# Determination No. R-2018-276

December 31, 2018

DETERMINATION by the Canadian Transportation Agency (Agency), for the 2017-2018 crop year, of the Canadian National Railway Company's (CN) and the Canadian Pacific Railway Company's (CP) Maximum Revenue Entitlement (MRE), revenue and whether their revenue exceeds their MRE, for the movement of western grain, pursuant to sections 150 and 151 of the Canada Transportation Act, S.C., 1996, c. 10, as amended (CTA).

Case number:
18-00107

## SUMMARY

[1] The Agency has determined CN’s and CP’s MRE and revenue covered by the MRE for the 2017-2018 crop year. For both railway companies, revenues were above their respective MREs.

[2] Table 1 summarizes the MRE, revenue, and payout calculations:

MRE Revenue Revenue in Excess of MRE Payout of Excess Revenue and Penalty $787,014,793$788,062,078 $1,047,285$1,099,649 $707,998,903$709,499,416 $1,500,513$1,575,539

## DETERMINATION

### 1.0 CN’s and CP’s Tonnage and Average Length of Haul

[3] The Agency, in determining CN’s and CP’s MRE, must determine each railway’s average length of haul for the movement of western grain and the number of tonnes of grain moved for the crop year.

[4] Section 147 of the CTA defines “movement”, “grain” and “crop year” 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

(a)  Thunder Bay or Armstrong, Ontario,

(b)  Churchill, Manitoba for export,

(c)  a port in British Columbia for export, other than export to the United States for consumption in that country, or

(d)  a point west of Thunder Bay or Armstrong, Ontario, if the grain is to be carried to a port in British Columbia for export, other than export to the United States for consumption in that country;

“grain” means

(a)  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

(b)  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 determined CN’s and CP’s tonnage and average length of haul, for the movement of western grain for the 2017-2018 crop year, to be as follows:

Table 2
Destination CN
Tonnes Moved
CP
Tonnes Moved
Total
Tonnes Moved
[1] Vancouver 11,197,003 13,795,623 24,992,626
[2] Prince Rupert 5,542,416 0 5,542,416
[3] Thunder Bay 2,287,164 4,697,699 6,984,863
[4] Eastern Canada 1,924,275 1,174,105 3,098,380
[5] Interswitching Adjustment 32,689 (32,689) 0
[6] Total 20,983,547 19,634,738 40,618,285
[7] Average length of haul (miles) 1,007 896 953

[6] The Agency’s determinations were based on detailed traffic submissions by CN and CP, which were reviewed by the Agency to verify that the traffic qualified as western grain movements and that the related revenue, tonnage and mileage amounts were accurate. This review led to the addition, deletion or modification of a number of records.

[7] CN and CP moved a combined 40.6 million tonnes of western grain in the 2017-2018 crop year, 6.0 percent lower than the western grain volume they moved in the previous crop year.

[8] CN’s and CP’s combined average length of haul for the crop year was 953 miles, no change from the previous crop year.

[9] While Churchill is an eligible western grain destination, there were no Churchill-bound movements during the crop year by CN or CP.

### 2.0 Agency Process for Administering the MRE Program and Industry Proposals for Changes

[10] Consistent with the Agency’s established approach, CN and CP were given until April 30, 2018 to propose any new methodological changes or issues of interpretation that will have a material impact on the determination of the MRE, for the Agency’s consideration for application to the 2017-2018 crop year. On April 27, 2018, CN submitted a request that the Agency consider a different source for determining the total number of tonnes moved in the crop year (Item E from subsection 151(1) of the CTA).

### CN’s request

[11] CN requests that the Agency reconsider Decision No. 529-R-2009 and that it either:

1. cease using the Canadian Grain Commission (CGC) unload information (i.e., to determine the number of tonnes of grain moved by CN); or
2. if the unload information is assessed as acceptable, determine a manner whereby the unload information can be shared or transmitted to railway companies in a timely, regular manner in order to ensure that railway companies have the information required in order to comply with the provisions of the CTA.

[12] CN submits that the rationale used by the Agency in support of Decision No. 529-R-2009 is no longer applicable, noting the CGC is no longer responsible for the weighing of grain using scales it regularly “tests and, if necessary, recalibrates”; providing the railways with daily tonnage information; and providing validation and dispute resolution processes. CN further argues that the CGC is no longer the owner of the information, as it comes from the grain companies; the quality of the data submitted through the CGC has deteriorated; and if the purpose of the CGC data is to verify railway submissions, this can be done by the Agency through other means. Finally, CN submits that under the current reporting arrangement CN does not have the necessary timely information to manage its revenues within its MRE.

### Background on CN’s request

[13] The MRE formula takes the average revenue per tonne from the base year (indexed for inflation and other adjustments) and multiplies it by the tonnes moved in the crop year to arrive at the railways’ MREs.

[14] At origin (i.e., at the loading elevators), grain companies weigh and enter the number of loaded tonnes of grain, by rail car, into the railway company’s information system, which is used in creating the railway company’s bill of lading. At destination (i.e., port), the grain company weighs the number of tonnes of grain to be unloaded, by rail car, and, as part of its licensing requirements with the CGC, supplies the CGC with a daily account.

[15] In 2009, in  Decision No. 529-R-2009, the Agency  noted that the railway companies were not consistently using CGC data, and directed CN and CP to report tonnages using weights obtained from the CGC. The Agency noted that the CGC unload weights represented the most accurate and neutral accounting of the grain tonnage shipped to terminals and transfer elevators, based on a number of factors:

• the CGC regularly tests and, if necessary, recalibrates the terminal scales;
• the CGC has a dispute resolution process in place that is open to all parties; and,
• any new methodology would need to meet essential requirements of consistency and reliability, that it be verifiable by a qualified third party and/or the Agency, and be fully tested before adoption.

[16] In 2013, following changes to the Canada Grain Act, R.S.C., 1985, c. G-10 (CGA), the CGC ceased to weigh grain at the ports. The CGC continues to be responsible for overseeing the weighing of grain for export, setting out the requirements and responsibilities of licensed terminal elevators to ensure accurate and verifiable weights. The grain companies must, as part of their licensing requirements, provide the CGC with daily accounts of the tonnage unloaded.

[17] The Agency, with some adjustments to recognize identified reporting issues, uses the CGC-supplied data to determine the tonnes of grain moved by CN and CP. Where the grain is not moved through a CGC-licensed terminal, the Agency uses the CN and CP supplied data (i.e., origin data). For the 2017-2018 crop year, the CGC-supplied data was used to establish approximately 81% of CN’s and 83% CP’s total tonnage.

### Analysis and Findings

[18] CN’s submission indicates that there are variances between the CN-supplied and CGC-supplied data, but does not submit information that demonstrates that the variances are attributable to the quality of the CGC data. The Agency’s analysis indicates that while there are mostly small discrepancies between the data for loaded and unloaded grain, the variances have a similar probability of being positive or negative and largely offset each other. Moreover, there is no evidence that one data set is more accurate than the other. For the 2017-2018 crop year, using CGC figures lowers CN’s total tonnage by 131,294 tonnes (on total matched tonnes of 16.9 million) or 0.7%, and increases CP’s tonnage total by 22,009 (on total matched tonnes of 16.2 million) or 0.1%.

[19] CN correctly notes that the CGA no longer obligates CGC to have a representative present to supervise the weighing of grain; however, the legislation does require that grain be weighed at the terminal elevator upon arrival (inward weighing) and that this process be subject to oversight by the CGC. Subsection 69.1(1) of the CGA states, “[…] an operator of a licensed terminal elevator shall weigh grain received into the elevator in a manner authorized by the Commission”. Further, the CGC tests, inspects and certifies all bulk weighing systems in licensed terminal elevators to ensure compliance with the CGA and the Weights and Measures Act, R.S.C., 1985, c. W-6. The data collected pursuant to these provisions are relied upon by multiple stakeholders and organizations, including Statistics Canada for the purposes of establishing the export volumes for Canadian grains.

[20] The use of the destination tonnage is consistent with how the 2000-2001 base year statistics were developed. Rigour, fairness and consistency demand that the methodology used to establish tonnage in subsequent years, which is compared with the base year, match, to the extent possible, the methodology used in the base year.

[21] A number of data adjustments are made in calculating the MRE to take into account that the destination tonnage data includes partial unloads (i.e., where a car cannot be completely unloaded until repaired)-which can result in lower reported destination tonnage for a railcar-and situations where the reported origin car tonnage is clearly understated when compared to the CGC data.

[22] In consideration of the points above, the Agency finds that it is most reasonable to continue to use the CGC-supplied data.

[23] With respect to CN’s request that the Agency ensure the unload information is transmitted to railway companies in a more timely manner, the Agency notes that it does not have this legal authority. It nevertheless encourages the parties to come to an arrangement whereby unload data are shared with the railway companies on a more frequent basis.

### 3.0 Determination of CN’s and CPʼs MRE

[24] Subsection 151(1) of the CTA states that the following formula is to be used by the Agency in its determination of CN’s and CP’s MRE:

[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 that applies to the company, as determined by the Agency. [25] The Agency, for the 2017-2018 crop year, determines CN’s MRE to be$787,014,793 and CP’s MRE to be 707,998,903. The Agency inputs into the formula and the MRE are summarized in the following table:

CN CP Comments $348,000,000$362,900,000 Prescribed in subsections 151(2) and (3) of the CTA 12,437,000 13,894,000 Prescribed in subsections 151(2) and (3) of the CTA 1,007 896 Established by the Agency in this Determination 1,045 897 Prescribed in subsections 151(2) and (3) of the CTA 20,983,547 19,634,738 Established by the Agency in this Determination 1.3817 1.3817 Established by the Agency in Determination No. R-2017-37 $787,014,793$707,998,903 Established by the Agency in this Determination

### 4.0 Determination of CN’s and CP’s Western Grain Revenue

#### 4.1 REVENUE AND REVENUE REDUCTIONS

[26] The determination of a prescribed railway company’s revenue from western grain requires many assessments by the Agency, as to what is to be included as revenue or as an allowable reduction to revenue, as detailed in subsections 150(3), (4) and (5) of the CTA, and in Agency Decision No. 114-R-2001.

[27] A prescribed railway company’s statutory western grain revenue, as identified in the CTA, stems mostly from billings by the prescribed railway company 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 performing interswitching or exchange switching; and

[28] As of May 23, 2018, the date the Transportation Modernization Act, S.C., 2018, c. 10 was enacted, amounts earned for both interswitching at rates determined in accordance with section 127.1 of the CTA and for the movement of grain in containers on flat cars are no longer counted as revenues towards the railway companies’ MREs.

[29] In addition, the prescribed railway companies’ statutory western grain revenue is net of any amounts paid or allowed for incentives, rebates or any other similar reductions, and does not include:

• amounts that are earned as part of a performance penalty or 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; or
• compensation received for running rights.

[30] Allowable reductions to a railway company’s statutory western 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 (i.e., 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.

[31] The following items do not reduce a railway company’s statutory western 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.

[32] Railway company records relating to western grain revenue were reviewed. 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 appropriately captured and that revenue exclusions or reductions are appropriate and accurate.

[33] Adjustments were made to the revenue figures provided by the railway companies in various submissions. The revenue and MRE adjustments are summarized below.

##### CN

[34] For CN, the following adjustments resulted in an increase to CN’s reported western grain revenue and/or its calculated MRE:

• rebate amounts claimed by CN relating to their Commercial Fleet Integration Program were adjusted downwards to comply with the Agency’s established methodology for excluding ineligible movements and to remove GST amounts;
• CN claimed discounts for short line payments to which they were not entitled, so those amounts were disallowed;
• trucking related deductions were reduced as a direct result of the removal of low tonnage movements;
• volume rebate incentive amounts were reduced to exclude amounts associated with ineligible movements;
• an adjustment was made to correct a recording error in the amount claimed by CN as a reduction to revenues for IDF contributions and a separate amount claimed as an IDF contribution was deferred until next crop year;
• a correction was made to the equivalent tonnes calculation related to interswitching activities, which increased CN’s MRE; and
• various minor adjustments and a correction to the CGC matching results submitted by CN resulted in a small increase in CN’s reported MRE.

[35] For CN, the following adjustments resulted in a reduction to CN’s reported western grain revenue and/or its calculated MRE:

• Records that contained erroneous information, such as movements reported with zero tonnage, duplicate records, low tonnage, or erroneous revenue per tonne, were removed from CN’s Grain Traffic Database (GTDB), which impacted both CN’s revenue and MRE; and
• An adjustment was made to CN’s revenue to reflect additional traffic subject to weekend and day of week loading rebates, which increased the amount claimed as rebates and lowered CN’s reported revenue.
##### CP

[36] For CP, the following adjustments resulted in an increase to CP’s reported western grain revenue and/or its calculated MRE:

• CP’s submission excluded eligible interline movements forwarded to CN, so these movements and associated revenue were added to CP’s submission and raised both CP’s MRE and revenue;
• CP’s submitted amount for pick-up and delivery charges associated with trucking (an eligible reduction to revenue) was decreased, as a result of the removal of miscellaneous adjustments to the GTDB; and
• CP’s reported tonnage figure was increased to reconcile with the tonnage figures submitted to the Agency by the CGC.

[37] For CP, the following adjustments resulted in a reduction to CP’s reported western grain revenue and/or its calculated MRE:

• Records that contained erroneous information, such as movements reported with zero tonnage, duplicate records, low tonnage, or erroneous revenue per tonne, were removed from CP’s GTDB, which lowered both CP’s revenue and MRE;
• Revenues submitted by CP related to soybean traffic that was moved prior to the passage of the Transportation Modernization Act were removed;
• The amount claimed as a reduction to revenues for contributions to IDFs was adjusted to correct an understatement in CP’s original submission;
• The revenue amount submitted by CP for additional switching was adjusted downward to remove revenue associated with ineligible movements; and
• A reduction in tonnage related to the equivalent tonnes calculation reduced CP’s MRE.

[38] Agency staff will provide CN and CP with further details on these adjustments to their revenue and MRE in a separate confidential reconciliation letter.

#### 4.3 CNʼS AND CPʼS WESTERN GRAIN REVENUE DETERMINATION

[39] The Agency, after taking into account its findings and adjustments, has determined CNʼs and CP’s western grain revenue for crop year 2017-2018 to be as follows:

• CN = $788,062,078; and • CP =$709,499,416.

### 5.0 CN’s and CP’s revenue in excess of their MRE and penalty

[40] CN’s and CP’s revenues were above their MRE. Subsection 150(2) of the CTA provides that if a prescribed railway company’s revenue, as determined by the Agency, for the movement of grain in a given crop year exceeds the company’s MRE for that crop year, the company shall pay out the excess amount and any penalty that may be specified in the Railway Company Pay Out of Excess Revenue for the Movement of Grain Regulations, SOR/2001-207 (Regulations).

[41] The Regulations provide, in part, that:

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

(a) 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

(b) 15 per cent 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.

[42] Given that CN’s statutory grain revenue exceeds its MRE for the 2017-2018 crop year by an amount of $1,047,285 which represents 0.1 percent of CN’s determined MRE, the Agency, pursuant to the Regulations and subsection 150(2) of the CTA, orders CN to pay to the Western Grains Research Foundation, within 30 days from the date of this Determination, the amount of$1,099,649, which represents the sum of the excess revenue amount of $1,047,285, and the prescribed penalty of$52,364, as provided for under paragraph 2(a) of the Regulations.

[43] Upon payment of the excess amount and the applicable penalty, CN is to notify the Agency’s Chief Compliance Officer, in writing, of the amount paid out and the date on which it was paid.

[44] Given that CP’s statutory grain revenue exceeds its MRE for the 2017-2018 crop year by an amount of $1,500,513, which represents 0.2 percent of CP’s determined MRE, the Agency, pursuant to the Regulations and subsection 150(2) of the CTA, orders CP to pay to the Western Grains Research Foundation, within 30 days from the date of this Determination, the amount of$1,575,539, which represents the sum of the excess revenue amount of $1,500,513, and the prescribed penalty of$75,026, as provided for under paragraph 2(a) of the Regulations.

[45] Upon payment of the excess amount and the applicable penalty, CP is to notify the Agency’s Chief Compliance Officer, in writing, of the amount paid out and the date on which it was paid.

## Member(s)

Scott Streiner
Elizabeth C. Barker
J. Mark MacKeigan
Date modified: