Decision No. 443-R-2011

December 22, 2011

DETERMINATION by the Canadian Transportation Agency of the Western Grain Revenue Caps for the movement of western grain by prescribed railway companies for crop year 2010-2011.

DETERMINATION by the Canadian Transportation Agency of a prescribed railway company’s revenue for the movement of western grain for crop year 2010-2011 and whether a prescribed railway company’s western grain revenue exceeds its corresponding Revenue Cap, pursuant to sections 150 and 151 of Division VI, Part III of the Canada Transportation Act, S.C., 1996, c. 10, as amended.

File No.: 
T6650-2

INTRODUCTION

[1] This Decision provides the Canadian Transportation Agency's (Agency) determinations of the Western Grain Revenue Caps, and revenue, for the movement of western grain by prescribed railway companies for crop year 2010-2011. These determinations are necessary to ensure that a prescribed railway company's western grain revenue does not exceed its maximum revenue entitlement, which is referred to as its Revenue Cap. If a prescribed railway company's revenue exceeds its Revenue Cap, the company must pay out the excess amount and penalties, as specified in the Railway Company Pay Out of Excess Revenue for the Movement of Grain Regulations, SOR/2001-207. There were two prescribed railway companies during the 2010-2011 crop year: the Canadian National Railway Company (CN) and the Canadian Pacific Railway Company (CP).

[2] The Agency's determination of CN's and CP's Revenue Caps must utilize the formula, the base year statistics, and the volume-related composite price index as defined in section 151 of the Canada Transportation Act (CTA). It also requires CN's and CP's specific tonnage and length of haul statistics for crop year 2010-2011.

[3] The Agency's determination of each of CN's and CP's western grain revenue complies with subsections 150(3), (4) and (5) of the CTA. It also complies with Decision No. 114-R-2001 dated March 16, 2001 and subsequent decisions concerning the interpretation of a number of matters that are to be considered when the Agency determines a prescribed railway company's grain revenue for Revenue Cap purposes.

AGENCY DECISION

1.0 CN'S AND CP'S WESTERN GRAIN TRAFFIC STATISTICS FOR CROP YEAR 2010-2011

[4] A western grain movement for a given crop year is defined in section 147 of the CTA. Key terms are 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
  1. Thunder Bay or Armstrong, Ontario, or
  2. Churchill, Manitoba, or a port in British Columbia for export,

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

"grain"
means
  1. 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
  2. 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's determinations of CN's and CP's tonnage and length of haul statistics for western grain movements for crop year 2010-2011 are shown in Table 1 below. These determinations were based on detailed traffic submissions by CN and CP, which were verified to ensure that the traffic qualified as western grain movements and that the related revenue, tonnage and mileage statistics were accurate. This verification led to the rejection or modification of a small portion of the traffic. In the case of both railway companies, a number of records containing miscellaneous errors e.g. duplicate records, low revenue per tonne figures, movements with zero tonnes etc. were found and removed by Agency staff. The net result of removing these records from CN's and CP's submitted traffic lowered their reported tonnage by about 2,700 tonnes and 700 tonnes, respectively. In addition, the impact of using the Canadian Grain Commission (CGC) reported tonnage is discussed separately in section 2.1 below and is reflected in Table 1. Further, there was an adjustment to CP's length of haul calculation which is noted in section 2.2 below and which is also reflected in Table 1.

Table 1
Destination CN Tonnes Moved CP Tonnes Moved TOTAL Tonnes Moved
AVERAGE LENGTH OF HAUL (MILES) 1,010 913 965
Vancouver 8,535,116 9,256,848 17,791,964
Prince Rupert 4,385,005 40,239Note 1 4,425,244
Thunder Bay 1,667,957 4,862,017 6,529,974
Eastern Canada 1,853,684 527,263 2,380,947
TOTAL 16,441,762 14,686,367 31,128,129

[6] The above table indicates that 31.1 million tonnes of western grain were moved in the 2010-2011 crop year. The 31.1 million tonne figure is 2.5 percent lower than the western grain volume for the previous crop year.

[7] The 2010-2011 crop year average length of haul of 965 miles shown in the above table is 12 miles, or 1.2 percent, lower than for the previous crop year.

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

2.0 CN'S AND CP'S WESTERN GRAIN REVENUE CAPS FOR CROP YEAR 2010-2011

[9] Agency staff, as part of their regular verification work, have made adjustments to the revenue-cap-related figures submitted by the railway companies. The Agency has considered the staff adjustments and accepts them. The adjustments are discussed in sections 2.1 and 2.2 below.

2.1 CGC Tonnage

[10] The Agency, in Decision No. 529-R-2009, directed CN and CP to report, for all future determinations (beginning with crop year 2009-2010), Revenue Cap tonnages using weights obtained from the CGC, without any adjustments. Using this methodology, along with refinements made last year, Agency staff analyzed the revenue cap tonnages reported by each of CN and CP to ensure that they reflected CGC weights without any adjustments. This was done by matching railway reported tonnages with CGC data based on car initial, car number, origin and destination.

[11] In the evaluation for CN, discrepancies were found requiring a reduction of about 2,000 tonnes in CN's reported tonnage. This resulted in CN's Revenue Cap being lowered.

[12] A similar evaluation of CP's reported tonnage found additional matches and Agency staff adjusted CP submitted tonnage upwards by about 8,000 tonnes. This resulted in CP's Revenue Cap being raised.

2.2 CP's Length of haul calculation

[13] Average length of haul is a critical component of the Revenue Cap formula. CP initially submitted a figure of 915 miles. Agency staff found that CP's reported data and resubmitted data did not properly account for all of the shortline miles for movements that originated on lines operated by certain shortline railway companies. These shortline railway companies are not prescribed railway companies as defined in the CTA. Shortline revenue amounts are excluded and therefore so are the associated shortline miles. This is consistent with Agency Decision No. 114-R-2001.

[14] Removing the shortline miles for all of the affected movements reduced CP's average length of haul to 913 miles, thereby lowering CP's Revenue Cap.

2.3 CN and CP Revenue Cap calculations

[15] 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 Revenue Cap:

[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 as determined by the Agency.

[16] For CN, in respect of crop year 2010-2011, the values for A, B, C, D, E and F are as follows:

A
= $348,000,000
B
= 12,437,000
C
= 1,010
D
= 1,045
E
= 16,441,762
F
= 1.1384

[17] CN's values for A, B and D are prescribed by subsection 151(2) of the CTA. As shown in section 1.0 of this Decision, the 2010-2011 crop year values for C and E were 1,010 miles and 16,441,762 tonnes, respectively. The value of 1.1384 for the volume-related composite price index for crop year 2010-2011 was determined previously by the Agency pursuant to subsection 151(5) of the CTA in Decision No. 159-R-2010.

[18] Applying these values to the Revenue Cap formula results in a CN Revenue Cap for crop year 2010-2011 of $509,316,957.

[19] For CP, in respect of crop year 2010-2011, the values for A, B, C, D, E and F are as follows:

A
= $362,900,000
B
= 13,894,000
C
= 913
D
= 897
E
= 14,686,367
F
= 1.1384

[20] CP's values for A, B and D are prescribed by subsection 151(3) of the CTA. As shown in section 1.0 of this Decision, the 2010-2011 crop year values for C and E were 913 miles and 14,686,367 tonnes, respectively. The value of 1.1384 for the volume-related composite price index for crop year 2010-2011 was determined by the Agency in Decision No. 159-R-2010.

[21] Applying these values to the Revenue Cap formula results in a CP Revenue Cap for crop year 2010-2011 of $442,570,741.

3.0 DETERMINATION OF CN'S AND CP'S WESTERN GRAIN REVENUE FOR CROP YEAR 2010-2011

3.1 Revenue and revenue reductions

[22] The determination of a prescribed railway company's grain revenue requires many assessments by the Agency as to what is to be included as revenue or as an allowable reduction to revenue. While a partial list of such matters appears in subsections 150(3), (4), and (5) of the CTA, a more comprehensive list was established, following consultation with the grain industry, in Decision No. 114-R-2001.

[23] In summary, a prescribed railway company's statutory western grain revenue stems mostly from billings 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 includes:

  • 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.

[24] A railway company's statutory grain revenue is to be net of any amounts paid or allowed for incentives, rebates or any other similar reductions, and does not include:

  • amounts that are earned which the Agency characterizes as a performance penalty or as being 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.

[25] Allowable reductions to a railway company's statutory 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 (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.

[26] The following matters do not reduce a railway company's statutory 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.

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

[27] 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 captured and that revenue exclusions or reductions are appropriate and accurate. As part of this detailed analysis, onsite visits to CN and CP offices, when deemed appropriate, were carried out.

[28] Based on Agency staff findings, a number of adjustments were made to CN and CP revenue-related items. An outstanding issue before the Agency this year related to CP's revenue-based methodology for determination of rail-only revenue for intermodal traffic. This issue was first dealt with in Decision No. 529-R-2009 and further in last year's Decision No. 512-R-2010, in which the Agency directed CP to propose for Agency consideration a revenue-based methodology using criteria similar to CN's methodology to be in place for application in this year's determination. This is addressed in section 3.3 below. In addition, there were a number of technical items identified by Agency staff that have implications for the Agency's determinations. These items are addressed in section 3.4 below.

3.3 Issue addressed

CP's revenue-based methodology for the determination of rail-only revenues for intermodal traffic
Background

[29] CP often, for intermodal traffic, uses a bundled rate (one that includes revenue amounts for both rail and trucking). In these situations, the Agency must isolate the component that constitutes rail-only revenue, as only the rail portion constitutes a movement under the Revenue Cap Program.

[30] CP historically submitted annual cost-based figures as a proxy for estimating the trucking portion of the total revenue received for moving intermodal containers when there is a bundled rate. In Decision No. 529-R-2009 the Agency required CP to change to a revenue-based approach in time for the 2009-2010 crop year.

[31] CP developed and implemented an approach for the 2009-2010 crop year that the Agency did not accept as it was neither revenue-based nor verifiable. The Agency, in Decision No. 512-R-2010, therefore directed CP to submit a revenue-based methodology for the determination of rail-only revenues for intermodal traffic that would be verifiable and fully implemented for the 2010-2011 crop year.

[32] In March 2011, CP filed its proposed methodology (March 2011 methodology). This methodology set out a system in which CP would offer its intermodal customers various clearly defined rate options, including a rate for the rail-only portion of the movement.

[33] Agency staff examined the March 2011 methodology and confirmed to CP that Agency staff was satisfied with it, provided that the methodology was implemented as proposed.

[34] CP filed its 2010-2011 grain traffic database and supporting documentation in early October 2011. CP also provided a confidential document that described the manner in which CP implemented the March 2011 methodology for most of its intermodal traffic involving bundled rates. The document also included two new methodologies that CP was proposing for application to the remainder of its intermodal traffic.

Agency analysis and findings

[35] For 87 percent of CP's 2010-2011 intermodal traffic, where a bundled rate was used, CP had applied its March 2011 methodology appropriately and rail-only revenues could be easily calculated and verified. The Agency is satisfied with the March 2011 methodology and that it has been implemented properly for this portion of CP's intermodal traffic.

[36] For a small percentage (4 percent) of its intermodal customers where CP uses a bundled rate, CP has not established a formal distinction between the bundled rate and the rail-only rate within a unique tariff or confidential contract. For these movements, CP proposed an alternative methodology to the March 2011 methodology, namely using a rail-only rate established within an existing general Limited Distribution Tariff (LDT). Using this alternative methodology and information readily available within the LDT, Agency staff were able to establish a verifiable amount for the rail-only portion of these movements. Despite the fact that this methodology was introduced after the deadline established for proposals related to any methodological/interpretation changes as established in the Agency's Decision No. LET-R-12-2011, the Agency is prepared to accept this proposed methodology (LDT methodology) as it is verifiable. This is a special exception to the required procedure and CP is strongly reminded that any future proposals for methodological changes are to be submitted by the Agency's established deadline.

[37] For 1 percent of its bundle-rated intermodal traffic, CP was not able to provide any intermodal related data from its systems and consequently did not apply a reduction for these movements. The Agency accepts CP's conservative approach.

[38] For the remaining 8 percent of CP's bundle-rated intermodal traffic, CP proposed an alternative methodology that could not be substantiated by Agency staff. The proposed methodology attempts to estimate trucking charges for certain special rate intermodal movements using a ratio based on other intermodal traffic movements. The Agency finds that this approach is neither revenue-based nor verifiable. Further, CP did not substantiate the revenues it claimed for these movements. In addition, the proposed methodology was introduced after the Agency's established deadline. For these reasons, the Agency rejects this proposed methodology for CP's special rate intermodal movements. For this year, the Agency has instead applied the LDT methodology for these movements. This results in an upward revision to CP's reported western grain revenue.

[39] Based on the direction given to CP in last year's Decision No. 512-R-2010 regarding the establishment of a revenue-based methodology that was to be in place for application in this year's determination, the Agency's expectation was that the verifiable revenue-based methodology would apply to 100 percent of CP's intermodal traffic involving bundled rates. Given that this is not the case, the Agency directs CP one last time to propose, within 90 days of the date of this Decision, for consideration by the Agency, a revenue-based methodology for the portion of the traffic referred to in paragraph 38 above which can be substantiated with verifiable information. If the proposal is not received by the Agency within the 90-day period or if the Agency, upon review of the proposal, is not satisfied with the proposal, the Agency, for this portion of the traffic in next year's determination, will apply the LDT methodology or such other methodology as the Agency determines to be appropriate, which may include a denial of reduction for all or part of such movements.

3.4 Technical Adjustments identified by Agency staff

[40] Agency staff, as part of their regular verification work, have made adjustments to the revenue figures submitted by the railway companies. The Agency has considered the staff adjustments and accepts them. The adjustments are discussed below.

CN

[41] For CN, the following adjustments made by Agency staff resulted in an increase to CN's reported western grain revenue.

  • CN claimed a volume rebate amount it had with a specific shipper. The commodity involved was not an eligible commodity included in Schedule II of the CTA. Hence, the rebate amount was not allowed.
  • For a small number of movements involving shortlines, CN had claimed shortline payments that were double the actual amount. Agency staff made the appropriate adjustment to the shortline payment amounts claimed by CN.
  • With respect to CN's submission regarding weekend loading incentives, i.e., amounts that are excluded from eligible revenues, CN claimed amounts for a small number of movements that were either moved outside of the 2010-2011 crop year, involved ineligible commodities or were moved to ineligible destinations. CN's total week-end loading claim was reduced accordingly.

[42] For CN the following adjustments made by Agency staff resulted in a reduction to CN's reported western grain revenue.

  • Records that contained erroneous information, such as movements reported with zero tonnage, duplicate records, low tonnage, or erroneous revenues per tonne, were removed from CN's grain traffic database.
  • In examining a new revenue reduction submission by CN, made pursuant to subsection 150(5) of the CTA (IDF contribution), the date upon which the revenue reduction began was adjusted by Agency staff.
CP

[43] For CP, the following adjustments made by Agency staff resulted in an increase to CP's reported western grain revenue:

As established in Decision No. 114–R-2001 (section 3.0), revenue earned by a railway company for additional switching that was requested by the shipper is considered eligible revenue under the Revenue Cap program unless it is due to shipper error or failure to meet obligations. CP has a general ledger account entitled "Local Switching" linked to a CP tariff for all commodities entitled "Railcar Supplemental Services - Tariff 2". Among the charges established within Tariff 2 are charges that Agency staff consider "additional switching - requested by the shipper". CP had not reported any eligible grain revenues from the "Local Switching" account. Agency staff requested and obtained from CP an estimate of the amount in the account related to eligible grain revenues. CP's eligible western grain revenue for the current crop year was increased by that amount.

When submitting the estimate, CP argued that the amount was not material and should not be considered in this year's determination. Given that this adjustment relates to an obligation by CP to conform to the existing policy and methodology governing the administration of the Revenue Cap Program, materiality does not apply. This application of materiality is clearly set out in Agency Decision No. LET-R-57-2011.

  • Corrections to calculations of amounts related to IDF reductions were made which resulted in a reduction to the IDF amounts claimed by CP.
  • An adjustment was made to reconcile CP interswitching-related revenues with corresponding amount claimed as interswitching payments by CN.

[44] For CP, the following adjustments made by Agency staff resulted in a reduction to CP's reported western grain revenue.

  • Records that contained erroneous information, such as movements reported with zero tonnage, duplicate records, low tonnage, or erroneous revenues per tonne, were removed from CP's grain traffic database.
  • Certain payments were added for a number of shortline movements that CP had not recorded in its grain traffic database.

[45] Agency staff will be providing the railway companies separate confidential reconciliation letters with details on the above adjustments.

3.5 CN and CP western grain revenue determinations

[46] Taking all of the findings and adjustments into account, the Agency has determined CN's and CP's western grain revenue for crop year 2010-2011 to be: CN = $508,403,510; CP = $443,822,775.

4.0 COMPARISON OF CN'S AND CP'S 2010-2011 REVENUE CAPS AND REVENUE

[47] In summary, the Agency has determined the western grain Revenue Caps and revenue for CN and CP for crop year 2010-2011 as set out below. CN has remained below its cap by $913,447 whereas CP has exceeded its cap by $1,252,034.

Table 2
Crop Year 2010-2011 Revenue Cap Revenue Excess Amount Amount below Revenue Cap
CN $509,316,957 $508,403,510   $913,447
CP $442,570,741 $443,822,775 $1,252,034  

[48] Subsection 150(2) of the CTA provides that if a prescribed railway company's revenue for the movement of grain in a given crop year, as determined by the Agency, exceeds the company's Revenue Cap for that year, the company shall pay out the excess amount, and any penalty that may be specified in the regulations.

[49] The Railway Company Pay Out of Excess Revenue for the Movement of Grain Regulations, SOR/2001-207 (Regulations) provide, in part:

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

  1. 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
  2. 15 percent 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.

[50] Given that CP's statutory grain revenue exceeds its Revenue Cap for crop year 2010-2011 by an amount of $1,252,034, the Agency, pursuant to subsection 150(2) of the CTA and the Regulations, orders CP to pay to the Western Grains Research Foundation, within 30 days from the date of this Decision, the amount of $1,314,636 representing the sum of the excess amount of $1,252,034 and the prescribed penalty of $62,602 as provided for under paragraph 2(a) of the Regulations.

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.

Notes

Note 1

Reflects movements by CP to Edmonton, with CN haulage from Edmonton to Prince Rupert.

Return to reference 1

Member(s)

Geoffrey C. Hare
Raymon J. Kaduck
John Scott
Date modified: