Decision No. 378-R-2016

SUMMARY

[1] The Agency has determined CN’s and CP’s MRE and revenue for the 2015-2016 crop year as set out in Table 1. CN’s and CP’s revenues were both above their MRE and, as such, they are required to pay out the excess revenue and penalty, as set out in Table 1, to the Western Grains Research Foundation.

 

Table 1

	MRE	Revenue	Revenue in Excess of MRE	Payout of Excess Revenue and Penalty
CN	$684,749,693	$685,791,606	$1,041,913	$1,094,009
CP	$677,879,839	$681,266,322	$3,386,483	$3,555,807

INTRODUCTION

[2] This Decision provides the Agency’s determinations of the prescribed railway companies’ MRE and revenue for the movement of western grain for the 2015-2016 crop year.

[3] These determinations are necessary to ensure that a prescribed railway company’s western grain revenue does not exceed its MRE. If a prescribed railway company’s revenue exceeds its MRE, the company must pay out the excess amount plus a penalty, as specified in the Railway Company Pay Out of Excess Revenue for the Movement of Grain Regulations, SOR/2001-207 (Regulations).

[4] There were two prescribed railway companies during the 2015-2016 crop year: the Canadian National Railway Company (CN) and the Canadian Pacific Railway Company (CP).

[5] The Agency’s determination of CN’s and CP’s MRE is pursuant to the formula defined in section 151 of the CTA.

AGENCY DETERMINATION

[6] The Agency, in determining a prescribed railway company’s MRE, must first determine its average length of haul for the movement of western grain and the number of tonnes of grain involved in that movement for the crop year. The Agency also determines the prescribed railway company’s revenue and whether its revenue exceeded its MRE and, if it did, the excess amount with penalty that it must pay out to the Western Grains Research Foundation.

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

[7] Section 147 of the CTA defines “movement”, “grain” and “crop year” as follows:

[8] The Agency determined CN’s and CP’s tonnage and average length of haul, for the movement of western grain for the 2015-2016 crop year, to be as follows:

Table 2

Destination	CN Tonnes Moved	CP Tonnes Moved	Total Tonnes Moved
Vancouver	9,392,367	14,076,101	23,468,468
Prince Rupert	6,274,822	74,034Note 1	6,348,856
Thunder Bay	2,415,151	4,915,218	7,330,369
Eastern Canada	1,641,972	1,603,737	3,245,709
Interswitching Adjustment (Equiv. Tonnes Approach – Decision No. 305-R-2015)	60,267	(60,267)	0
Total	19,784,579	20,608,823	40,393,402
Average length of haul (miles)	1,015	890	951

[9] 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 verification led to the addition, rejection or modification of a number of records.

[10] CN and CP moved a combined 40.4 million tonnes of western grain in the 2015-2016 crop year, 2.2 percent lower than the western grain volume they moved in the previous crop year.

[11] CN’s and CP’s combined average length of haul for the crop year was 951 miles, 0.4 percent higher than in the previous crop year.

[12] While Churchill is an eligible western grain destination, there were no Churchill-bound movements during the crop year by a “prescribed railway company”.

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

[13] In 2011, the Agency developed a new process for administering the MRE Program. The intent was to streamline the process, for all parties involved, by clearly establishing the Agency’s approach to administering and improving the predictability of the MRE Program. Following consultations with the prescribed railway companies in 2010 and 2011, the Agency issued a series of letter decisions establishing the new approach to managing the MRE Program. One aspect of the approach is that any proposals for methodological changes and interpretations that have a material impact are to be submitted to the Agency for its consideration on or before April 30 of the crop year to which the change relates.

[14] In an Agency staff letter dated January 22, 2016, participants were given until April 30, 2016 to propose new issues for the Agency’s consideration for application to the 2015-2016 crop year. On April 29, 2016, CN submitted five issues for the Agency’s consideration, as follows:

1. Interswitching and exchange switching

[15] CN argues that it is not properly compensated through the MRE for interswitching and exchange traffic and requests that the Agency reconsider its adopted approach on this matter.

2. Mileage from the main sorting yards to the final vessel loading location

[16] CN argues that the mileage travelled by CN from its main sorting yards (i.e., Thornton Yard and Neebing Yard) to the final vessel loading destinations in Vancouver and Thunder Bay, respectively, should be included in determining CN’s average length of haul.

3. Eligibility of stations not designated in the CTA as a port in British Columbia and the eligibility of traffic interchanged to the Southern Railway of British Columbia (SRY)

[17] CN argues that traffic destined to Thornton Yard and traffic destined to Vancouver Intermodal Terminals (VIT) are not eligible movements, as neither location is listed within the definition of a “port in British Columbia.”

[18] CN also argues that traffic forwarded to the SRY at New Westminster is not an eligible movement because the interchanged traffic is transported by a non-prescribed railway company or by truck to its ultimate vessel loading destination.

4. Agency’s approach to administering material changes

[19] CN argues that the approach for handling proposed changes within the MRE program as established by the Agency through a series of decisions, including Decision Nos. LET-R-212-2010, LET-R-57-2011 and LET-R-100-2011, is unfair to the railway companies in that the established timelines do not allow the railway company sufficient time to have an issue addressed within a given crop year.

5. The use of the Canadian Grain Commission (CGC) unload weights

[20] CN argues that the reliability of the CGC unload weight data has diminished since the removal of inwards inspections by the CGC and, as such, should no longer be used to determine its tonnage moved in a crop year.

Analysis and Findings

1. Interswitching and exchange switching

[21] Interswitching and exchange switching involve the transportation by an interswitching carrier (at the origin, destination, or both) of a shipment that is transported by a line-haul carrier for most of the distance. The concerns about the treatment of interswitching raised by CN were addressed by the Agency in Decision No. 305-R-2015. In that Decision, the Agency established a methodology for determining an adjustment to the MRE, the “Equivalent Tonnes approach”, that improved the recognition of work performed by the interswitching carriers within the MRE program. Given that the Agency has already addressed the issue, no further investigation on this matter is warranted.

2. Mileage from the main sorting yards to the final vessel loading location

[22] The Agency addressed this issue in Decision No. 334-R-2016, wherein it concluded that the length of haul should be determined using the same methodology and the same mileage that was used in arriving at the base year average length of haul. The Agency concluded that the base year length of haul amounts did not include the additional miles and, as such, the additional miles should not be included in establishing CN’s average length of haul for the crop year.

3. Eligibility of stations not designated in the CTA as a port in British Columbia and the eligibility of traffic interchanged to the SRY

[23] The Agency addressed this issue in Decision No. 336-R-2016, wherein it concluded that:

1. Traffic delivered to the Thornton Yard and VIT is not moved to a port in British Columbia within the meaning of section 147 of the CTA and it is thus not eligible traffic subject to the MRE; and,

2. Traffic delivered to New Westminster is moved by rail to a port in British Columbia, for export by a vessel to a country other than the United States of America and is thus eligible traffic subject to the MRE, irrespective of whether it is moved to a vessel loading facility by a prescribed or non-prescribed railway company or by any other means.

4. Agency’s approach to administering material changes

[24] The Agency addressed this issue in Decision No. 400-R-2015, wherein it found that the current approach to managing the MRE program is the fairest way to address material issues given the wide range of interests at stake and the complexity of the matters that the Agency is faced with, and found that a change in its approach was not warranted.

[25] The Agency notes that the Federal Court of Appeal addressed the Agency’s approach in Canadian National Railway Company v. Canadian Transportation Agency et al., 2016 FCA 266, which was CN’s appeal of Agency Decision No. 451-R-2014. In that decision, the Court stated:

…I find that the Agency followed a fair procedure for hearing and addressing the complaints of its stakeholders, including CN’s, by way of consultation. There has been no breach of procedural fairness, and as a result there is no reason for this Court to intervene.

[26] The Agency finds no reason to alter its established approach at this point in time.

5. The use CGC unload weights

[27] The Agency is following up on this matter and seeking the input of other affected parties, including CP and the CGC. The CGC has informed the Agency that it is in the process of analysing its data to determine if the concerns are merited. The Agency finds that, as there is no evidence at this time to assess whether CN’s claim warrants a change, the Agency will continue the practice of using the CGC unload weights for the 2015-2016 crop year and a ruling on this issue will be made for application to the 2016-2017 crop year after the CGC has completed its assessment and the Agency has examined all of the evidence provided.

3.0 Determination of CN’s and CPʼs MRE

[28] 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 MRE:

[29] For CN, in respect of the 2015-2016 crop year, the values for A, B, C, D, E and F are as follows:

[30] The Agency, after inserting these values into the MRE formula, determines that CN’s MRE for the 2015-2016 crop year is $684,749,693.

[31] For CP, in respect of crop year 2015-2016, the values for A, B, C, D, E and F are as follows:

[32] The Agency, after inserting these values into the MRE formula, determines that CP’s MRE for the 2015-2016 crop year is $677,879,839.

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

4.1 Revenue and revenue reductions

[33] 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.

[34] In summary, a prescribed railway company’s statutory western grain revenue stems mostly from billings by the prescribed railway companies 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 include:

• 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.

[35] The prescribed railway company’s 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; nor,
• compensation received for running rights.

[36] 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.

[37] 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.

4.2 Agency review of revenue and revenue deductions, and general findings

[38] Railway company records relating to western grain revenue were reviewed by Agency staff. 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.

4.3 Adjustments to revenue identified by Agency staff

[39] Agency staff made adjustments to the revenue figures submitted by the railway companies. The Agency has considered the staff adjustments and accepts them. The revenue and MRE adjustments are summarized below.

CN

[40] For CN, the following adjustments made by Agency staff resulted in an increase to CN’s reported western grain revenue and/or its MRE^{Note 2}:

• An adjustment to the amounts claimed by CN for shortline payments and Intermodal reductions was made following the removal of miscellaneous and miscoded traffic;
• A reduction to the amount claimed by CN for discounts associated with its Commercial Fleet Integration Program was made, increasing CN’ reported revenue;
• Discounts claimed by CN, for its Test Shuttle Program, were reduced for traffic identified as not falling within the 2015-2016 crop year or that was ineligible for other reasons; and,
• CN’s revenue was increased to reflect earned revenue associated with additional switching requested by the shipper pursuant to CN’s supplemental services tariff 9000 Item 13000.

[41] For CN, the following adjustments made by Agency staff 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, which impacted both CN’s revenue and MRE;
• An adjustment was made to CN’s revenue to reflect additional traffic subject to weekend loading rebates, which increased the amount claimed as rebates and lowered CN’s reported revenue;
• CN’s reported tonnage figure was decreased to reconcile with the tonnage figures submitted by the CGC;
• The removal of traffic miscoded as an eligible commodity (i.e., soybean traffic included as peas) lowered CN’s reported revenue and its MRE; and,
• The amount claimed by CN for contributions to the IDF, pursuant to subsection 150 (5) of the CTA, was reduced as CN claimed amortized amounts for a longer period than it was entitled to.

CP

[42] For CP, the following adjustments made by Agency staff resulted in an increase to CP’s reported western grain revenue and/or its calculated MRE^{Note 3}:

• CP’s revenue was increased to reflect activities associated with additional switching requested by the shipper;
• 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.

[43] For CP, the following adjustments made by Agency staff 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 grain traffic database, which impacted both CP’s revenue and MRE;
• The removal of traffic miscoded as an eligible commodity (soybean traffic included as peas) lowered CP’s reported revenue and its MRE;
• The contributions that CP claimed for payment to the IDF were adjusted to correct for an understatement in CP’s original submission;
• Tonnage related to interswitching activities was reduced; and,
• Revenues from car hire were reduced to correct for an overstatement.

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

4.4 CNʼs and CPʼs western grain revenue determination

[45] The Agency, after taking into account its findings and adjustments, has determined CNʼs and CP’s western grain revenue for crop year 2015-2016 to be as follows:

• CN = $685,791,606; and,
• CP = $681,266,322.

5.0 CNʼs and CPʼs MRE and Revenue

[46] The Agency has determined CN’s and CP’s MRE and revenue for the 2015-2016 crop year to be as set out below in Table 3. CN’s and CP’s revenues were both above their MRE and, as such, they are required to pay out the excess revenue and penalty, as set out in the Table below, to the Western Grains Research Foundation.

Table 3

	MRE	Revenue	Revenue in Excess of MRE
CN	$684,749,693	$685,791,606	$1,041,913
CP	$677,879,839	$681,266,322	$3,386,483

[47] 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 Regulations.

[48] 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.

[49] Given that CN’s statutory grain revenue exceeds its MRE for the 2015-2016 crop year by an amount of $1,041,913, 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 $1,094,009, which represents the sum of the excess revenue amount of $1,041,913 and the prescribed penalty of $52,096, as provided for under paragraph 2(a) of the Regulations.

[50] Upon payment of the excess amount and the applicable penalty, CN is to notify the Agency, in writing, of the amount paid out and the date on which it was paid.

[51] Given that CP’s statutory grain revenue exceeds its MRE for the 2015-2016 crop year by an amount of $3,386,483 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 $3,555,807, which represents the sum of the excess revenue amount of $3,386,483 and the prescribed penalty of $169,324 as provided for under paragraph 2(a) of the Regulations.

[52] Upon payment of the excess amount and the applicable penalty, CP is to notify the Agency, in writing, of the amount paid out and the date on which it was paid.