Decision No. 628-R-2008

December 30, 2008

See Decision No. 529-R-2009

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 2007-2008, and DETERMINATION by the Canadian Transportation Agency of a prescribed railway company's revenue for the movement of western grain for crop year 2007-2008 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 revenues, for the movement of western grain by prescribed railway companies for crop year 2007-2008. These determinations, which must be completed by December 31, 2008, 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 2007-2008 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 2007-2008.

[3] The Agency's determination of CN's and CP's western grain revenue complies with the matters contained in subsections 150(3),(4), (5) and (6) of the CTA. It also complies with Agency Decision No. 114-R-2001 Part III of the Division VI dated March 16, 2001 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 2007-2008

[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 of 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 of 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;
"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.

[5] The Agency's determination of CN's and CP's volume and length of haul statistics for western grain movements for crop year 2007-2008 is shown in Table 1 below. This determination was based on detailed traffic submissions by CN and CP. The submissions were examined to ensure that the traffic qualified as western grain movements and that the related revenue, tonnage and mileage statistics were accurate. The examination led to the rejection of a relatively small amount of traffic.

 
Railway Destination Tonnes moved
CN CP Total
TOTAL 13123630 13687889 26811519
AVERAGE LENGTH OF HAUL (MILES) 1021 876 947
Vancouver 5318379 7627255 12945634
Prince Rupert 4469187 0 4469187
Thunder Bay 1712492 5384911 7097403
Eastern Canada 1623572 675723 2299295

[6] The above table indicates that 26,811,519 tonnes of western grain were moved in the 2007-2008 crop year. The 26,811,519 volume figure is 6.1 percent lower than the western grain volume for the previous crop year.

[7] The 2007-2008 crop year average length of haul of 947 miles shown in the above table is 2 miles higher 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. The reason is that the CTA requires the carriage of western grain to be by a "prescribed railway company" and the Hudson Bay Railway Company is not a prescribed railway company.

2.0 CN'S AND CP'S WESTERN GRAIN REVENUE CAPS FOR CROP YEAR 2007-2008

[9] 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.

[10] For CN, in respect of crop year 2007-2008, the values for A, B, C, D, E and F are as follows:

A
= $348,000,000
B
= 12,437,000
C
= 1,021
D
= 1,045
E
= 13,123,630
F
= 1.0639

[11] The source of CN's values for A, B and D is prescribed by subsection 151(2) of the CTA. As shown earlier in section 1.0 of this Decision, the 2007-2008 crop year values for C and E were 1,021 miles and 13,123,630 tonnes respectively. The value of 1.0639 for the volume-related composite price index for crop year 2007-2008 was determined previously by the Agency pursuant to subsection 151(5) of the CTA in Decision No. 67-R-2008.

[12] Substitution of these CN values into the Revenue Cap formula results in a CN Revenue Cap for crop year 2007-2008 of $383,305,439. In other words, after accounting for the actual tonnage and actual length of haul in crop year 2007-2008, CN's Revenue Cap is $383,305,439.

[13] For CP, in respect of crop year 2007-2008, the values for A, B, C, D, E and F are as follows:

A
= $362,900,000
B
= 13,894,000
C
= 876
D
= 897
E
= 13,687,889
F
= 1.0639

[14] CP's values for A, B and D are derived from subsection 151(3) of the CTA and as shown in section 1.0 of this Decision, the 2007-2008 crop year values for C and E were 876 miles and 13,687,889 tonnes respectively. The value of 1.0639 for the volume-related composite price index for crop year 2007-2008 was provided in Agency Decision No. No. 67-R-2008.

[15] Substitution of these CP values into the Revenue Cap formula results in a CP Revenue Cap for crop year 2007-2008 of $373,633,960. In other words, after accounting for the actual tonnage and actual length of haul in crop year 2007-2008, CP's Revenue Cap is $373,633,960.

3.0 DETERMINATION OF CN'S AND CP'S WESTERN GRAIN REVENUE FOR CROP YEAR 2007-2008

3.1 Revenue and revenue reductions

[16] The determination of a prescribed railway company's grain revenue requires many assessments as to what is to be included as revenue or as an allowable reduction to revenue. 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.

[17] 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.

[18] 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 railway 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.

[19] 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.

[20] 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

[21] Railway company records relating to western grain revenue were audited by Agency staff. Initial freight revenue, including payments to other railway companies involved with the carriage of grain, were submitted by CN and CP on a per movement basis. Both were verified, on a test basis, against company accounting records and source documents. Numerous onsite visits were also made to CN and CP offices to ensure that all western grain revenue was captured and to determine whether revenue exclusions or reductions were appropriate and accurate.

[22] Based on the audit findings, a number of adjustments were made to CN and CP revenue-related items. A number of issues were reviewed this year and they are discussed below. Taking all of the findings and adjustments into account, the Agency has determined CN's and CP's western grain revenue for crop year 2007-2008 to be: CN = $409,267,319; CP = $407,440,160.

i) Inclusion of traffic originating from outside Canada.
Background and issue

[23] On April 6, 2004 the World Trade Organization (WTO) ruled that subsections 150(1) and (2) of the CTA may adversely affect the competitive conditions of imported grain. Parliament, following the WTO ruling, addressed that ruling by enacting legislation on August 1, 2005 to amend the definition of "grain" in section 147 of the CTA from:

"grain"
means

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.

to:

"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;

[24] The issue is whether grain that is brought by rail from the United States of America and moved through Canada to be exported by sea, is considered to be imported into Canada.

[25] For the purposes of the Revenue Cap determination for crop year 2006-07, the Agency decided to include about 1,800 such movements as "grain". However, in its 2006-07 Revenue Cap Decision, the Agency advised that it would further review the issue.

Agency analysis and finding

[26] CN submits that the inclusion of intransit grain under the Revenue Cap Program would contradict all representations made to CN by the federal government at the time this provision was enacted and would be inconsistent with the wording of the provision and the intent.

[27] CP maintains that the inclusion of intransit grain under the Revenue Cap Program would be at odds with the WTO April 6, 2004 Ruling.

[28] The Revenue Cap is established by section 150 of the CTA. Subsections 150(1) and (2) are the most relevant with respect to this issue and are reproduced here:

150. (1) A prescribed railway company's revenues, as determined by the Agency, for the movement of grain in a crop year may not exceed the company's maximum revenue entitlement for that year as determined under subsection 151(1).

(2) If a prescribed railway company's revenues, as determined by the Agency, 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), the company shall pay out the excess amount, and any penalty that may be specified in the regulations, in accordance with the regulations.

[29] Section 147 of the CTA defines the words "grain" and "movement" used in these subsections. The definition of "grain" cited above includes imported grain.

[30] Whether that imported grain is subject to the Revenue Cap is determined by reference to the definition of "movement":

"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;

[31] For greater certainty, the ports in British Columbia are also defined.

"port in British Columbia"
means Vancouver, North Vancouver, New Westminster, Roberts Bank, Prince Rupert, Ridley Island, Burnaby, Fraser Mills, Fraser Surrey, Fraser Wharves, Lake City, Lulu Island Junction, Port Coquitlam, Port Moody, Steveston, Tilbury and Woodwards Landing;

[32] There is no need to determine whether the grain is "in transit" or destined for the domestic market. If the carriage of the grain fits squarely within the definition of "movement", then the revenue earned from the carriage of the grain is subject to the Revenue Cap. This is because subsection 150(1) provides that a prescribed railway company's revenues for the movement of grain in a crop year may not exceed the company's maximum revenue entitlement for that year.

[33] As to the word "imported", it does not mean more than "[grain] brought in to the country". In R v. Bell [1983] 2 S.C.R. 471, the Supreme Court of Canada, dealing with the meaning of "import" within the context of the Narcotics Control Act, stated:

I do not find it necessary to make extensive reference to dictionaries in order to define the word ‘import'. In my view, since the Narcotic Control Act does not give a special definition of the word, its ordinary meaning should apply and that ordinary meaning is simply to bring into the country or to cause to be brought into the country.

[34] It follows that the same should apply to the CTA in that, as it does not give a special definition of the word "imported", its ordinary meaning should apply and that ordinary meaning is simply to bring into the country or to cause to be brought into the country.

[35] The Agency finds that grain brought by rail from the United States of America and moved through Canada to be exported by sea is a grain movement for the purpose of the CTA and is therefore eligible under the Revenue Cap Program.

ii) Revenue determination for U.S. originating traffic
Background and issue

[36] A shipment originating in the U.S. and terminating in Canada typically moves under a single rate, generating revenue related to the overall movement. For such cross-border movements, the railway companies calculate the Canadian and U.S. revenue for the respective Canadian and U.S. portions of the movement, for income tax purposes, as follows. A pre-established percentage of total revenue is assigned to the country of origin, a pre-established percentage of total revenue is assigned to the destination country, and the remaining amount of total revenue is allocated between the two countries on the basis of the mileage moved in each country. Exchange rate adjustments, as well as any other applicable adjustments, are then applied.

[37] CP accepts that, under the Revenue Cap Program, the revenue for the Canadian portion of a U.S. originating movement should reflect the amount CP derives for Canadian income tax purposes. CN argues that for movements that it handles on both sides of the border, its revenue for the Canadian portion of a U.S. originating movement should not be the amount that it determines as inter-railway company revenue for income tax purposes, but an alternative amount derived using an "East/West Allocation Methodology".

[38] The East/West Allocation Methodology was developed by the Agency under the Revenue Cap Program, specifically for Canadian grain movements which originate in the West and terminate in the East (i.e., east of Thunder Bay or Armstrong), and which move under a single rate. In this case, a revenue allocation methodology is necessary because only the portion of the movement from the western origin to Thunder Bay or Armstrong qualifies as a Revenue Cap movement. Hence, the total revenue must be allocated between the eligible western portion of the movement and the ineligible eastern portion of the movement.

[39] The East/West Allocation Methodology begins by determining the per tonne revenue for a given movement [e.g. $58 per tonne]. An amount of about $7 per tonne is assigned to the West. This amount is known as the "West Intercept". It stems from underlying base year costing information and reflects costs (and revenues) that do not vary with mileage. Next, an amount of about $1 is assigned to the East. This amount is known as the "East Intercept" and was established from a special study conducted in 2001. The remaining per tonne amount [in this example, $50 = $58 - $7 - $1] is then divided between the West and East portions of the movement on the basis of mileage. If the mileage is equal, the East and West portions of the movement would both be assigned $25 per tonne of revenue. It follows that the western revenue would be $7 + $25, or $32 per tonne while the eastern revenue would be $1 + $25, or $26 per tonne.

Agency analysis and finding

[40] CN argues that application of the East/West Allocation Methodology to derive U.S. and Canadian revenue is more appropriate than using its inter-company revenue allocation methodology (used to derive its U.S and Canadian revenue for income tax purposes). It asserts that in both cases the challenge is to derive the revenue for the regulated and unregulated portions of a movement. In one case, the unregulated portion is in the U.S. while in the other case, the unregulated portion is in eastern Canada.

[41] CN adds that its inter-company formula is conceptually the same as the Agency's East/West Allocation Methodology in that a fixed amount is assigned to the originating and terminating regions, with the balance prorated on a mileage basis. The main difference between the two approaches is the values assigned to the originating and terminating regions.

[42] CN suggests that the Western Intercept (under the East/West Allocation Methodology) is based on costs related to the origination of grain movements and, because the grain tends to be grown in rural areas away from the main line, there are relatively high costs per mile associated with gathering it. CN adds that the costs related to the collection of grain are incurred by the region that does the collecting (i.e., the originator). It argues that these costs are specific to the origin and not to western Canada, and thus the East/West Allocation Methodology can appropriately be applied to U.S. originating grain.

[43] The Agency acknowledges that the two approaches use similar concepts. But there are significant differences between the two approaches.

[44] First, as noted above, the East/West Allocation Methodology was developed specifically for application to Canadian grain movements which originate in the West and terminate in the East (i.e., east of Thunder Bay or Armstrong), and which move under a single rate. It was developed out of necessity, to determine a component amount that is otherwise unknown. For movements originating in the U.S. and terminating in Canada, revenue has already been determined for the Canadian and U.S. portions of the movement, and it has been accepted by tax authorities in both countries. There is therefore no need for application of the East/West Allocation Methodology to derive the Canadian portion of the revenue for such movements (for Revenue Cap purposes) because that revenue has already been determined.

[45] Second, use of the East/West Allocation Methodology to derive revenue for the Canadian portion of U.S. originating movements produces a Canadian revenue figure at variance with that required for income tax purposes.

[46] Finally, the East/West Allocation Methodology uses a West Intercept that reflects all of the costs, and related revenue, over the western grain domain, that do not vary with mileage. The West Intercept is not, as CN suggests, related only to the origin. This intercept reflects non-mileage related costs such as: origin switching and the higher-cost destination switching, carload billing costs, costs for loss and damage, fixed costs stemming from labour and material regressions and an amount related to Grain Dependent Branch Line costs, a concept unique to Canadian western grain costing and revenue development. The West Intercept is thus related to the entire western grain movement, over the eligible statutory domain.

[47] Application of the East/West Allocation Methodology to total revenue for traffic originating in the U.S. would therefore inappropriately assign a portion of revenue to the U.S. for items related specifically to Canadian western grain. The same applies to the East Intercept which was based on statutory western grain movements that continue to move east of Thunder Bay and Armstrong to eastern Canadian destinations.

[48] The Agency therefore finds that, under the Revenue Cap Program, the East/West Allocation Methodology shall not be applied to derive revenue for the Canadian portion of a U.S. originating movement.

iii) Sale of the Stettler Subdivision
Background and issue

[49] When a western grain movement originates on track owned and operated by a shortline railway company and is forwarded to a "prescribed" railway company (currently CN and CP) for further movement, the portion of the movement handled by the shortline railway company does not qualify as a Revenue Cap movement. In such cases, the prescribed railway company typically bills the shipper for the full movement from the shortline origin to the final destination, and then pays the shortline railway company an amount for the work it has performed. The amount that the prescribed railway company claims as revenue under the Revenue Cap Program is the total amount billed for the movement, less the amount paid to the shortline railway company.

[50] Prior to 2006, the Stettler Subdivision1

was owned by Central Western Railway Corporation (CWRC), a shortline railway company. CWRC contracted the Canadian Heartland Training Railway (CHTR) to haul grain to Stettler where it was interchanged to CP for line haul.

[51] On January 19, 2006, CN purchased the CWRC. In Decision No. 719-R-2006, the Agency found that once CN purchased the CWRC, the movement of grain over the Stettler Subdivision became Revenue-Cap eligible and subject to the Railway Interswitching Regulations, SOR/88-41, as amended, with interswitching rates applying.

[52] In the latter half of 2007, the Stettler Subdivision was sold again, this time by CN to Alberta Prairie Steam Tours Limited (APST), a shortline railway company. To verify and determine the exact date of the sale, the Agency requested that CN provide documentation that would establish the date of the transaction.

[53] The Agency was provided with a Memorandum of Understanding between CHTR, APST and CN dated May 24, 2007 showing that APST was to take over ownership of the line effective September 1, 2007, as well as an Agreement of Purchase and Sale between APST and CWRC (CN) dated August 31, 2007. However, the Agreement of Purchase and Sale was not signed by all the parties as a number of sale-related activities had not been executed. The Agency then asked CN to provide it with the registered Certificates of Title, issued by the Province of Alberta. These certificates indicated that title to the land was transferred from CN to APST on December 7, 2007.

[54] The issue is the date on which the sale of the Stettler Subdivision took place.

Positions of CN and CP

[55] CN and CP assert that the effective date of the sale should be September 1, 2007.

[56] CN asserts that movements over the Stettler Subdivision should be treated as interswitching traffic until September 1, 2007 and as shortline haulage thereafter. CN states that, while it recognizes that the official sale date was December 7, 2007, CP began dealing directly with APST/CHTR on September 1, 2007 and CN stopped being a party to any transactions on that date.

[57] CP shares CN's view with respect to the timing of the sale of the Stettler Subdivision. This is based on its position that the Subdivision was acquired by APST/CHTR effective September 1, 2007 and that APST/CHTR have been operating over the Subdivision since that time. CP states that the movements in question are joint line movements with CP and CHTR/APST sharing a division of revenues and that CHTR is a provincially-regulated shortline railway company that is independent of, and at arms length from, CP.

Agency analysis and finding

[58] The August 31, 2007 Agreement of Purchase and Sale that was provided to the Agency was not signed by all of the parties as a number of sale-related activities had not been fully executed. No other relevant and probative evidence was provided to the Agency which supported the railway companies' position. In the absence of such evidence, the Agency finds that the date of sale of the Stettler Subdivision is the date shown in the Certificates of Title issued by the Province of Alberta, that is December 7, 2007.

[59] As a consequence of this ruling, rail movements over the Stettler Subdivision prior to December 7, 2007 are classified as interswitching and those afterwards as shortline movements. The impact of this ruling is to decrease the shortline deductions claimed by CP for the 2007-08 crop year by $70,245 and to increase its interswitching payments by $23,495, for a net increase to its revenue of $46,750. This ruling also increases CN interswitching revenue, as well as its overall revenue, by an amount of $23,495.

iv) CN's submission under subsection 150(5) of the CTA.

[60] Subsection 150(5) of the CTA states:

For the purposes of this section, 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.

[61] CN submitted eleven amounts for consideration under subsection 150(5) of the CTA. Amounts under this subsection are commonly called "Industrial Development Funds", or IDF. Qualifying IDF are amortized over a 10-year period and these amortized amounts, in addition to the associated costs of capital, are permissible reductions to a railway company's revenue. In the discussion that follows, specific amounts and locations are not provided, due to confidentiality.

[62] Nine of the eleven amounts related to transactions that occurred in 2001 and 2002. CN asserts that it had overlooked submitting them for consideration in those years. It asked that the amounts be considered commencing with the 2007-08 crop year, requesting the 4 or 5 years' allowances that would remain had CN submitted the amounts back in 2001 and 2002, and had the amounts been approved by the Agency.

[63] These nine amounts were reviewed by the Agency.

  • One amount clearly qualified as an IDF. The Agency finds that CN's request to include this IDF, commencing with the 2007-08 crop year and seeking the remaining 4-5 years' allowances that would remain had the amounts been submitted and approved back in 2001 and 2002, to be reasonable. The Agency approves this amount as an IDF.
  • Three other amounts were originally questioned as being IDF amounts because of the way they were structured. However, the Agency determined that the funds were provided strictly for the purpose of offsetting elevator construction costs, which were of a physical nature. One of these three amounts had to be revised because CN had claimed a reduction for part of it in crop year 2001-02. As above, the Agency finds that CN's request to include these IDF, commencing with the 2007-08 crop year and seeking the remaining 4-5 years' allowances that would remain had the amounts been submitted and approved in 2001 and 2002, to be reasonable. The Agency approves these amounts as IDF, subject to the one noted adjustment.
  • Five remaining amounts related to the construction of track where the IDF contracts indicate that CN was to directly or indirectly retain ownership of the track. As above, CN asked the Agency to include these IDF, commencing with the 2007-08 crop year, seeking the remaining 4-5 years allowances that would remain had the amounts been submitted and approved in 2001 and 2002. In response to a question as to whether subsection 150(5) allows for a railway company to retain ownership of its contribution, CN submitted that subsection 150(5) of the CTA did allow for contributions where the railway company owned the asset being provided. CN argues that it is providing the use of the asset instead of the use and ownership of the asset. This is a new issue before the Agency and it is complex. It not only requires a careful interpretation of subsection 150(5) of the CTA but, should the Agency determine that such contributions in whole or in part qualify as IDF, it would need to review and evaluate appropriate methodologies for determining the amortized amounts for such contributions. Furthermore, such matters normally warrant a full industry-wide consultation. Although the Agency has attempted to deal with this issue this year, it finds that a ruling is more appropriately delayed until next year to allow for a full industry-wide consultation on this matter. Therefore, these five amounts will not be considered in respect of the current 2007-08 crop year determination, but will be considered in respect of the 2008-09 crop year.

[64] As for the two remaining amounts, these amounts related to transactions that occurred during the 2007-08 crop year. However, the IDF contracts also indicated that CN is to retain ownership of the track. For reasons explained above, the Agency finds that a ruling on the ownership issue is more appropriately delayed until next year to allow for a full industry-wide consultation on this matter. Therefore, these two amounts will also not be considered in respect of the current 2007-08 crop year determination, but will be considered in respect of the 2008-09 crop year.

v) The determination of CN's pickup and delivery charges for intermodal unit (IMU) movements.

[65] CN offers various rate options to customers who move their product in 20- and 40- foot containers. For example, CN provides a "bundled" rate for the entire movement, which includes both the trucking and rail portions, or a rate for only the rail portion of the movement. Only the rail portion of the movement within the western domain is Revenue Cap eligible. The total revenue received by CN must therefore be reduced by the amount attributable for trucking charges, if applicable, as well as amounts relating to the ineligible eastern portion of the rail move (i.e., the portion east of Thunder Bay or Armstrong) should the IMU movement terminate in eastern Canada. Trucking at origin is called "pick-up" while the trucking at destination is called "delivery". The charges for one or both of them are generally referred to as "P&D" charges.

[66] For crop years prior to 2004-05, CN submitted P&D charges based on a CN cost-based proxy methodology. An estimation methodology is used because the task of retrieving actual P&D invoices for thousands of IMU grain movements would be much too burdensome. CN states that its cost-based proxy methodology provided a conservative estimate of what CN actually paid to truckers, because the methodology assigned local P&D charges to both local and the longer haul highway P&D movements. For crop years prior to 2004-05, the Agency accepted that CN's P&D proxy methodology did not overstate its P&D charges.

[67] For crop year 2004-05, CN revised its cost-based proxy methodology so that local trucking movements were assigned local charges, as had been done in crop years prior to 2004-05, but its highway movements were assigned higher charges stemming from CN Tariff 7589. That is, the higher Tariff 7589 charges were assigned to the longer haul highway movements instead of the lower local P&D charges. This resulted in a substantial increase in CN's submitted P&D charges, as approximately half of CN's P&D movements were highway movements. The Agency decided to audit CN's revised P&D charges. The test results from a discovery sample showed that CN's P&D charges were overstated and the Agency applied a reduction to CN's submitted P&D charges for crop year 2004-05.

[68] For crop years 2005-06 and 2006-07, the Agency continued to review CN's estimated P&D charges. Both examinations revealed that CN's revised cost-based proxy methodology overstated CN's actual P&D charges and the Agency applied reductions to CN's submitted P&D charges fr both crop years.

[69] For crop year 2007-08, CN provided the Agency with documentation relating to public and private tariffs, and confidential contract information. The Agency's audit found that some of the estimated revenue for P&D was overstated while other amounts were understated. As well, some of the revenue estimates differed from that submitted by CN. However, overall, CN's P&D proxy system was found to be reasonably accurate and the Agency accepts the amounts estimated by CN for P&D for crop year 2007-08.

vi) The determination of rail revenues for intermodal (IMU) movements
The issue

[70] The issue is whether CN and CP should be allowed to deduct, from their IMU revenue, amounts related to three cost items in order to derive the appropriate revenue under the Revenue Cap Program.

[71] The three cost items are:

  1. Lifting costs at railway company IMU terminals:
    At railway IMU terminals, railway equipment is used to lift empty and loaded containers onto and off of trucks, as well as to lift empty and loaded containers onto, and off of, railway flat cars. There is a cost associated with these activities, and CN has estimated its average cost based on an assessment of lifts required for all IMU movements. CP has never provided an estimate of these costs because, in past years, it never claimed that such costs should be an allowable reduction to IMU rail revenue.
  2. Container maintenance costs:

    The costs of maintaining containers owned by CN or CP.

  3. Container ownership costs:

    The costs of capital and depreciation for containers owned by CN or CP.

Consultation

[72] The Agency decided to consult with the grain industry on this issue. To this end, a consultation document was prepared, entitled Revenue Cap Program: Determination of Revenue for Intermodal Movements (the Consultation Document), as well as a Consultation Plan and both were distributed to the grain industry on October 9, 2008.

[73] The Consultation Plan outlined a three-stage process: the railway companies were given until October 24, 2008 to provide comments to the Agency, which were distributed by the Agency to all parties on October 27, 2008; the non-railway company parties were then given until November 12, 2008 to provide comments to the Agency, which were distributed by the Agency to all parties on November 13, 2008; and finally, the railway companies had until November 25, 2008 to provide the Agency with rebuttal comments, which were distributed by the Agency to all parties on November 26, 2008.

Agency analysis and findings

[74] CN notes that the Agency has applied the three cost reductions to its IMU revenue since the inception of the Revenue Cap Program and, in recent Agency decisions, it was indicated that such reductions "must be quantified" to derive the rail portion of CN's IMU revenue. The reason that recent decisions indicated the reductions "must be quantified" was to correctly describe CN's submitted IMU methodology, and not to comply with any specific Agency determination on this matter. The Agency has never reviewed the appropriateness of the three cost reductions, and this was conveyed to CN by Agency staff in a report sent to CN on May 28, 2008. Since the inception of the Revenue Cap Program, the Agency had implicitly accepted CN's IMU methodology. But that does not prevent the Agency from considering a previously-unreviewed matter at any time, in respect of the year under study. The Agency finds that it is empowered to review the appropriateness of the three cost reductions.

[75] Both railway companies assert that, under the Revenue Cap Program, the three deductions must apply to revenue because costs for these three items were not included in the WGTA 1992 Costing Review.

[76] The Agency examined the costing of IMU movements under the WGTA for the 1988 and, more importantly, for the 1992 WGTA Costing Review. The Agency found that the three cost items were not included for IMU movements for CN in either review. CN's methodology, which was to deduct from its IMU revenue amounts for these three cost items, was therefore consistent with its 1992 cost development. The Agency found that CP's costs for the three cost items were included for IMU movements under both Costing Reviews. So while CP claims that it had erroneously overlooked deducting costs for the three items from its IMU revenue, allowances for these three items were fully integrated into CP's 1992 cost base.

[77] The importance of the 1992 Costing Review was downplayed in the Consultation Document because, due to data restrictions, the Agency was forced to substitute hopper car revenue for IMU revenue. Consequently, for IMU movements, there is no direct linkage between the revenue embedded within the Revenue Caps to costs stemming from the 1992 Costing Review.

[78] Information obtained by the Agency in recent years allowed it to estimate what the actual IMU rail revenue would have been had the three cost items been included in the CTA's Base Year Revenues. The Agency then compared the estimated amount to the substituted hopper car revenue. The comparison showed that CN and CP's Revenue Caps, based on the use of substituted hopper car data, provide adequate revenue to compensate the railway companies for the three cost items.

[79] CN asserts that IMU lifting is analogous to grain elevators or terminals that transload grain between hopper cars and trucks or vessels, and as revenue collected by the grain companies for elevation services is clearly not categorized as rail transportation revenue, nor should revenue relating to IMU lifting. Several non-railway company respondents point out that the analogy is incorrect because, in contrast to the elevation of grain into hopper cars which is done by grain elevator companies using their labour and equipment on their land, the lifting of containers is done by the railway companies using railway company labour and equipment, operating on railway company land. The activity of lifting containers is clearly a rail activity and it is an activity that is required for, and related to, the containerized movement of grain over a railway line. This is consistent with the National Transportation Agency's (predecessor to the Agency) determination of costs under the 1992 WGTA Costing Review where it approved costs submitted by CP for IMU movements which included lifting costs.

[80] CN argues, with support from CP, that the IMU activity relating to the lifting of containers is not a rail activity as it takes place before the rail activity begins and again, after the rail activity ends. CN asserts that the CTA's definition of grain, as "the carriage of grain by a prescribed railway company over a railway line", confirms that lifting charges do not form part of the rail movement because they are not an activity that is "over a railway line" and are thus, a non-rail activity. CN notes that this is consistent with two Decisions, one issued by the National Transportation Agency on October 7, 1988 and another by the Railway Transport Committee, Western Division of the Canadian Transport Commission (Decision No. WDR 1987-08) under the Western Grain Transportation Act, R.S.C., 1985, c. W-8, which defined movements as the carriage of grain by any railway company over any line of railway.

[81] The issue here is whether lifting relates to the carriage of grain by a prescribed railway company over a railway line. CN's argument that lifting costs do not relate to the carriage of grain over a railway line simply because they are not an over a railway line activity, is not valid. Lifting is a service that the railway companies provide and which is integral to containerized rail movement.

[82] The Agency approved a number of costs for the movement of grain over a railway line under the 1992 WGTA Costing Review. These are embedded within the current Revenue Caps. A portion of these costs, and revenues, relate to activities that precede or follow the physical movement of grain being carried over a railway line, or that indirectly relate to the physical movement of grain being carried over a railway line. Such cost items include: costs for the prior-empty and post-empty car movements (where no grain is being carried); and, costs for billing, marketing and sales, overheads and administration (which are not direct over a railway line activities).

[83] The inclusion of such costs is consistent with long-established costing principles. Furthermore, as noted above, under the 1988 and 1992 WGTA Costing Reviews, lifting costs for one railway company were included as eligible WGTA costs, relating to the movement of grain over a railway line. The Agency has already established that lifting costs are eligible costs relating to the movement of grain over a railway line.

[84] As for the two Decisions referenced by CN, these Decisions dealt with the question as to whether the railway companies could apply new charges for storage and diversion to statutory grain movements. A key consideration was whether revenue for such activities was already included in the statutory line-haul rate because, if so, the railway companies were already being compensated for these activities. In these Decisions, it was found that costs for storage and diversion were not included in the statutory rate and consequently, the railway companies were entitled to compensation for them. This conclusion is clear from Decision No. WDR 1987-08 page 5 where the Committee stated:

...we are of the view that the [storage] charge assessed pursuant to the above item does not form part of the line-haul rate set under Part II of the WGTA, nor does the diversion charge conflict with the actual line-haul rate... . the diversion charge is an accessorial or supplemental charge for a specific service provided by the railway. In our view, the railway company may assess such a charge since it is entitled to compensation for the services which it provides... .

[85] As noted above, the Agency determined that the amounts for IMU rail revenue that are embedded within the railway company Revenue Caps include compensation for lifting, as well as amounts for the other two cost items. This is consistent with the rulings in the above Decisions that the railway companies are entitled to compensation for the services that they provide. However, in the present case, the compensation is already being provided as it is embedded within each railway company's Revenue Caps. It follows that for consistency, the revenue that the railway companies report under the Revenue Cap Program must also include revenue for the three cost items.

[86] The Agency finds that, beginning with the 2007-08 crop year, CN and CP shall not reduce IMU revenue under the Revenue Cap Program by the three cost items. CN has benefited in the past years from a reduction to its IMU revenue by these items, while CP has not. For the 2007-08 and future crop years, the Agency's ruling results in common treatment for both railway companies.

[87] The impact of this ruling is to correct CN's IMU revenue, which is increased by about $1.1 million within CN's Revenue Cap as determined for crop year 2007-08. There is no impact upon CP's IMU revenue for crop year 2007-08.

vii) Multi Car Block (MCB) incentives and related "performance penalties"

[88] In last year's Revenue Cap Decision, the Agency dealt with an issue relating to situations where the shipper fails to meet one of the conditions required to receive the full MCB incentive. CP submits that its revenue under the Revenue Cap Program should be reduced by the full amount of the MCB incentive, while the amount it collected for the failure of the shipper to meet an unloading condition (under Tariff CPRS 4312 Item 130) constituted an amount in respect of a performance penalty not constituting revenue under the Revenue Cap Program.

[89] The Agency ruled that it was not reasonable for amounts collected under Tariff CPRS 4312 Item 130 to be characterized as being in respect of a performance penalty within the meaning of paragraph 150(3)(b) of the CTA. Consequently, the amounts that CP collected under this tariff, where the 24-hour unload condition was not met, were recognized as revenue under the Revenue Cap Program for crop year 2006-07.

[90] CP appealed the Agency's 2006-07 Decision on this matter to the Federal Court of Appeal. The case will not be heard until 2009. Consequently, the Agency has applied its ruling to the 2007-08 crop year, and increased CP's revenue by about $180,000.

viii) Other issues

[91] There are a number of other issues of a confidential nature due to their commercial sensitivity that the Agency must rule on during the course of determining railway revenue and Revenue Caps under the Revenue Cap Program. Because of their confidential nature, the Agency rulings are confidential and privy only to the parties involved and do not form part of the public record.

[92] To date, such rulings have dealt with: i) whether certain funds returned by a shipper to a prescribed railway company constitute a "return of IDF"; ii) whether a type of equipment charge should be taken into account when determining the amount of payment a prescribed railway company makes to a shortline railway company; and, iii) whether amounts returned by a shipper to a prescribed railway company constitute a cancellation or disqualification of an incentive or rebate, or whether it is reasonably characterized as being a performance penalty.

ix) Review of the railway companies' miscellaneous and ancillary revenue accounts

[93] The Agency intends to continue to review the railway companies' miscellaneous and ancillary revenue accounts annually under the Revenue Cap Program to ensure that all qualifying western grain revenue is captured.

4.0 Comparison of CN's and CP's Revenue Caps and Revenue

[94] The Agency has determined the western grain Revenue Caps and revenue for CN and CP for the crop year 2007-2008 as summarized below. Both CN and CP exceeded their Revenue Caps.

 
  REVENUE CAP REVENUE EXCESS AMOUNT AMOUNT BELOW REVENUE CAP
CN $383,305,439 $409,267,319 $25,961,880 -
CP $373,633,960 $407,440,160 $33,806,200 -

[95] Subsection 150(2) of the CTA provides that if a prescribed railway company's revenues, as determined by the Agency, for the movement of grain in a given crop year 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. The Railway Company Pay Out of Excess Revenue for the Movement of Grain Regulations, SOR/2001-207 (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.

[3.] (1) If the Agency concludes that a prescribed railway 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, the Agency must make a decision or order requiring the company to pay out the excess amount and the applicable penalty, as determined under section 2, in accordance with subsection 150(2) of the Act.

(2) A decision or order in relation to a crop year must be sent to a prescribed railway company no later than 10 days after the Agency determines the company's revenues for the movement of grain and maximum revenue entitlement for that year.

[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.

(2) At the time an excess amount and the applicable penalty are paid out, the prescribed railway company must notify the Agency, in writing, of the amount paid out and the date on which it was paid out.

(3) An excess amount and the applicable penalty must be paid out no later than 30 days after the day on which the prescribed railway company receives the decision or order referred to in section 3.

[96] Given that CN's statutory grain revenue exceeds its Revenue Cap for crop year 2007-08 by an amount of $25,961,880, the Agency, pursuant to subsection 150(2) of the CTA and subsection 3(1) of the Regulations, orders CN to pay the Western Grains Research Foundation, within 30 days from the date of this Decision, an amount of $29,856,162 representing the sum of the excess amount of $25,961,880 and the prescribed penalty of $3,894,282 as provided for under paragraph 2(a) of the Regulations.

[97] Given that CP's statutory grain revenue exceeds its Revenue Cap for crop year 2007-08 by an amount of $33,806,200, the Agency, pursuant to subsection 150(2) of the CTA and subsection 3(1) of the Regulations, orders CP to pay the Western Grains Research Foundation, within 30 days from the date of this Decision, an amount of $38,877,130 representing the sum of the excess amount of $33,806,200 and the prescribed penalty of $5,070,930 as provided for under paragraph 2(a) of the Regulations.

[98] Upon payment of the excess amount and the applicable penalty, CN and CP, pursuant to subsection 4(2) of the Regulations, are 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
John Scott
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