Decision No. 512-R-2010
December 21, 2010
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 2009-2010.
DETERMINATION by the Canadian Transportation Agency of a prescribed railway company's revenue for the movement of western grain for crop year 2009-2010 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
 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 2009-2010. 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. There were two prescribed railway companies during the 2009-2010 crop year: the Canadian National Railway Company (CN) and the Canadian Pacific Railway Company (CP).
 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 2009-2010.
 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 dated March 16, 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.
1.0 CN's and CP's western grain traffic statistics for crop year 2009-2010
 A western grain movement for a given crop year is defined in section 147 of the CTA. Key terms are as follows:
- 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
- Thunder Bay or Armstrong, Ontario, or
- 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;
- 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
- 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.
 The Agency's determinations of CN's and CP's tonnage and length of haul statistics for western grain movements for crop year 2009-2010 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 rejection or modification of a small amount of traffic. In the case of both railway companies, a small number of duplicate records were found and removed by Agency staff. The net result of removing the duplicates from CN's and CP's submitted traffic lowered their reported tonnage by about 1,200 tonnes and 270 tonnes, respectively. In addition, the impact of using the Canadian Grain Commission (CGC) reported tonnage is discussed separately in section 2.1 below and is reflected in Table 1. Further, there were adjustments to length of haul calculations which are noted in section 2.2 below and which are also reflected in Table 1.
|Railway Destination||Tonnes Moved|
|Average length of haul (miles)||1,040||916||977|
 The above table indicates that 31.9 million tonnes of western grain were moved in the 2009-2010 crop year. The 31.9 million tonne figure is 2.3 percent higher than the western grain volume for the previous crop year.
 The 2009-2010 crop year average length of haul of 977 miles shown in the above table is 13 miles, or 1.3 percent, higher than for the previous crop year.
 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, Hudson Bay Railway Company, is not a prescribed railway company.
2.0 CN's and CP's Western grain revenue caps for crop year 2009-2010
2.1 CGC Tonnage
 The Agency, in Decision No. 529-R-2009, directed CN and CP to report, for all future determinations (beginning with crop year 2009-2010), Revenue Cap tonnages using weights obtained from the CGC, without any adjustments. To ensure compliance with this direction, Agency staff had discussions with CN, CP and the CGC to ensure that all parties were aware of the Agency's direction and to ensure that Agency staff would be able to properly evaluate future railway company submissions. Following an initial conference call with Agency staff, the railway companies continued further dialogue with the CGC to better understand the CGC data.
 CN used three different CGC database sources to construct its tonnage figures for this year's determination. Upon review, Agency staff confirmed that CN matched an additional 20 records that Agency staff had not matched during its own independent assessment. CN's methodology submitted this year also included certain assumptions for excluding the CGC reported tonnage and CN substituted its own tonnage figure for these movements, contrary to the Agency's direction. Furthermore, CN did not provide sufficient evidence for Agency staff to recommend to the Agency Panel Members that the assumptions made by CN were valid.
 Agency staff therefore adjusted CN submitted tonnage for crop year 2009-2010 with an overall reduction of about 3,000 tonnes by relying on the CGC information in instances where there was a discrepancy between CN's submission and the CGC data. This resulted in CN's Revenue Cap being lowered.
 Agency staff performed a similar evaluation of CP's reported tonnage for crop year 2009-2010 and found additional matches compared to those reported by CP. Agency staff were able to match 92 percent of the CP movements to the CGC database compared to CP's 83 percent. This resulted in CP's Revenue Cap being raised.
2.2 CP's Length of haul calculation
 The average length of haul is a critical component of the Revenue Cap formula. CP submitted a figure of 918 miles. Upon verification, Agency staff determined that the CP submitted figure was based on both CP miles and shortline miles. Given that shortline amounts are excluded from CP's revenue, so are the associated shortline miles. Removing the shortline miles reduced CP average length of haul to 916 miles. The result of this adjustment lowered CP's Revenue Cap.
CN and CP Revenue Cap calculations
 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
- is the company's revenue for the movement of grain in the base year;
- is the number of tonnes of grain involved in the company's movement of grain in the base year;
- 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;
- is the number of miles of the company's average length of haul for the movement of grain in the base year;
- 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
- is the volume-related composite price index as determined by the Agency.
 For CN, in respect of crop year 2009-2010, the values for A, B, C, D, E and F are as follows:
- = $348,000,000
- = 12,437,000
- = 1,040
- = 1,045
- = 15,772,919
- = 1.0638
 CN's values for A, B and D are prescribed by subsection 151(2) of the CTA. As shown in section 1.0 of this Decision, the 2009-2010 crop year values for C and E were 1,040 miles and 15,772,919 tonnes, respectively. The value of 1.0638 for the volume-related composite price index for crop year 2009-2010 was determined previously by the Agency pursuant to subsection 151(5) of the CTA in Decision No. 176-R-2009.
 Applying these values to the Revenue Cap formula results in a CN Revenue Cap for crop year 2009-2010 of $467,654,362.
 For CP, in respect of crop year 2009-2010, the values for A, B, C, D, E and F are as follows:
- = $362,900,000
- = 13,894,000
- = 916
- = 897
- = 16,143,165
- = 1.0638
 CP's values for A, B and D are prescribed by subsection 151(3) of the CTA. As shown in section 1.0 of this Decision, the 2009-2010 crop year values for C and E were 916 miles and 16,143,165 tonnes, respectively. The value of 1.0638 for the volume-related composite price index for crop year 2009-2010 was determined by the Agency in Decision No. 176-R-2009.
 Applying these values to the Revenue Cap formula results in a CP Revenue Cap for crop year 2009-2010 of $455,725,757.
3.0 Determination of CN's and CP's Western grain revenue for crop year 2009-2010
3.1 Revenue and revenue reductions
 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.
 In summary, a prescribed railway company's statutory western grain revenue stems mostly from billings generated by 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.
 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.
 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.
 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.
3.2 Agency review of revenue and revenue deductions, and general findings
 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. Verification procedures were carried out on a record by record basis in addition to more detailed analysis involving sample testing. Verification procedures and analysis, which included onsite visits to CN and CP offices, when deemed appropriate, were also carried out to provide reasonable assurance that all western grain revenue has been captured and that revenue exclusions or reductions are appropriate and accurate.
 Based on Agency staff findings, a number of adjustments were made to CN and CP revenue-related items. There was one issue before the Agency this year related to CP's TRIEX (Truck Rail Intermodal Excellence) system which the Agency indicated in last year's decision would be addressed on or before this year's determination. In addition, there were a number of technical items identified by Agency staff that have implications for the Agency's determinations and they are addressed below.
3.3 Issue addressed
CP TRIEX system and the determination of rail-only revenue for intermodal movements
 CP often uses a bundled rate (one that includes both the rail and trucking portions of a movement) for the intermodal movement of grain. When the bundled rate falls within the scope of the Revenue Cap Program, the Agency must isolate the component that constitutes rail-only revenue, as only the rail portion of the movement of western grain is Revenue Cap eligible.
 CP had historically submitted annual cost-based figures as a proxy for estimating the trucking portion of the total revenue received for moving intermodal containers when there is a bundled rate. Last crop year, CP refined its cost-based approach within its TRIEX system.
 The Agency, in Decision No. 529-R-2009, accepted the CP submitted figures for crop year 2008-2009, but clearly stated that:
 Agency staff have conducted an audit of the CP TRIEX System and the Agency is prepared to utilize the costing information from this system in the Revenue Cap decision of this year. However, this will be the last year in which this cost-based approach will be accepted.
 With CP's commitment to provide all necessary resources to work collaboratively with the Agency, the intent is to have in place, in time for the Revenue Cap decision of December 2010, a revenue-based approach for the determination of the rail revenue in intermodal movements.
 This year CP submitted a revised methodology, still based on its TRIEX system, in which CP has estimated the trucking revenue and trucking costs. CP submits that the margin between the two amounts is reasonable and therefore the Agency should accept CP's estimated trucking revenue as a fair proxy for the true revenue-based approach referred to by the Agency in Decision No. 529-R-2009.
Agency analysis and findings
 After reviewing the documentation provided by CP, Agency staff found that the CP methodology was not verifiable. In response to the Agency's concerns about verification problems, CP reiterated that its methodology should be assessed using reasonableness testing and that the Agency should accept the ratio of the two estimated figures – one on its revenue and one on its costs – as being reasonable. That is not acceptable to the Agency.
 The only verifiable information available to the Agency was CP's contracts in which both bundled and rail-only rates are quoted. The information provided by CP with respect to its contracts was not complete and Agency staff were able to analyze both rate options for only approximately one-quarter of all CP intermodal movements involving trucking.
 Based on CP's own contracts and adjusting when required to account for the verifiable total revenue actually received by CP for its movements, the Agency made an upward adjustment to the rail revenue figures submitted by CP.
 This is not the first time that the Agency has been forced to use sampling results for CP intermodal movements. In Decision 710-R-2004, where the Agency had only 12 movements on which to base its determination, the following statement was made:
 In this case, although the sample obtained by the Agency as part of the auditing of the pickup and delivery charges is limited, the Agency finds that the sample can be used to assist it in reasonably quantifying allowable pickup and delivery charges for crop year 2003-2004. Therefore, this finding provides the Agency with the basis to make a reasonable determination. However, when, as in this case, the evidence allows the Agency to exercise its discretion and make a reasonable determination, the Agency, in doing so, must be mindful that it is the railway company's responsibility to substantiate any claim with respect to its Revenue Cap submission. Therefore a claim or portion thereof will only be determined by the Agency to the extent that evidence supports it.
 The Agency considers CP's failure to meet its commitment, as reflected in Decision No. 529-R-2009, a serious matter. Accordingly, the Agency requires CP, within 90 days, to propose for consideration by the Agency for application in CP's 2010-2011 Revenue Cap review, a revenue-based methodology using criteria similar to CN's methodology and which can be substantiated with verifiable information, absent which, Agency staff will develop a methodology for consideration and application by the Agency.
3.4 Technical Adjustments identified by Agency staff
 Agency staff, as part of their regular verification work, have made some technical adjustments to the revenue figures submitted by the railway companies. These cover either technical items in submissions or filings that are inconsistent with previous Agency decisions and practices. The Agency has considered the staff adjustments and accepts them. Each of the adjustments are discussed below.
 For CN, the following technical adjustments made by Agency staff resulted in an increase to CN's reported western grain revenue.
- CN claimed a volume rebate amount it had with a specific shipper. During the Agency staff verification process, CN indicated that the amount claimed by the shipper was in dispute. No payment has been recorded by CN and the rebate amount was not allowed.
- CN submitted about 30 movements with no recorded western grain revenue. Agency staff calculated the appropriate amount of revenue to assign to CN western grain revenue based on the total revenue provided within those movements.
- In examining a new revenue reduction submission by CN, made pursuant to subsection 150(5) of the CTA (IDF contribution), a clerical error was noted which required a revision to the CN submitted amount.
- CN assigned 12 full months for both depreciation and cost of capital to all newly submitted IDF contributions. This implies that all new capital and/or cash contributions occurred on the first day of the crop year. This is inconsistent with the timing approach for all newly submitted IDF contributions established at the commencement of the Revenue Cap Program. A timing difference was also noted for past IDF contributions. In both circumstances, past and newly submitted IDF contributions, Agency staff used the timing approach initially established by the Agency and agreed to by CN when the Revenue Cap Program was initiated.
 For CP, the following adjustments made by Agency staff resulted in an increase to CP's reported western grain revenue:
- CP submitted a new IDF contribution which contained certain terms and conditions which Agency staff considered required a special review. This review resulted in a revision in the amount submitted by CP.
- CP assigned a full 12 months for both depreciation and cost of capital to all newly submitted IDF contributions in this year's determination. Agency staff made the appropriate adjustments as they had done with CN.
- Agency staff noted that CP inadvertently assigned depreciation and cost of capital amounts to 1999 projects that were fully amortized by the end of last year's determination. In addition, the CP calculations for its 2000 IDF contributions inadvertently assigned the depreciation amounts twice. In both cases, Agency staff made the appropriate adjustments.
- With respect to intermodal movements, and the trucking portion within those movements, CP incorrectly applied the East/West allocation methodology for movements destined to Eastern Canada that was established by the Agency at the commencement of the Revenue Cap Program. This required an upward adjustment to the CP submission.
 Agency staff will be providing the railway companies separate confidential reconciliation letters with more details on the above adjustments made to their respective submissions.
 Taking all of the findings and adjustments into account, the Agency has determined CN's and CP's western grain revenue for crop year 2009-2010 to be: CN = $463,919,885; CP = $454,043,873.
4.0 Comparison of CN's and CP's 2009-2010 revenue caps and revenue
 In summary, the Agency has determined the western grain Revenue Caps and revenue for CN and CP for crop year 2009-2010 as set out below. Both railways are under their respective Revenue Caps.
|Crop Year 2009-2010||Revenue Cap||Revenue||Excess Amount||Amount Below Revenue Cap|
 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, exceed 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. As CN's and CP's statutory grain revenues fell below their respective Revenue Caps for the crop year 2009-2010, no payouts or penalties apply.
- Geoffrey C. Hare
- Raymon J. Kaduck
- John Scott