, references to 2013-2014 mean the crop year from August 1, 2013 to July 31, 2014.
 The “revenue cap” program, established August 1, 2000 for the movement of western grain by prescribed railway companies, requires the Agency to annually determine a revenue cap for each railway company and to subsequently determine whether each railway company has exceeded its cap.
 Subsection 151(1) of the Canada Transportation Act (CTA) provides the formula that the Agency is to use in determining the revenue caps. One of the inputs to the formula is the VRCPI.
 Subsection 151(4) of the CTA states that:
The following rules are applicable to the volume-related composite price index:
- in the crop year 2000-2001, the index is deemed to be 1.0;
- the index applies in respect of all of the prescribed railway companies; and
- the Agency shall make adjustments to the index to reflect the costs incurred by the prescribed railway companies for the purpose of obtaining cars as a result of the sale, lease or other disposal or withdrawal from service of government hopper cars and the costs incurred by the prescribed railway companies for the maintenance of cars that have been so obtained.
 The development of the 2013-2014 VRCPI involved detailed submissions of historical price information of railway inputs (labour, fuel, material and capital) from the prescribed railway companies, currently the Canadian National Railway Company (CN) and the Canadian Pacific Railway Company (CP). The submitted information was reviewed and verified by Agency staff. In addition, Agency staff developed forecasts for future changes in the price of railway inputs.
ISSUES CONSIDERED BY THE AGENCY
Paragraph 151(4)(c) of the CTA adjustment
 Paragraph 151(4)(c) of the CTA calls upon the Agency to make an adjustment to the VRCPI to reflect the costs incurred by a prescribed railway company for the purpose of obtaining cars as a result of the sale, lease or other disposal or withdrawal from service of Government hopper cars and the costs incurred by the railway companies for the maintenance of those cars.
 In Decision No. LET-R-113-2006, the Agency determined that a cost adjustment under paragraph 151(4)(c) was warranted following the Canadian Wheat Board (CWB) informing CN and CP that it would be offering each of the companies the opportunity to enter into leasing arrangements to secure the use of the hopper cars that had previously been provided without charge. In Decision No. 253-R-2006 dated April 28, 2006, the adjustment was made.
 In Decision No. 8-R-2013, a similar adjustment was made to reflect the changes in cost incurred by each of CN and CP in relation to the Saskatchewan Government hopper cars. That Decision established a methodology to be used in making future cost adjustments to the VRCPI. It also sets out two conditions by which an adjustment is to be made, namely (1) the Government hopper cars are sold, leased, disposed of or withdrawn from service, and (2) as a result of the first condition, the railway company obtains hopper cars. The Agency also indicated that it would continue monitoring the use of, and the contracts for, the replacement hopper cars to ensure that the cost adjustment it made continues to reflect actual costs incurred.
 In its submissions for this year’s VRCPI determination, CP disclosed that it is in the process of ending its leasing arrangements with the CWB and by August 1, 2013 will have returned all CWB cars and entered into new leasing arrangements with third-party leasing companies to partially replace the returned CWB cars.
 Given these facts, the Agency informed CP of its intention to make an adjustment pursuant to the methodology established in Decision No. 8-R-2013, effective August 1, 2013, and provided CP with the opportunity to disclose any further evidence of cars obtained.
 CP responds that the current methodology set out in Decision No. 8-R-2013 did not properly reflect the true costs that CP would incur in replacing the CWB cars. CP states that the current methodology for determining an adjustment under paragraph 151(4)(c) of the CTA as set out in Decision No. 8-R-2013 recognizes newly leased cars as direct replacements for any government cars that have been returned. CP argues that if the Agency allows only those costs associated with a known number of replacement cars (which CP has leased and identified as replacement cars) then there would be very few cars to replace the CWB cars. CP states that it plans to make up for the net reduction in car capacity by improving car cycle times with its existing fleet and by increasing the use of its subsidiaries’ cars – Soo Line Railway Company (Soo Line) and the Dakota Minnesota & Eastern Railroad Company (DM&E.)
 CP argues that the cost associated with the improved cycle times and the increased usage of its subsidiaries’ cars should be recognized. It proposes that the Agency make a cost adjustment based on a deemed number of replacement cars and a per car leasing charge that is based on an average of existing leasing arrangements. CP’s deemed number of cars is a notional figure derived from a mathematical exercise essentially involving a deemed number of regulated grain revenue-tonne miles, the ratio of the CWB fleet capacity to CP’s total hopper car fleet capacity, a productivity improvement factor, and an adjustment for cars identified as CWB car replacements.
 Two questions arise from CP’s response:
- Does the Agency accept CP’s proposal that a deemed number of replacement cars be established and that a cost associated with that deemed number of cars, based on an average of historical leasing costs, be reflected in the 2013-2014 VRCPI determination?
- Does the Agency agree that the increase in costs associated with the increased usage of its subsidiaries’ cars as a result of the withdrawal of the CWB hopper cars notionally represent costs incurred by CP in obtaining hopper cars? If so, how should it make such an adjustment?
Question 1 – Analysis and conclusion
 The Agency notes that paragraph 151(4)(c) of the CTA requires that it adjust the VRCPI to reflect the “costs incurred...for the purpose of obtaining cars.” In the Agency’s opinion, this language, which uses the past tense, indicates that only actual costs incurred in respect of any identifiable cars obtained can be reflected. In other words, for an adjustment to be made, costs incurred must be clearly quantifiable and, for that purpose, they must be related to an act of actually obtaining cars.
 The Agency finds the methodology proposed by CP to be highly speculative as it is based on an anticipated number of replacement cars to move an anticipated volume of grain. Therefore, it does not provide a clear basis for making the cost adjustment called for by paragraph 151(4)(c) of the CTA.
 Furthermore, the number of deemed cars that results from this mathematical exercise would not take into account whether these cars have been obtained, which must be determined before costs can be reflected in the VRCPI. The Agency rejects CP’s proposal to recognize the costs of a deemed number of cars. The Agency will be prepared to make a cost adjustment for cars actually obtained by CP and for which there is a known and verifiable cost.
Question 2 – Analysis and conclusion
 CP plans to make up for the lost capacity resulting from the withdrawal from service of the CWB cars through improved car cycle times including the use of its own hopper cars (owned or under capital and operating leases) and through the increased utilization of its subsidiaries’ cars.
 With respect to the increased or more intensive use of CP’s own existing hopper cars, the Agency rejects the notion that there should be a cost incurred attributable to these cars. The Agency is of the opinion that the increased use of the cars CP already has does not constitute an act of obtaining cars within the meaning of the CTA. CP cannot meet the requirement of paragraph 151(4)(c) of the CTA by obtaining cars from itself, i.e., the act of obtaining cars must involve another party.
 With respect to the increased utilization of CP’s subsidiaries’ cars, the Agency notes that CP’s U.S. subsidiaries, Soo Line and DM&E, have provided CP with cars that are either owned or leased from third parties by these companies so that CP can transport regulated grain in them. Soo Line is a wholly-owned subsidiary of Soo Line Corporation and Soo Line Corporation is an indirect wholly-owned subsidiary of CP. DM&E is an indirect wholly-owned subsidiary of Soo Line Corporation.
 While CP, Soo Line and DM&E are related parties, the Agency views Soo Line and DM&E as separate and financially accountable entities. DM&E and Soo Line either own or are named as the lessees in formal leasing arrangements with third party lessors and, therefore, bear the financial responsibility for the use of those hopper cars. Furthermore, for regulatory costing purposes, the Agency does not recognize the financial statements of CP consolidated, but rather only those of its Canadian operations. In principle, obtaining cars at a market rate from a subsidiary should not be treated differently than if they were obtained on the market from a third party.
 The Agency notes that the nature of the arrangement by which CP obtains cars from its subsidiaries differs from the leases considered for paragraph 151(4)(c) of the CTA adjustments in previous Agency decisions. Specifically, the leases previously taken into account were of a longer duration which allowed for the costs incurred to be easily determinable for future periods on the basis of known obligations. The Agency notes that in the case of intercompany use, a car hire or per diem rental charge is used. This is equivalent to leasing these assets on a short-term basis, and the extent of the use of the assets for the next period cannot be determined with any certainty.
 The Agency is prepared to accept, in principle, that the increased utilization of a subsidiary’s cars satisfies the requirement of obtaining cars if the subsidiary’s cars are used in regulated grain service and provided that the costs so incurred are quantifiable and based on a verified number of cars used. The Agency understands that as with other intercompany transactions, the charges for the use of CP’s subsidiaries’ cars are subject to company policies and accounting conventions. The Agency therefore intends to seek assurance that they are recorded at no more than fair market value in CP’s accounts. If CP can demonstrate to the Agency that a quantifiable and verifiable amount representing the net increase in the use of its subsidiaries’ cars that is directly attributable to the withdrawal of the CWB cars has been incurred by CP, the Agency will consider making an adjustment. Any required information must be provided to the Agency in time for it to make an informed decision. Agency staff will communicate with CP regarding data requirements and timing.
Paragraph 151(4)(c) of the CTA adjustment for the 2013-2014 determination
 Applying the principles and methodologies set out in Decision No. 8-R-2013, the Agency will make an adjustment to the 2013-2014 VRCPI as follows:
- The removal of the leasing charges for the entire fleet of CWB cars being returned by the beginning of the 2013-2014 crop year. Specifically, the weight first established in Decision No. LET-R-113-2006 will be adjusted downward to reflect the fact that CP is no longer incurring leasing charges for the use of the CWB hopper cars; and
- The costs incurred in respect of CP’s new leasing arrangements with third party lessors to partially offset the withdrawal from service of the CWB cars. In keeping with the methodology established in Decision No. 8-R-2013, a twelfth and thirteenth weight will be added to the 2013-2014 VRCPI to reflect the costs incurred by CP in obtaining new replacement hopper cars
 As part of its submission on the paragraph 151(4)(c) of the CTA adjustment, CP submitted an amount to be considered by the Agency as decommissioning charges which are to be included in the cost calculation pursuant to Decision No. 8-R-2013. As CP’s claims are more properly categorized as maintenance costs, not distinct decommissioning costs, they were not reflected in the 2013-2014 weight for the replacement cars. The Agency finds that these claims were appropriately rejected by staff.
MAJOR COMPONENTS OF THE VRCPI
 The development of the labour price index captures price changes in wages, wage-related items (such as bonuses and stock-based compensation) and fringe benefits (such as government and railway company pensions, and employment insurance). In Decision No. 97-R-2012, the Agency decided that it would discontinue its previous practice of developing historical wage-related and fringe benefit price changes based on multi-year averages and replace it with the standard price indexation methodology which uses single year input prices and quantities indices.
 For 2013-2014, the Agency used the same methodology for historical price indices as was used last year and the forecast for labour prices results in an increase of 1.4 percent.
 The railway fuel price index reflects changes in the average annual price per litre of diesel fuel. The Agency uses a long-established model based on the relationship of railway fuel prices and the price of crude oil. The model also accounts for any known hedging practices, federal fuel excise tax and provincial fuel sales taxes.
 The Agency relies on crude oil price forecasts from a number of expert third-party forecasters as inputs to the Agency’s fuel forecasting model.
 The average of the third-party forecasters for the price of crude oil used in the development of the 2013-2014 railway fuel price index is $US95/bbl for 2013 and $US94/bbl for 2014. An important element in the development of forecasts for the railway fuel price index is the Canada/US exchange rate. The average of third-party forecasts for the exchange rate in US cents per Canadian dollar is 97.8 for 2013 and 100.5 for 2014.
 The Agency fuel forecast model predicts a 1.2 percent decline in fuel prices for 2013-2014.
 Railway companies purchase thousands of different material items each year, far too numerous to track individually. Therefore, the material price index reflects changes in the average annual price of a basket of railway materials, similar to the consumer price index. The Agency’s long-established methodology involves a series of regressions based on the major railway material components to forecast (based on third-party data) the average material price change. For crop year 2013-2014, the Agency is forecasting a 1.6 percent increase in the material price index.
 One of the components in this group is the cost of capital rate which is applied to the capital indices. This item has been dealt with separately in Decision Nos. LET-60-2013 and LET‑62‑2013. Other components in this group include leased hopper car rates, amortization of investments, and the net impact of replacing 1992 hopper car maintenance costs with more recent actual costs, as determined and implemented in Decision No. 67-R-2008 pursuant to Clause 57 of Bill C-11, passed in June 2007.
 This component also includes an adjustment which was made to last year’s VRCPI to reflect the cost changes incurred by each of CN and CP related to the leasing of third party-owned hopper cars to replace withdrawn Saskatchewan Government hopper cars (CN) and the leasing back of the Saskatchewan cars (CP), as laid out in Decision No. 8-R-2013. The two weights associated with that adjustment have been incorporated into the VRCPI.
 The Agency has applied the same methodologies and cost basis as last year for each of these other components. The combined impact of changes for other components is a price decrease of 5.8 percent for 2013-2014. This change is partially attributable to a forecasted decline in the combined CN and CP cost of capital rate for 2013-2014.
Overview of VRCPI changes for the next crop year
 The table below provides a summary of the changes for 2013-2014 VRCPI.
|Major Component||Effective Weight (%)||% Change|
|Total weighted price changes within 2013-2014 not including the CWB adjustment||100||+0.1|
|Downward Revision to 2012-2013 VRCPI weighted price changes based on actual and up-dated forecasted data and minor technical adjustments.||-1.6Note 2|
|Total weighted price changes since 2012-2013 VRCPI Determination||-1.8|
EVOLUTION OF THE VRCPI
 The graph in the appendix illustrates the impact of the current VRCPI determination in the context of the evolution of the VRCPI since 2001-2002.
 The VRCPI has tracked up and down since the beginning of the Revenue Cap Program. In recent years, exceptional fluctuations have reflected the volatility of fuel prices, the hopper car adjustment in 2007-2008 and, last year, the new methodologies to better recognize the cost of capital and the effect on the labour price index of the substantial payments made by CN and CP to their pension funds. The VRCPI has grown at an average annual rate of 2.0 percent over the 2000-2001 to 2013-2014 period.
 The Agency’s determination of the VRCPI for 2013-2014 is 1.2691, a decrease of 1.8 percent from 2012-2013.
 The VRCPI of 1.2691 will be applied in the legislative formula under section 151 of the CTA when the Agency makes its revenue cap determinations by December 31, 2014 for 2013‑2014.
APPENDIX TO DECISION NO. 161-R-2013
- Note 1
Other consists of leased hopper cars, amortization, cost of capital, cost of CWB cars, embedded cost for hopper car maintenance, 2007-2008 actual costs for hopper car maintenance, cost for replacing Saskatchewan hopper cars and removal of embedded Saskatchewan car maintenance.
- Note 2
The net decrease of 1.8 percent is largely attributable to having over forecasted the change in the price of diesel fuel in last year’s determination.