Decision No. 477-R-2012

December 19, 2012

DETERMINATION by the Canadian Transportation Agency of the Western Grain Revenue Caps for the movement of western grain by prescribed railway companies for crop year 2011-2012.

 

DETERMINATION by the Canadian Transportation Agency of a prescribed railway company’s revenue for the movement of western grain for crop year 2011-2012 and whether a prescribed railway company’s western grain revenue exceeds its corresponding Revenue Cap, pursuant to sections 150 and 151 of Division VI, Part III of the Canada Transportation Act, S.C., 1996, c. 10, as amended.

File No.: 
T6650-2

INTRODUCTION

[1] This Decision provides the Canadian Transportation Agency’s (Agency) determinations of the Western Grain Revenue Caps, and revenue, for the movement of western grain by prescribed railway companies for crop year 2011-2012. These determinations are necessary to ensure that a prescribed railway company’s western grain revenue does not exceed its maximum revenue entitlement, which is referred to as its Revenue Cap. If a prescribed railway company’s revenue exceeds its Revenue Cap, the company must pay out the excess amount and penalties, as specified in the Railway Company Pay Out of Excess Revenue for the Movement of Grain Regulations, SOR/2001-207 (Regulations). There were two prescribed railway companies during the 2011‑2012 crop year: the Canadian National Railway Company (CN) and the Canadian Pacific Railway Company (CP).

[2] The Agency’s determination of CN’s and CP’s Revenue Caps must utilize the formula, the base year statistics, and the volume-related composite price index as defined in section 151 of the Canada Transportation Act (CTA). It also requires CN’s and CP’s specific tonnage and length of haul statistics for crop year 2011-2012.

[3] The Agency’s determination of each of CN’s and CP’s western grain revenue complies with subsections 150(3), (4) and (5) of the CTA. It also complies with Decision No. 114-R-2001 and subsequent decisions concerning the interpretation of a number of matters that are to be considered when the Agency determines a prescribed railway company’s grain revenue for Revenue Cap purposes.

AGENCY DECISION

1.0 CN’S AND CP’S WESTERN GRAIN TRAFFIC STATISTICS FOR CROP YEAR 2011-2012

[4] A western grain movement for a given crop year is defined in section 147 of the CTA. Key terms are as follows:

“movement”
in respect of grain, means the carriage of grain by a prescribed railway company over a railway line from a point on any line west of Thunder Bay or Armstrong, Ontario, to
  1. Thunder Bay or Armstrong, Ontario, or
  2. Churchill, Manitoba, or a port in British Columbia for export,

but does not include the carriage of grain to a port in British Columbia for export to the United States for consumption in that country;

“grain”
means
  1. any grain or crop included in Schedule II that is grown in the Western Division, or any product of it included in Schedule II that is processed in the Western Division, or
  2. any grain or crop included in Schedule II that is grown outside Canada and imported into Canada, or any product of any grain or crop included in Schedule II that is itself included in Schedule II and is processed outside Canada and imported into Canada;
“crop year”
means the period beginning on August 1 in any year and ending on July 31 in the next year.

[5] The Agency’s determinations of CN’s and CP’s tonnage and length of haul statistics for western grain movements for crop year 2011-2012 are shown in Table 1 below. These determinations were based on detailed traffic submissions by CN and CP, which were verified to ensure that the traffic qualified as western grain movements and that the related revenue, tonnage and mileage statistics were accurate. This verification led to the addition, rejection or modification of a small portion of the traffic. The net result of these adjustments from CN’s and CP’s submitted traffic lowered their reported tonnage by about 2,500 tonnes and 21,000 tonnes, respectively.

Table 1
Destination CN Tonnes Moved CP Tonnes Moved TOTAL Tonnes Moved
AVERAGE LENGTH OF HAUL (MILES) 1,000 902 952
Vancouver 7,827,636 10,090,239 17,917,875
Prince Rupert 4,718,000 0 4,718,000
Thunder Bay 2,520,126 5,431,582 7,951,708
Eastern Canada 2,001,294 471,534 2,472,828
TOTAL 17,067,056 15,993,355 33,060,411

[6] The above table indicates that 33.1 million tonnes of western grain were moved in the 2011-2012 crop year. The 33.1 million tonne figure is 6.2 percent higher than the western grain volume for the previous crop year.

[7] The 2011-2012 crop year average length of haul of 952 miles shown in the above table is 13miles, or 1.3 percent, lower than for the previous crop year.

[8] Churchill is an eligible western grain destination. However, the Churchill-bound movements did not qualify to be included under the Revenue Cap Program because the CTA requires the carriage of western grain to be by a “prescribed railway company” and the only railway company “involved in the movement of western grain” (or) “that performs western grain movements” at Churchill, the Hudson Bay Railway Company, is not a prescribed railway company.

2.0 AGENCY PROCESS FOR ADMINISTERING THE REVENUE CAP PROGRAM

[9] In 2011 the Agency finalized a new process for administering the Revenue Cap Program. The intent was to streamline the process for all parties involved by clearly establishing the Agency’s approach to administering, and improving the predictability of, the program.

[10] Each year, industry participants are provided the opportunity to raise potential issues for the Agency’s consideration. In Decision No. LET-R-50-2012, participants were provided until April30, 2012 to propose new issues for the Agency’s consideration. No submissions were received related to this year’s determination.

3.0 CN’S AND CP’S WESTERN GRAIN REVENUE CAPS FOR CROP YEAR 2011-2012

[11] Agency staff have made adjustments to the revenue-cap related figures submitted by the railway companies. The Agency has considered the staff adjustments and accepts them. The net impact of these adjustments lowered both CN’s and CP’s Revenue Caps. The adjustments are discussed in section 4.3, along with Agency staff’s railway company revenue adjustments.

3.1 CN and CP Revenue Cap calculations

[12] Subsection 151(1) of the CTA states that the following formula is to be used by the Agency in its determination of a prescribed railway company’s Revenue Cap:

[A/B + ( (C-D) x $0.022)] x E x F

where

A
is the company’s revenue for the movement of grain in the base year;
B
is the number of tonnes of grain involved in the company’s movement of grain in the base year;
C
is the number of miles of the company’s average length of haul for the movement of grain in that crop year as determined by the Agency;
D
is the number of miles of the company’s average length of haul for the movement of grain in the base year;
E
is the number of tonnes of grain involved in the company’s movement of grain in the crop year as determined by the Agency; and
F
is the volume-related composite price index as determined by the Agency.

[13] For CN, in respect of crop year 2011-2012, the values for A, B, C, D, E and F are as follows:

A
= $348,000,000
B
= 12,437,000
C
= 1,000
D
= 1,045
E
= 17,067,056
F
= 1.1777

[14] CN’s values for A, B and D are prescribed by subsection 151(2) of the CTA. As shown in section1.0 of this Decision, the 2011-2012 crop year values for C and E were 1,000 miles and 17,067,056 tonnes, respectively. The value of 1.1777 for the volume-related composite price index for crop year 2011-2012 was determined previously by the Agency pursuant to subsection151(5) of the CTA in Decision No. 136-R-2011.

[15] Applying these values to the Revenue Cap formula results in a CN Revenue Cap for crop year 2011-2012 of $542,516,131.

[16] For CP, in respect of crop year 2011-2012, the values for A, B, C, D, E and F are as follows:

A
= $362,900,000
B
= 13,894,000
C
= 902
D
= 897
E
= 15,993,355
F
= 1.1777

[17] CP’s values for A, B and D are prescribed by subsection 151(3) of the CTA. As shown in section1.0 of this Decision, the 2011-2012 crop year values for C and E were 902 miles and 15,993,355 tonnes, respectively. The value of 1.1777 for the volume-related composite price index for crop year 2011-2012 was determined by the Agency in Decision No. 136-R-2011.

[18] Applying these values to the Revenue Cap formula results in a CP Revenue Cap for crop year 2011-2012 of $494,036,573.

4.0 DETERMINATION OF CN’S AND CP’S WESTERN GRAIN REVENUE FOR CROP YEAR 2011-2012

4.1 Revenue and revenue reductions

[19] The determination of a prescribed railway company’s grain revenue requires many assessments by the Agency as to what is to be included as revenue or as an allowable reduction to revenue. While a partial list of such matters appears in subsections 150(3), (4) and (5) of the CTA, a more comprehensive list was established, following consultation with the grain industry, in Decision No. 114-R-2001.

[20] In summary, a prescribed railway company’s statutory western grain revenue stems mostly from billings generated by the application of rates contained in published tariffs or in confidential contracts applicable to western grain movements. A railway company’s statutory grain revenue also includes:

  • a portion of amounts received for ensuring car supply through the car ordering process;
  • amounts received for providing premium service;
  • amounts received for performing interswitching or exchange switching; and
  • amounts received for additional switching requested by the shipper.

[21] A railway company’s statutory grain revenue is to be net of any amounts paid or allowed for incentives, rebates or any other similar reductions, and does not include:

  • amounts that are earned which the Agency characterizes as a performance penalty or as being in respect of demurrage or for the storage of rail cars loaded with grain;
  • amounts earned for staging of rail cars in transit;
  • amounts for additional car switching, necessary due to shipper error or failure to meet obligations; nor
  • compensation received for running rights.

[22] Allowable reductions to a railway company’s statutory grain revenue include:

  • the amortized amounts of contributions for the development of grain-related facilities to a grain handling undertaking that is not owned by the company (Industrial Development Fund contributions, or IDF);
  • amounts paid or allowed for interswitching or exchange switching; and
  • amounts related to container pickup and delivery charges that are included in gross revenue amounts for intermodal movements.

[23] The following matters do not reduce a railway company’s statutory grain revenue:

  • amounts paid or allowed as dispatch;
  • amounts paid by railway companies resulting from the discontinuance of grain-dependent branch lines;
  • amounts paid by the railway companies as a performance penalty; and
  • amounts paid for running rights.

4.2 Agency review of revenue and revenue deductions, and general findings

[24] Railway company records relating to western grain revenue were reviewed by Agency staff. Initial freight revenue data, including payments to other railway companies involved in the carriage of grain, were submitted by CN and CP on a per movement basis. General verification procedures were made on a record by record basis. In addition, more detailed analysis, based on sample testing, was performed to provide reasonable assurance that all western grain revenue has been captured and that revenue exclusions or reductions are appropriate and accurate. As part of this detailed analysis, onsite visits to CN and CP offices, when deemed appropriate, were carried out.

[25] An outstanding issue before the Agency this year related to CP’s revenue-based methodology for determination of rail-only revenue for intermodal traffic. This issue was first addressed by the Agency two years ago in Decision No. 529-R-2009. In that Decision, the Agency directed CP to propose for Agency consideration a revenue-based methodology using criteria similar to CN’s methodology. Last year, CP submitted a revenue-based methodology which covered 92 percent of its intermodal movements involving bundled rates (rates that include revenue amounts for both rail and trucking). This year, CP revised its methodology to adopt a revenue-based approach for 100 percent of its bundle-rated movements. These movements were reviewed by Agency staff to confirm that the appropriate rail-only revenue was reported by CP. Minor adjustments to CP’s submission were required.

4.3 Technical Adjustments identified by Agency staff to submitted Revenue Caps and Revenue Figures

[26] Agency staff have made technical adjustments to the revenue figures submitted by the railway companies. The Agency has considered the staff adjustments and accepts them. The revenue adjustments, and the Revenue Cap adjustments noted earlier are discussed below.

CN

[27] For CN, the following adjustments made by Agency staff resulted in an increase to CN’s reported western grain revenue and/or its calculated Revenue Cap.

  • CN’s submission excluded eligible interline movements forwarded to CP. The movements and associated revenue were added to CN’s submission and resulted in an impact to both CN’s Revenue Cap and revenue.
  • CN was requested to submit any ancillary revenue that may qualify as eligible revenue under the Revenue Cap Program. CN’s submission was found to be acceptable for this year’s determination.
  • Adjustments were made to CN’s revenue amounts assigned to eastern Canada in relation to a small number of records involving shortlines or volume rebates involving movements which were ultimately destined to eastern Canada.
  • Adjustments were required to CN’s revenue reductions for movements related to its eastern Canada portion of weekend loadings that were claimed twice.
  • Corrections to calculations of amounts related to IDF reductions were made which resulted in a reduction to the IDF amounts claimed by CN.

[28] For CN, the following adjustments made by Agency staff resulted in a reduction to CN’s reported western grain revenue and/or its calculated Revenue Cap.

  • In the evaluation of CN’s reported tonnage compared to the tonnage figures submitted to the Agency by the CGC, discrepancies were found requiring a reduction of about 1,100 tonnes in CN’s reported tonnage. This resulted in CN’s Revenue Cap being raised.
  • Records that contained erroneous information, such as movements reported with zero tonnage, duplicate records, low tonnage, or erroneous revenues per tonne, were removed from CN’s grain traffic database which impacted both CN’s revenue and Revenue Cap.

CP

[29] For CP, the following adjustments made by Agency staff resulted in an increase to CP’s reported western grain revenue and/or its Revenue Cap:

  • In the evaluation of CP’s reported tonnage compared to the tonnage figures submitted to the Agency by the CGC reported tonnage, discrepancies were found requiring an addition of about 11,000 tonnes in CP’s reported tonnage. This resulted in CP’s Revenue Cap being raised.
  • Corrections to calculations of amounts related to IDF reductions were made which resulted in a reduction to the IDF amounts claimed by CP.
  • Adjustments were made to CP’s revenue amounts assigned to eastern Canada in relation to a small number of records involving shortlines or volume rebates involving movements that were ultimately destined to eastern Canada.
  • An increase to CP’s submitted average length of haul impacted CP’s Revenue Cap.

[30] For CP, the following adjustments made by Agency staff resulted in a reduction to CP’s reported western grain revenue and/or its Revenue Cap.

  • CP’s domestic movements involving Southern Railway Company (SRY) were removed from CP’s traffic which impacted both its revenue and Revenue Cap.
  • Records that contained erroneous information, such as movements reported with zero tonnage, duplicate records, low tonnage, or erroneous revenues per tonne, were removed from CP’s grain traffic database which impacted both CP’s revenue and Revenue Cap.
  • Minor revenue adjustments were made to CP’s intermodal submission which increased CP’s allowable deductions to revenue for intermodal traffic involving trucking amounts built into its rates.

[31] Agency staff will provide each railway company with details of the above adjustments in a separate confidential reconciliation letter.

4.4 CN’s and CP’s western grain revenue determinations

[32]Taking all of the findings and adjustments into account, the Agency has determined CN’s and CP’s western grain revenue for crop year 2011-2012 to be: CN = $542,756,316; CP = $494,436,705.

5.0 COMPARISON OF CN’S AND CP’S 2011-2012 REVENUE CAPS AND REVENUE

[33] In summary, the Agency has determined the western grain Revenue Caps and revenue for CN and CP for crop year 2011-2012 as set out below. Both railway companies are over their respective Revenue Cap.

Table 2
Crop Year 2011-2012 Revenue Cap Revenue Amount above Revenue Cap Amount below Revenue Cap
CN $542,516,131 $542,756,316 $240,185  
CP $494,036,573 $494,436,705 $400,132  

[34] Subsection 150(2) of the CTA provides that if a prescribed railway company’s revenue for the movement of grain in a given crop year, as determined by the Agency, exceeds the company’s Revenue Cap for that year, the company shall pay out the excess amount, and any penalty that may be specified in the regulations.

[35] The Regulations provide, in part:

2. The penalty that a prescribed railway company shall pay out pursuant to subsection 150(2) of the Act, if the company’s revenues for the movement of grain in a crop year exceed the company’s maximum revenue entitlement for that year, as determined under subsection 151(1) of the Act, is

  1. five per cent of the excess amount, if that excess amount is one per cent or less of the company’s maximum revenue entitlement; or
  2. 15 percent of the excess amount, if that excess amount is more than one per cent of the company’s maximum revenue entitlement

4. (1) The excess amount and the penalty that a prescribed railway company shall pay out pursuant to subsection 150(2) of the Act must be paid out to the Western Grains Research Foundation in the form of a certified cheque, money order or bank draft.

[36] Given that CN’s statutory grain revenue exceeds its Revenue Cap for crop year 2011-2012 by an amount of $240,185, the Agency, pursuant to subsection 150(2) of the CTA and the Regulations, orders CN to pay to the Western Grains Research Foundation, within 30 days from the date of this Decision, the amount of $252,194, representing the sum of the excess amount of $240,185 and the prescribed penalty of $12,009 as provided for under paragraph 2(a) of the Regulations.

[37] Upon payment of the excess amount and the applicable penalty, CN is to notify the Agency, in writing, of the amount paid out and the date on which it was paid.

[38] Given that CP’s statutory grain revenue exceeds its Revenue Cap for crop year 2011-2012 by an amount of $400,132, the Agency, pursuant to subsection 150(2) of the CTA and the Regulations, orders CP to pay to the Western Grains Research Foundation, within 30 days from the date of this Decision, the amount of $420,138 representing the sum of the excess amount of $400,132 and the prescribed penalty of $20,006 as provided for under paragraph 2(a) of the Regulations.

[39] Upon payment of the excess amount and the applicable penalty, CP is to notify the Agency, in writing, of the amount paid out and the date on which it was paid.

Member(s)

Geoffrey C. Hare
Raymon J. Kaduck
J. Mark MacKeigan
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