# Q&A: Maximum Revenue Entitlement for the transportation of western grain

## What is the Maximum Revenue Entitlement?

The Maximum Revenue Entitlement is a limit on the overall revenue that can be earned by the Canadian National Railway Company (CN) and the Canadian Pacific Railway Company (CP) for shipping regulated grain from origins within the Western Division or outside of Canada to specific export positions.

It is based on a formula that can also be described as a limit to the average revenue per tonne, for a given length of haul that CN and CP can earn, adjusted for the level of inflation of railway input prices.

The Maximum Revenue Entitlement applies to a crop year, which goes from August 1 in any year – to July 31 in the next year.

## What movements of grain does it apply to?

The Maximum Revenue Entitlement applies to the movement of western grain by rail.

Movement involves 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.

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

Note: Churchill-bound movements

Churchill is an eligible western grain destination. However, the Churchill-bound movements do not currently qualify to be included under the Maximum Revenue Entitlement Program because the CTA requires the carriage of western grain to be by a "prescribed railway company" and the only railway company at Churchill "involved in the movement of western grain" (or) "that performs western grain movements" is Hudson Bay Railway Company, which is not a prescribed railway company.

Grain includes any grain or crop included in Schedule II (or any product of those grains or crops) that is grown:

• in the Western Division

For specific examples of which routing qualify, see the Agency’s interpretation note: Routing of Grain and the Maximum Revenue Entitlement Program.

## Why does the Agency establish a Maximum Revenue Entitlement?

The Agency is required by the Canada Transportation Act to set annual Maximum Revenue Entitlements for CN and CP and to determine whether each maximum revenue entitlement has been exceeded.

The Maximum Revenue Entitlement was created in August 2000 by an act of Parliament to replace maximum freight rates. Parliament agreed to let the railway companies set individual rates for shipping western grain, but required them to stay within a total revenue limit based on all Western grain movements calculated by the Agency in an effort to provide some shipping price protection for farmers.

## What is the process for determining the Maximum Revenue Entitlement?

The Maximum Revenue Entitlement for a given crop is established in relation to a “base year”. Since 2000-2001, the Agency has adjusted each railway company's base year revenue figure to reflect inflation, actual tonnage moved and the corresponding actual average length of haul. The Agency announces the inflation index before each new crop year begins, by the statutory deadline of April 30.

Based on the actual tonnage moved and actual average length of haul, the Agency then determines if each railway company is over or under its maximum revenue entitlement. This statutory determination is made after the crop year ends and must be announced no later than December 31 of each year as per the Canada Transportation Act, Section 150(6).

## What happens if a railway company exceeds its Maximum Revenue Entitlement?

The railway company will have 30 days to pay the excess amount, plus a penalty, to the Western Grains Research Foundation, a farmer-financed and directed organization set up to fund research that benefits Prairie farmers.

If the excess amount is… Then the penalty is…

1% or less of the company’s maximum revenue entitlement

5% of the excess amount

more than 1% of the company’s maximum revenue entitlement

15% of the excess amount

## How is the Maximum Revenue Entitlement calculated?

The Maximum Revenue Entitlement for a given crop year is established in relation to the “base year” of 2000-2001.

The formula for calculating the Maximum Revenue Entitlement is:

Maximum Revenue Entitlement = [A ÷ B + ((C - D) × $0.022)] × E × F Numbers based on the base year Letter This represents the… CN CP A company’s revenues for the movement of grain$348,000,000

$362,900,000 B number of tonnes of grain involved in the company’s movement of grain 12,437,000 13,894,000 D number of miles of the company’s average length of haul for the movement of grain 1,045 897 Numbers related to the crop year Letter This represents the… C number of miles of the company’s average length of haul for the movement of grain E number of tonnes of grain involved in the company’s movement of grain F volume-related composite price index ## What is the$0.022 in the formula?

The $0.022 is an adjustment factor. It accounts for any differences in a railway company's average length of haul for a crop year versus its base year. If the average length of haul for the crop year is longer than the average for the base year, the railway company is entitled to earn an additional$0.022 per tonne, multiplied by the VRCPI.

## What is the volume-related composite price index (VRCPI)?

The VRCPI is an inflation index that reflects forecasted price changes for CN and CP for labour, fuel, and material and capital purchases.

The VRCPI is determined by April 30, before the crop year begins. This leaves time for the railway companies to factor inflation into their freight rates or establish other pricing strategies accordingly for the crop year beginning August 1.

## What impact does the VRCPI have on the Maximum Revenue Entitlement?

The VRCPI is just one of the three factors in a formula the Agency must calculate annually in determining the maximum revenue the railway companies are entitled to collect from moving western grain. The other two factors are the actual tonnage of grain that was hauled and the average length of haul during the crop year. The maximum revenue entitlement is based on adjustments to railway companies' revenues in the base year of 2000-2001, using those three factors.

All other things being equal (i.e. the other two factors mentioned above), the VRCPI has a direct relationship with railway Maximum Revenue Entitlements. For instance, a 3% increase in the VRCPI will result in a 3% increase in railway companies' Maximum Revenue Entitlements.

## Why is the 2012-2013 VRCPI the largest increase yet?

The 2012-2013 VRCPI determination reflects the adoption of two new methodologies as a result of two earlier Agency decisions to better reflect the price paid by the railway companies for certain input:

1. the cost of capital (Decision No. 425-R-2011, issued December 2011)
2. pension costs and the averaging methodology in the development of the labour price index (Decision No. 97-R-2012, issued March 2012).

The cumulative effects of the cost of capital and pension decisions, along with other price increases, resulted in a significantly larger than usual change in the VRCPI for the 2012-2013 crop year.

The application of the two new methodologies had a one-time impact on the 2012-2013 VRCPI.

## What has been the VRCPI trend in the past couple of years?

The VRCPI has tracked up and down since the beginning of the Maximum Revenue Entitlement Program.

In recent years, exceptional fluctuations have reflected the:

• volatility of fuel prices;
• hopper car adjustment in 2007-2008; and
• new methodologies to better recognize the cost of capital and the effect on the labour price index of the substantial payments made by CN and CP towards their pension funds.

Since 2000-2001, the VRCPI has grown at an average annual rate of around 2%.

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