Decision No. 211-R-2007

File No. T6650-2

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INTRODUCTION

[1] The Canadian Transportation Agency (hereinafter the Agency) is required to determine the volume-related composite price index for crop year 2007-2008. A crop year begins on August 1 of one year and ends on July 31 of the following year.

BACKGROUND

[2] The current "revenue cap" regime, established August 1, 2000, for the movement of western grain by a prescribed railway company replaced the former rate scale regime for such movements. The Canada Transportation Act (hereinafter the CTA) requires the Agency to determine each railway company's revenue cap annually and to determine whether each cap has been exceeded by the railway company.

[3] Subsection 151(1) of the CTA provides the formula that the Agency is to use in determining the revenue caps. One of the inputs to the formula is the volume-related composite price index. This index is to be determined by the Agency in advance of the crop year on or before April 30. Hence, by April 30, 2007, the Agency must determine the value for the volume-related composite price index for crop year 2007-2008.

[4] Subsection 151(4) of the CTA states that:

The following rules are applicable to the volume-related composite price index:

1. in the crop year 2000-2001, the index is deemed to be 1.0;
2. the index applies in respect of all of the prescribed railway companies; and
3. the Agency shall make adjustments to the index to reflect the incremental costs incurred by the prescribed railway companies for the purpose of obtaining cars as a result of the sale, lease or other disposal or withdrawal from service of government hopper cars.

[5] The development of the volume-related composite price index for 2007-2008 required detailed submissions of historical price information of railway inputs (labour, fuel, material and capital) from the prescribed railway companies, currently the Canadian National Railway Company (hereinafter CN) and the Canadian Pacific Railway Company (hereinafter CP). The submitted information was reviewed and verified by Agency staff. In addition, the railway companies and Agency staff developed forecasts for future changes in the price of railway inputs. The historical and forecasted information was summarized in an Agency report and shared with grain industry participants for consultation purposes. Consultation included participants from producer organizations, the Canadian Wheat Board, shipper organizations, grain companies, railway companies, and federal, provincial and municipal governments.

ISSUES RELATING TO THE LABOUR PRICE COMPONENT

[6] The volume-related composite price index measures price changes, for CN and CP combined, based on a basket of input cost components. The basket consists of seven input cost components; labour, fuel, material, leased cars, depreciation, cost of capital and Canadian Wheat Board cars leased to CN and CP; each having its own price index.

[7] For crop year 2005-2006 and prior years, the labour price index was developed based on information for

1. regular Wage Items (regular pay, overtime pay, vacation pay, etc) and
2. Wage-Related Items (management bonuses, signing bonuses, training costs, share purchase plans and gain sharing plans) but excluded
3. Fringe Benefit Items (CPP, QPP and Company pension amounts, Employment Insurance, Health & Welfare).

Beginning with the 2006-2007 crop year, the development of the labour price index was expanded to include Stock-Based Compensation as a Wage-Related Item, and to include all of the Fringe Benefit Items. Furthermore, data for Wage-Related and Fringe Benefit Items is to be normalized by using multi-year moving averages.

[8] During this year's (crop year 2007-2008) price index consultation, CN and CP questioned certain methodological issues related to the incorporation of Wage-Related and Fringe Benefit Items into the development of the labour price index. While some methodological issues were resolved, other issues require further investigation.

[9] A number of non-railway respondents questioned whether it was appropriate to include certain Wage-Related and Fringe Benefit Items into the development of the labour price index. In particular, they questioned the inclusion of amounts for management bonuses and Stock-Based Compensation.

CALLS FOR A COSTING REVIEW

[10] One of the major concerns raised by a number of non-railway respondents during the 2007-2008 crop year consultation was the need for a "Costing Review", in order to adjust the CTA's cost-based revenues (which determine the railway companies' annual revenue caps) to a more appropriate level. Respondents complained that the Agency conducts a thorough and complex analysis into the annual determination of the volume-related composite price index, but gives no consideration to the cost-based revenue to which this index is applied; cost-based revenue which dates back to 1992 Costing Review information. The respondents indicated that it is unfair and inappropriate for the railway companies to benefit by having their revenue increased to capture railway cost inflation while at the same time incurring no revenue adjustment to take into account extensive productivity gains accrued by the railways since the partial adjustment that was made in 2000, in respect of the Revenue Cap Regime.

AGENCY DECISION

[11] The Agency's determination of the volume-related composite price index for crop year 2007-2008 is: 1.1611, reflecting an increase of 3.2 percent from crop year 2006-2007.

[12] This determination is in compliance with subsection 151(4) of the CTA in that:

1. the crop year 2007-2008 index is determined on the basis that the crop year 2000-2001 index was deemed to be 1.0;
2. the index applies in respect of all of the prescribed railway companies; and
3. the volume-related composite price index has been adjusted to reflect the incremental costs incurred by the prescribed railway companies for the purpose of obtaining cars from the Canadian Wheat Board as a result of the sale, lease or other disposal or withdrawal from service of government hopper cars. No adjustment occurs for the Federal Government's hopper cars because the Federal Government decided to maintain ownership of its cars.

[13] In making this determination, the Agency considered the views of the grain industry participants with which it consulted during March and April of this year. The Agency also took into account the most recent economic conditions and forecasts.

[14] Given the concerns raised during consultation by the participants over the inclusion, and the methodology for inclusion of, Wage-Related and Fringe Benefit Items into the development of the component labour price index, the Agency intends to review these items prior to the issuance of the crop year 2008-2009 volume-related composite price index.

[15] As for the non-railway respondent requests for a Costing Review, the Agency intends to bring these requests to the attention of Transport Canada, as the Minister of Transport, Infrastructure and Communities has the authority to request that such a review be undertaken.

[16] The volume-related composite price index of 1.1611 will be applied in the legislative formula under section 151 of the CTA when the Agency is required to make its revenue cap determinations for the crop year 2007-2008, which is legislated to be rendered by December 31, 2008.