Decision No. 451-R-2014

INTRODUCTION

[1] This Decision provides the Canadian Transportation Agency’s (Agency) determinations of the Western Grain Maximum Revenue Entitlements (MRE), and revenue, for the movement of western grain by prescribed railway companies for crop year 2013-2014. 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 and penalties, as specified in the Railway Company Pay Out of Excess Revenue for the Movement of Grain Regulations, SOR/2001-207 (Regulations). There were two prescribed railway companies during the 2013-2014 crop year: the Canadian National Railway Company (CN) and the Canadian Pacific Railway Company (CP).

[2] The Agency’s determination of CNʼs and CP’s MRE 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). The Agency also requires CNʼs and CP’s specific tonnage and length of haul statistics for crop year 2013-2014.

[3] The Agency’s determination of each of CNʼs 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 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 MRE purposes.

AGENCY DECISION

1.0 CN’S AND CP’S WESTERN GRAIN TRAFFIC STATISTICS FOR CROP YEAR 2013-2014

[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 CNʼs and CP’s tonnage and length of haul statistics for western grain movements for crop year 2013-2014 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 addition, rejection or modification of a small portion of the traffic. The net result of these adjustments from CNʼs and CP’s submitted traffic was to decrease CP’s reported tonnage by about 15,400 tonnes and to decrease CN’s reported tonnage by about 2,100 tonnes.

TABLE 1

Destination	CN - Tonnes Moved	CP - Tonnes Moved	TOTAL Tonnes Moved
Vancouver	8,912,115	12,553,206	21,465,321
Prince Rupert	6,111,697	0	6,111,697
Thunder Bay	2,435,156	5,249,025	7,684,181
Eastern Canada	1,750,622	1,450,132	3,200,754
TOTAL	19,209,590	19,252,363	38,461,953
AVERAGE LENGTH OF HAUL (MILES)	1,017	873	945

[6] The above table indicates that 38.5 million tonnes of western grain were moved in the 2013-2014 crop year. The 38.5 million tonne figure is 18.8 percent higher than the western grain volume for the previous crop year.

[7] The 2013-2014 crop year average length of haul of 945 miles shown in the above table is one mile, or 0.1 percent, higher 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 MRE 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, the Hudson Bay Railway Company, is not a prescribed railway company.

2.0 AGENCY PROCESS FOR ADMINISTERING THE MRE PROGRAM

[9] In 2011, the Agency finalized 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 Program.

[10] Each year industry participants are provided the opportunity to raise potential issues for the Agency’s consideration. In an Agency staff letter dated January14, 2014, participants were given until April 30, 2014 to propose new issues for the Agency’s consideration. No submissions were received related to this year’s determination.

2.1 Issue to be reviewed prior to the 2015-2016 crop year

[11] On August 15, 2014, CN filed an application with the Agency requesting it to review and vary the manner in which it treats revenues associated with interswitching activities under the MRE Program. CN claims that the Agency’s current practice (originally established at the inception of the Program in 2000-2001 following industry consultations) is causing financial harm in that it does not afford CN the proper recognition for interswitching movements within the calculation of its MRE. CN asserts that, while it must claim the revenue it receives for having performed interswitching, it does not receive an adjustment to its MRE that fully reflects the interswitching movements performed.

[12] On September 29, 2014, the Agency responded to CN’s application, indicating that it intends to conduct an industry-wide consultation on the issue raised by CN. This is consistent with the Agency’s policy regarding proposed interpretation/methodological changes within the MRE Program. The Agency intends to rule on this matter prior to the beginning of the 2015-2016 crop year, after consultation with all interested parties.

[13] While in its application, CN refers to the treatment of interswitching revenue only, the approach currently adopted by the Agency for interswitching applies equally to “exchange switching” activities so that any review and subsequent changes that may be considered for interswitching could have implications for the treatment of “exchange switching” traffic and its associated revenue. The Agency’s consultation will, therefore, also encompass these elements.

3.0 CNʼS AND CPʼS WESTERN GRAIN MRE FOR CROP YEAR 2013-2014

[14] Agency staff has made adjustments to the MRE related figures submitted by the railway companies. The Agency has considered the staff adjustments and accepts them. These adjustments are discussed in section 4.3, along with Agency staff’s railway revenue adjustments.

3.1 CNʼs and CPʼs MRE 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 MRE:

[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 2013-2014, the values for A, B, C, D, E and F are as follows:

A = $348,000,000

B = 12,437,000

C = 1,017

D = 1,045

E = 19,209,590

F = 1.2691

[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 2013-2014 crop year values for C and E were 1,017 miles and 19,209,590 tonnes, respectively. The value of 1.2691 for the volume-related composite price index for crop year 2013-2014 was determined in 161-R-2013">Decision No. 161-R-2013.

[18] Applying these values to the MRE formula results in a CN revenue entitlement for crop year 2013-2014 of $667,128,937.

[19] For CP, in respect of crop year 2013-2014, the values for A, B, C, D, E and F are as follows:

A = $362,900,000

B = 13,894,000

C = 873

D = 897

E = 19,252,363

F = 1.2691

[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 2013-2014 crop year values for C and E were 873 miles and 19,252,363 tonnes, respectively. The value of 1.2691 for the volume-related composite price index for crop year 2013-2014 was determined by the Agency in 161-R-2013">Decision No. 161-R-2013.

[21] Applying these values to the MRE formula results in a CP revenue entitlement for crop year 2013-2014 of $625,273,950.

4.0 DETERMINATION OF CNʼS AND CPʼS WESTERN GRAIN REVENUE FOR CROP YEAR 2013-2014

4.1 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 114-R-2001">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.

4.2 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.

4.3 Technical adjustments identified by Agency staff to submitted MRE and revenue figures

[28] Agency staff have made technical adjustments to the revenue figures submitted by the railway companies. The Agency has considered the staff adjustments and accepts them. The revenue adjustments, and the MRE adjustments noted above, are discussed below.

CN

[29] For CN, the following adjustments made by Agency staff resulted in an increase to CN’s reported western grain revenue and/or its calculated MRE:

• An adjustment was made to CN’s reported western grain revenue to account for ancillary revenue related to additional switching.
• Adjustments were made to CN’s revenue amounts to reflect minor corrections to amounts claimed as reductions for shortline/destination switching payments.

[30] 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:

• In the evaluation of CN’s reported tonnage compared to the tonnage figures submitted to the Agency by the Canadian Grain Commission, small discrepancies were found, requiring a reduction of about 560 tonnes in CN’s reported tonnage. This resulted in CN’s MRE being lowered slightly.
• 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 upward adjustment was made to the amount CN claimed as a reduction to revenue for intermodal traffic involving trucking to reflect correct published tariff amounts.
• A minor adjustment was made to the amount CN submitted as an allowable reduction to revenue associated with its week-end loading incentives.

CP

[31] 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:

• In the evaluation of CP’s reported tonnage compared to the tonnage figures submitted to the Agency by the CGC, discrepancies were found, requiring an addition of about 2,570 tonnes in CP’s reported tonnage. This resulted in CP’s MRE being raised.
• Minor revenue adjustments were made to CP’s intermodal submission, which decreased CP’s allowable deductions to revenue for intermodal traffic involving trucking.
• A downward adjustment was made to the amount CP claimed as a reduction to revenue for payments to shortlines. In a small number of instances, the shortline payment amounts were counted twice.

[32] 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 amount of reported eligible revenue associated with car hire charges was reduced to correct an overstatement in CP’s original submission.
• CP’s submitted amount for volume rebates (an eligible reduction to revenue) was adjusted upwards to correct a minor calculation error.

[33] Agency staff will provide each railway company with details of the adjustments to its revenue and MRE in a separate confidential reconciliation letter.

4.4 CNʼs and CPʼs western grain revenue determination

[34] Taking all of the findings and adjustments into account, the Agency has determined CNʼs and CP’s western grain revenue for crop year 2013-2014 to be: CN = $672,110,852; CP = $623,620,236.

5.0 COMPARISON OF CNʼS AND CPʼS 2013-2014 MRE AND REVENUE

[35] The Agency has determined the western grain MRE and revenue for CN and CP for crop year 2013-2014 as set out below. CN is above its MRE, while CP is below.

TABLE 2

Crop year 2013-2014	MRE	Revenue	Amount above MRE	Amount below MRE
CN	$667,128,937	$672,110,852	$4,981,915
CP	$625,273,950	$623,620,236		$1,653,714

[36] 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 maximum revenue entitlement for that year, the company shall pay out the excess amount and any penalty that may be specified in the regulations.

[37] The 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

(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.

[38] Given that CN’s statutory grain revenue exceeds its MRE for crop year 2013-2014 by an amount of $4,981,915, 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 Decision, the amount of $5,231,011, which represents the sum of the excess amount of $4,981,915 and the prescribed penalty of $249,096 as provided for under paragraph 2(a) of the Regulations.

[39] 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.