Cost of Capital Methodology Review - Correspondence from the Agency Secretary – January 18, 2010

File No. T6275-17
January 18, 2010

To: Distribution List

Re: Review of the methodology used by the Canadian Transportation Agency (Agency) in determining the cost of capita l for federally regulated railway companies

File No. T6275-17
January 18, 2010

To: Distribution List

Re: Review of the publication/methodology used by the Canadian Transportation Agency (Agency) in determining the cost of capita l for federally regulated railway companies

Draft Terms of Reference for "a consultant to review publication/methodologies for determining the cost of capital rates for federally regulated railways in Canada, and to compare them to the Agency's current publication/methodology" were distributed to railway companies, shippers and other interested parties for comment on August 14, 2009.

The deadline for comment was extended at the request of various parties to September 24, 2009.  Comments were received from the Canadian Pacific Railway Company (CP), the Canadian National Railway Company (CN), RailAmerica, the Canadian Wheat Board (CWB), Teck Resources Limited (Teck), the Western Canadian Shippers' Coalition (WCSC), the Coalition of Rail Shippers (CRS), and the Forest Products Association of Canada (FPAC).  These comments have been posted on the Agency's Web site at http://www.otc-cta.gc.ca/eng/consultations-costofcapital.

The comments received raised several issues and have resulted in certain changes to the terms of reference, the review process and the projected timetable for the review.  Included with this letter are the finalized terms of reference, as well as a new proposed timetable for the first phase of the review, the study phase.

The comments received from several shippers and shippers groups raised the question of whether the review should be undertaken and how to proceed with the review.  Agency staff are of the opinion that a review is necessary.  However, in order to address concerns raised not only by shippers, but by all stakeholders who commented on the draft terms of reference, a modified approach to the review process has been developed and is described below.  The approach has two phases, the study phase, undertaken by a consultant, as described in the attached revised terms of reference, and a hearing phase that will provide an opportunity for interested parties to provide their views on one or more alternative publication/methodologies, including the Agency's current publication/methodology.

Study Phase

A consultant will undertake a study as described in the attached terms of reference.  It will be a study of cost of capital principles and an examination of a number of publication/methodologies currently used by economic regulatory bodies.  More specifically, it will involve an examination of both conceptual approaches to cost of capital and an examination of the approaches adopted, as well as recent research undertaken, by other regulatory bodies for establishing cost of capital rates.

Taking into account stakeholder comments on this issue, it has been decided that the consultant will examine the current publication/methodology used by the Agency, conceptual approaches to cost of capital, as well as publication/methodologies used by six other economic regulatory bodies.  These six will include at least three Canadian regulators, either federal or provincial, and two regulatory bodies responsible for regulating rail transportation on a national level, including the United States Surface Transportation Board.

The Agency will confirm and communicate the six selected publication/methodologies to be examined by the consultant to the interested parties on the distribution list.

The study phase will assist the Agency in obtaining a broader knowledge and understanding as an input to the second phase of the process.

Based on the comments on the draft terms of reference and the review process, the assessment of the issues and implications associated with implementing certain approaches, and any assessment of publication/methodologies (including impact) in relation to the railways' cost of capital would be more appropriately conducted through a hearing process, which would be assisted by stakeholder input, analysis by Agency staff, and the consultant's study.

Railway companies, shippers and other interested parties will be given an opportunity to comment on the consultant's final report before the study phase concludes.  As with the comments on the draft terms of reference, which are now posted, all submissions from interested parties pertaining to that report will be posted on the Agency's Web site and those on the distribution list will be notified of the posting.

The final report of the consultant, the comments from interested parties and the consultant's subsequent response to these comments will provide stakeholders and the Agency with a body of information to be considered during the hearing phase of the Agency's review of its cost of capital publication/methodology, which will commence following the /conclusion of the study phase.

Hearing Phase

In the hearing phase, a panel of Agency Members will consider the consultant's report and gather evidence from railways, shippers and other interested parties to ascertain if there is a potentially superior publication/methodology or publication/methodologies, or improvements that should be made, to the Agency's current "benchmark" publication/methodology.  The Agency will then make a determination as to which publication/methodology, its current publication/methodology or an alternative, it will use for the next five year period.  Alternatively, the Agency may conclude that a further phase of in-depth examination of one or more publication/methodologies is needed.

It is the intention of the Agency that any resulting determination on the publication/methodology used by the Agency for establishing cost of capital not be reviewed for at least five years, unless extraordinary circumstances warrant further review.

More detailed information on the hearing phase of the review will be provided following the /conclusion of the study phase.

If you have any questions or require any additional information regarding the terms of reference or any other aspect of this review, you may contact Dale McKeague, Director, Industry Determinations and Analysis Directorate, at 819-997-4914 or by e-mail at dale.mckeague@otc-cta.gc.ca.

Sincerely,

Cathy Murphy
Secretary

Attachments

Agency Cost of Capital Methodology Review 2009