Decision No. 655-R-2007
See Decision No. 297-R-2008 for amendments
See Decision No. 529-R-2009
IN THE MATTER OF the 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 2006-2007, and
IN THE MATTER OF the determination by the Canadian Transportation Agency of a prescribed railway company's revenue for the movement of western grain for crop year 2006-2007 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 (hereinafter the Agency) determinations of the Western Grain Revenue Caps, and revenues, for the movement of western grain by prescribed railway companies for crop year 2006-2007. These determinations, which must be completed by December 31, 2007, 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 2006-2007 crop year; the Canadian National Railway Company (hereinafter CN) and the Canadian Pacific Railway Company (hereinafter CP), about which the Agency made its Revenue Cap determinations.
[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 (hereinafter the CTA). It also requires CN's and CP's specific tonnage and length of haul statistics for crop year 2006-2007.
[3] The Agency's determination of CN's and CP's western grain revenue complies with the matters contained in subsections 150(3),(4), (5) and (6) of the CTA. It also complies with Agency Decision No. 114-R-2001 (In the matter of the Western Grain Revenue Cap established pursuant to Division VI, Part III of the CTA) dated March 16, 2001 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 2006-2007<
[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
- Thunder Bay or Armstrong, Ontario, or
- 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
- 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
- any grain or crop included in Schedule II that is grown outside of 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 of Canada and imported into Canada; [Note: there are over 50 types of grain defined in Schedule II as eligible grains under the revenue cap. These include the six major grains - wheat, barley, canola, oats, rye and flax.]
- "crop year"
- means the period beginning on August 1 in any year and ending on July 31 in the next year;
- "prescribed railway company"
- means the Canadian National Railway Company, the Canadian Pacific Railway Company and any railway company that may be specified in the regulations.
[5] The Agency's determination of CN's and CP's volume and length of haul statistics for western grain movements for crop year 2006-2007 is shown in Table 1 below. This determination was based on detailed traffic submissions by CN and CP. The submissions were examined to ensure that the traffic qualified as western grain movements and that the related revenue, tonnage and mileage statistics were accurate. The examination led to the rejection of a relatively small amount of traffic.
DESTINATION | TONNES MOVED CN | TONNES MOVED CP | TONNES MOVED TOTAL |
---|---|---|---|
AVERAGE LENGTH OF HAUL (MILES) | 1029 | 870 | 945 |
Vancouver | 5266257 | 7875789 | 13142046 |
Prince Rupert | 4926419 | 0 | 4926419 |
Thunder Bay | 1805383 | 6454627 | 8260010 |
Eastern Canada | 1480471 | 757795 | 2238266 |
TOTAL | 13478530 | 15088211 | 28566741 |
[6] The above table indicates that 28,566,741 tonnes of western grain were moved in the 2006-2007 crop year. The 28,566,741 volume figure is 0.6 percent higher than the western grain volume for the previous crop year.
[7] The 2006-2007 crop year average length of haul of 945 miles shown in the above table is 4 miles higher than for the previous crop year.
[8] Churchill is an eligible western grain destination however, the Churchill-bound movements which took place did not qualify to be included under the Revenue Cap regime. The reason is that the CTA requires the carriage of western grain to be by a "prescribed railway company" and the Hudson Bay Railway Company is not a prescribed railway company.
2.0 CN'S AND CP'S WESTERN GRAIN REVENUE CAPS FOR CROP YEAR 2006-2007
[9] 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.
[10] For CN, in respect of crop year 2006-2007, the values for A, B, C, D, E and F are as follows:
- A
- = $348,000,000
- B
- = 12,437,000
- C
- = 1,029
- D
- = 1,045
- E
- = 13,478,530
- F
- = 1.1252
[11] The source of CN's values for A, B and D is prescribed by subsection 151(2) of the CTA. As shown earlier in section 1.0 of this Decision, the 2006-2007 crop year values for C and E were 1,029 miles and 13,478,530 tonnes respectively. The value of 1.1252 for the volume-related composite price index for crop year 2006-2007 was determined previously by the Agency pursuant to subsection 151(5) of the CTA in Decision No. 253-R-2006 dated April 28, 2006.
[12] Substitution of these CN values into the Revenue Cap formula results in a CN Revenue Cap for crop year 2006-2007 of $419,022,943. In other words, after accounting for the actual tonnage and actual length of haul in crop year 2006-2007, CN's Revenue Cap is $419,022,943.
[13] For CP, in respect of crop year 2006-2007, the values for A, B, C, D, E and F are as follows:
- A
- = $362,900,000
- B
- = 13,894,000
- C
- = 870
- D
- = 897
- E
- = 15,088,211
- F
- = 1.1252
[14] CP's values for A, B and D are derived from subsection 151(3) of the CTA and as shown in section 1.0 of this Decision, the 2006-2007 crop year values for C and E were 870 miles and 15,088,211 tonnes respectively. The value of 1.1252 for the volume-related composite price index for crop year 2006-2007 was provided in Agency Decision No. 253-R-2006 dated April 28, 2006.
[15] Substitution of these CP values into the Revenue Cap formula results in a CP Revenue Cap for crop year 2006-2007 of $433,347,642. In other words, after accounting for the actual tonnage and actual length of haul in crop year 2006-2007, CP's Revenue Cap is $433,347,642.
3.0 DETERMINATION OF CN'S AND CP'S WESTERN GRAIN REVENUE FOR CROP YEAR 2006-2007
3.1 Revenue and revenue reductions
[16] The determination of a prescribed railway company's grain revenue requires many assessments as to what is, or is not, to be included as revenue, and what is, or is not, an allowable reduction to revenue. A partial listing of such matters appears in subsections 150(3), (4), and (5) of the CTA. A more comprehensive listing was established, following consultation with the grain industry, in Decision No. 114-R-2001.
[17] As a brief 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; amounts received for additional switching requested by the shipper; and, a portion of grain port "demurrage" charges. 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 railway 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; and, compensation received for running rights.
[18] 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. 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
[19] Railway company records relating to western grain revenue were audited by Agency staff. Initial freight revenue, including payments to other railway companies involved with the carriage of grain, were submitted by CN and CP on a per movement basis. Both were verified, on a test basis, against company accounting records and source documents. Numerous onsite visits were also made to CN and CP offices to ensure that all western grain revenue was captured and to determine whether revenue exclusions or reductions were appropriate and accurate.
[20] Based on the audit findings, a number of adjustments were made to CN and CP revenue-related items. Two major issues were reviewed this year and they are discussed below. Taking all of the findings and adjustments into account, the Agency has determined CN's and CP's western grain revenue for crop year 2006-2007 to be: CN = $416,917,074; CP = $437,107,995.
i) CN's Intermodal Unit (IMU) Revenue
[21] CN offers various rate options to customers who move their product in 20 and 40 foot containers. For example, CN provides a rate for the entire movement - including both the trucking and rail portions, or for only the rail portion of the movement. As only the rail portion (within the western domain) of the movement is Revenue-Cap eligible, the amounts charged by CN must be reduced by the amounts attributable for trucking charges (if applicable), for other allowable non-rail charges, as well as the ineligible eastern portion of the rail move (i.e., the portion east of Thunder Bay or Armstrong) should the IMU movement terminate in eastern Canada.
[22] CN's "bundled" rates for IMU movements include as many as five non-rail elements. These non-rail elements include trucking charges, as mentioned above, where the trucking at origin is called "pick-up", the trucking at destination is called "delivery", and the charges for one or both of them are generally referred to as "P&D" charges. The non-rail elements also include an ownership cost for CN-owned containers and two additional elements that are implicitly included in every rate; the lifting costs related to the multiple lifting activities associated with the container, and a container maintenance cost.
[23] The most significant of the non-rail elements are the P&D charges. For crop years prior to 2004-05, CN submitted P&D charges based on a "CN cost-based proxy" methodology. An estimation methodology was used because the task of retrieving actual P&D invoices for thousands of IMU grain movements would be much too burdensome for CN. CN stated that its cost-based proxy methodology provided a "conservative" estimate of what CN actually paid to truckers, because the methodology assigned "local" P&D charges to both "local" and "highway" P&D movements (highway trips extend beyond the boundaries for local movements). Hence, for crop years prior to 2004-05, in the circumstances the Agency found that CN's P&D proxy methodology did not overstate its P&D charges.
[24] Nevertheless, for crop year 2004-05, the Agency informed CN that it would audit CN's P&D charges. However, just prior to making its final October Revenue Cap submission for crop year 2004-05, CN revised its cost-based proxy methodology so that local trucking movements were assigned local charges (same as before), but its highway movements would be assigned higher charges stemming from CN Tariff 7589 (instead of local charges). This resulted in a substantial increase in CN's submitted P&D charges as approximately half of CN's P&D movements were highway movements.
[25] As CN had submitted a revised cost-based proxy methodology late in the audit period, Agency staff only had time to test the estimated charges against actual invoice charges for a small "discovery" sample. The test results showed that CN's P&D charges were overstated and the Agency approved and applied a 9.5 percent reduction to CN's submitted P&D charges. The Agency noted that it would conduct a more thorough review of CN's revised cost-based proxy methodology in the following year (i.e., for crop year 2005-06).
[26] The 2005-06 crop year review of CN's estimated P&D charges, stemming from its revised cost-based proxy methodology, was more rigorous and scientific than for the previous year. The examination revealed that CN's revised cost-based proxy methodology overstated CN's actual P&D charges. In some cases the reductions for the P&D and other non-rail charges were so large that the remaining revenue - to be attributed to the rail portion of the movement - was negative. CN disputed the study findings, claiming that its actual charges should be increased to allow for the inclusion of other costs. The Agency allowed some of the additional costs but still found that CN's cost-based proxy methodology overstated CN's P&D charges. The Agency approved a reduction of 24.9 percent to CN's estimated P&D charges and indicated that it would continue to review CN's cost-based proxy methodology in the following year (i.e., for crop year 2006-07). CN appealed the determination to the Federal Court of Appeal where the case is waiting to be heard.
[27] The Agency placed a high priority on its review of CN's estimated P&D charges for crop year 2006-07. In Decision No. LET-R-68-2007 dated April 5, 2007, the Agency presented a work plan, including critical milestone dates to meet the tight schedule required because of the December 31, 2007 legislated date for determining the 2006-07 Revenue Cap, which called for the Agency's audit staff to visit CN's IMU yards and offices by April 27, 2007 to receive a presentation of CN's overall IMU operations. The work plan also called for a second visit to CN's IMU offices to observe the retrieval and analysis of specific P&D charges for a sample of IMU movements, to take place by June 15, 2007. However, CN staff members were not co-operative. They were not able to clearly articulate or explain what CN's current P&D charge estimation methodology actually was or should be and suggested that a "revenue-based" approach may be a better method to estimate CN's P&D charges. Agency audit staff was finally able to conduct their first onsite visit, which was comprehensive and valuable, but not until June 26, 2007. As a result, the next phase of the audit review was delayed. On July 27, 2007, CN was asked to submit certain detailed cost-based information by September 4, 2007. However, on August 31, 2007, CN notified Agency personnel that it would not be submitting the detailed information until it had studied the issues further.
[28] Agency staff encouraged CN to submit the requested information. CN finally provided a submission on November 9, 2007, nine weeks after the September 4, 2007 due date. However, CN only submitted a one-page summary of the information and did not provide the detailed information requested by Agency staff. Consequently, Agency staff was unable to verify details of CN's cost-based information. CN was informed by Agency staff that the Agency may be forced to consider alternative evaluation approaches because of the limited time remaining.
[29] Agency staff conducted a reasonableness test of the amount of revenue CN's cost-based proxy methodology assigns to the rail versus non-rail portions of IMU movements. As was noted above, for crop year 2005-06, some of the non-rail revenue allocations were so large that the residual rail revenue became negative despite a rail haul of over 1,200 miles. In general, 48 percent of the reported IMU movements that included both pickup and delivery charges in the rate had more than 40 percent of the total revenue allocated to the non-rail components. For crop year 2006-07, the 48 percent ratio increased to 68 percent of the movements. While CP's IMU traffic differs from CN's, and is therefore not absolutely comparable, they are sufficiently similar that a comparison is relevant and reasonable. In contrast to CN's 2006-07 data, CP's 2006-07 data revealed that less than 10 percent of its movements had over 40 percent of its revenue allocated to the non-rail portion.
[30] The key reasonableness test of CN's non-rail revenue allocations for IMU movements involved a review of the amount of per tonne-mile rail revenue that results for IMU traffic with both pickup and delivery charges under CN's cost-based proxy methodology. The results showed that, on average, the per tonne-mile rail revenue for these movements was almost 30 percent lower than the average per tonne-mile rail revenue for the more efficient and cost-effective movements in hopper cars. Furthermore, the CN-allocated per tonne-mile rail revenue for IMU movements fell below the average per tonne-mile rail revenue for hopper cars 95 percent of the time. Given these incongruities, Agency staff developed a revenue-based methodology to better allocate revenue between the rail and non-rail portion of the movement.
[31] The revenue-based methodology developed by Agency staff used information made available by CN this past summer. A revenue-based methodology is preferable to CN's cost-based methodology because the Revenue Cap program is becoming increasingly more revenue-based than cost-based. That is, productivity gains are not taken into account and the Revenue Caps are only adjusted for inflation and do not reflect cost changes. As noted earlier, CN had proposed a revenue-based methodology as an option during April 2007 communications with Agency staff and suggested that the Agency may want to compare tariffs that include P&D charges to similar tariffs that are based solely on the rail component of the movement.
[32] Agency staff considered two options for a new revenue-based approach. The first was to follow the CN suggestion to compare tariffs that include P&D charges to similar tariffs that are based solely on the rail movement. This approach would then apply the revenue from the tariff for rail-only movements to the rail portion of bundled (rail plus trucking) movements. This approach would result in higher rail revenue for IMU movements compared to using CN's cost-based proxy methodology, as well as a variation to the revenue approach, described below.
[33] The second option for a revenue-based approach uses revenue information from CN's pricing module. However, it differs from CN's pricing-module revenue allocations in that discounts are distributed in equal percentage terms over both the rail and non-rail portions. CN's pricing module allocates the full discounts to the rail-only portion. As a test of the Agency staff's second revenue-based approach, it was applied to last year's (crop year 2005-06) IMU data. It produced almost identical results to that following the Agency's 24.9 percent reduction to CN's P&D charges. In other words, this new revenue-based approach supported the Agency's reduction to CN's P&D charges for crop year 2005-06.
[34] The Agency's current task is to assess CN's P&D and other non-rail charges in respect of crop year 2006-2007. While the Agency would prefer to use one of the new revenue-based approaches (or a derivative thereof) to determine CN's rail revenue for IMU movements, time did not permit any sharing of the Agency's new approaches with CN and consequently, CN has not been given an opportunity to review and comment on these new approaches. Hence, the Agency finds it appropriate to only consider new approaches in respect of future years. This leaves the Agency with the choice of accepting CN's IMU revenue as submitted, or applying the 24.9 percent reduction (to P&D charges) based on the assessments conducted for the previous year.
[35] Given that the Agency is of the opinion that CN's cost-based proxy methodology is flawed for the reasons identified above, the Agency finds it appropriate to reduce CN's P&D charges for crop year 2006-07 by 24.9 percent. The consequence of this adjustment is to increase CN's IMU revenue by approximately $360,000.
[36] The Agency plans to continue to review this matter with CN, in respect of the crop year 2007-08 determination. The Agency expects a much higher degree of co-operation from CN than was experienced this year in undertaking the 2006-07 review.
ii) Issues related to Multi Car Block (MCB) Incentives
[37] Two issues arose concerning MCB Incentives. The first issue, involving MCB incentives and related "performance penalties", was raised by CP in its October 10, 2007 submission wherein it provided final information relating to the 2006-07 crop year. The second issue, related to MCB incentives and dispatch, arose from the Agency's review of the first issue.
[38] The Agency decided to consult with parties typically involved in Revenue Cap related matters. A consultation document entitled "Multi-Car Block Incentive Rates and Related Allowances and Disallowances" (hereafter the "Consultation Document") was prepared and forwarded to all parties on November 14, 2007. The railway companies were given until November 28, 2007 to provide comments to the Agency. The non-railway parties were then given until December 7, 2007 to provide comments to the Agency on the Consultation Document and railway companies' submissions. The two issues are discussed separately, below.
a) MCB Incentives and related "performance penalties"
[39] This issue relates to situations where the shipper fails to meet one of the conditions required to receive the full MCB incentive. CP submits that its revenue under the Revenue Cap Program should be reduced by the full amount of the MCB incentive, while the amount it collects for the failure of the shipper to meet that condition constitutes an amount in respect of a performance penalty (thus, not constituting revenue under the Revenue Cap Program). This issue relates only to CP at this time but, as noted in the Agency's Consultation Document, the Agency's ruling could also affect CN's revenue determinations in future years. CN chose not to provide any comments on this issue. Hence, the discussion below is restricted to CP's MCB Incentives and related performance penalties. The amount at issue for CP for the 2006-07 crop year is very small, compared to its total revenue under the Revenue Cap program.
Background
[40] During the 2006-07 crop year, CP published tariffs related to the movement of grain under MCB incentives. The tariffs include i) Tariff CPRS 4311 Item 20000 - entitled "Special Rules, Regulations and Governing provisions, Multiple Car Block Rates and Loading Parameters" and ii) tariffs such as Tariff CPRS 4310 Item 20010 - entitled "Charges in Dollars per Tonne". These latter tariffs indicate the per tonne rate for "single car" movements (i.e., for movements that do not qualify as MCB movements) and amount of per tonne reduction for MCB movements.
[41] Under CP's 2006-07 MCB tariffs, if all of the conditions are met by the shipper, its rates for 56-car and 112-car block movements are$4 per tonne and $7 per tonne lower, respectively, than for single-car rates. A greater $7.50 per tonne MCB discount (compared to the $7 per tonne discount) is also available for 112-car block movements if it is loaded within 10 hours. Using the above $7 per tonne discount, if a CP shipper meets all of the terms and conditions for a 112-car MCB movement, it will receive a discount of $7 per tonne thereby reducing its freight charge from (for example) $35 per tonne to $28 per tonne. Under the Revenue Cap Program, CP submits an amount of revenue based on the $28 per tonne charge and this "net" amount is deemed to be statutory revenue by the Agency under the Revenue Cap Program.
[42] During the first six years under the Revenue Cap Program (i.e., from crop year 2000-01 to crop year 2005-06) shippers have occasionally failed to meet one or more of the conditions required to receive the full MCB discount. The most common failure relates to the condition to unload all of the cars within 24 hours in which case a lesser MCB reduction of (for example) $5 per tonne, instead of $7 per tonne, is applied. In this case, using the above example, CP submitted revenue under the Revenue Cap Program based on $30 per tonne ($35 per tonne less a $5 per tonne reduction) and this amount was accepted by the Agency. In other words, failing to meet one (or more) of the MCB conditions was treated by the Agency simply as a failure to qualify for the full MCB discount. There was no objection to this treatment by either railway company at that time.
[43] In its October, 2007 submission to the Agency in respect of crop year 2006-07, CP altered its earlier position and submitted that any amounts it collects for the delayed unloading of MCBs are performance penalties and thus, not revenue under the Revenue Cap Program. It also asserted that because these amounts are performance penalties, they can not be used to reduce statutory revenue under the Revenue Cap Program. In other words, continuing with the example above, CP is stating that it should be allowed to deduct the full $7 per tonne from its revenue for a MCB movement (even though the shipper failed to meet the unloading condition) and at the same time, be allowed to impose a charge of about $2 per tonne for the same failure. Thus, a $7 per tonne discount would fully reduce its statutory revenue under the Revenue Cap Program while the $2 per tonne receipt, as a "performance penalty", would not affect statutory revenue.
[44] The "performance penalty" that CP applies when a shipper fails to meet the 24-hour MCB unloading condition stems from its tariff CPRS 4312 Item 130 titled: "Penalties: Delayed Unloading of Multi Car Blocks". It states:
If the cars are shipped as a "multiple car block" according to Tariff CPRS 4311-Series Item 20000 but the block is not unloaded and released empty within the 24 hours of actual or constructive placements, as per paragraph L [P] of Tariff CPRS 4311-Series Item 20000 the shipper shall pay a penalty of:
- $180 per car on the whole block shipped for blocks of 50-99 cars
- $180 per car on the whole block shipped for blocks of 100+ cars
The empty release of the block will be based on the time the last car of the shipped block is released empty.
[45] An assessment of this MCB incentive issue and its impact - if any upon CP's statutory revenue - involves two paragraphs contained within subsection 150(3) of the CTA; one which relates to incentives and another relating to performance penalties. They are set out below.
[46] Paragraphs 150(3)(a) and (b) of the CTA state:
For the purposes of this section a prescribed railway company's revenue for the movement of grain in a crop year shall not include
- incentives, rebates or any similar reductions paid or allowed by the company;
- any amount that is earned by the company and that the Agency determines is reasonable to characterize as a performance penalty or as being in respect of demurrage or for the storage of railway cars loaded with grain;
Consultation Document
[47] To facilitate an open discussion on this issue, the Agency's Consultation Document provided a summary of CP's views on this issue which had been provided in its October 10, 2007 final Revenue Cap submission to the Agency. It also provided Agency staff's initial views as to CP's arguments. These two sets of views, from the Consultation Document, are provided below.
CP's views
[48] CP asserts, consistent with the language it uses within its Tariff CPRS 4312 Item130, that Tariff CPRS 4312 Item 130 - Penalties Delayed Unloading of Multi Car Blocks is a performance penalty according to paragraph 150(3)(b) of the CTA, and therefore cannot be included as revenue under the Revenue Cap Program.
[49] CP states that paragraph 150(3)(b) of the CTA clearly provides that if an amount is a performance penalty, then it is not to be included in the computation of a railway company's revenue under the Revenue Cap Program. CP concludes that the issue then is: what is a performance penalty?
[50] It answers this question by referring to a June 14, 2007 Federal Court of Appeal (FCA) Decision, FCA 240, Canadian Pacific Railway Company and Canadian Transportation Agency. In that case, the Agency had held that certain amounts recovered by CP were not performance penalties, but instead constituted a return of Industrial Development Funds. The FCA overturned the Agency Decision holding that the amounts were performance penalties rather than being capital in nature and consequently, should not have been factored against capital accounts so as to reduce CP's revenue entitlement.
[51] CP states that Pelletier, J.A. in that Court Decision defined a performance penalty as a penalty that relates to failure to complete an obligation.
[52] According to CP, the Court also recognized as important whether the shipper could avoid payment by doing what was required or not doing what was proscribed. CP points out that Pelletier, J.A. stated in his reasons, the following:
The CTA concluded that there was a direct link between the amounts payable and the IDF contributions made by the appellant and that the amounts received were therefore a clawback of the IDF contribution. This conclusion is unreasonable for several reasons. ... Secondly, the payments only became due upon the failure of the shipper to meet its contractual obligations such that it would be entirely possible for the shipper to escape payment of these amounts altogether. In other words, there was no certainty that the payments would ever be made which is inconsistent with the notion of cost recovery by way of clawback. ...
The CTA's characterization of the amounts in question as clawback was therefore unreasonable and cannot stand. ...
[53] CP concludes, therefore, that "It is patent that the penalty for failure to unload and release cars that is assessed against some shippers is a performance penalty."
[54] CP also notes that its MCB program includes terms and conditions which include various rates, charges and obligations to both the shipper and to CP. If a shipper chooses to ship under a MCB program, it must fulfill certain obligations. If the shipper does not meet all of the terms then it will be subject to application of performance penalties. CP then draws attention to Section P of MCB Tariff CPRS 4311 Item 20000 which states the requirement to unload cars within 24 hours. CP notes that the shipper can avoid performance penalties if it meets the performance standard. It adds that this particular performance penalty is part of an overall grain products program [Max Trax] which rewards good performance and penalizes poor performance.
[55] CP asserts that since the 2001-02 crop year, the Agency has improperly and incorrectly been including Tariff CPRS 4312 Item 130 performance penalties as additional revenue for CP under the Revenue Cap Program and this assessment is wrong and unreasonable.
[56] Finally, CP asserts that it has always considered Tariff CPRS 4312 Item 130 as a performance penalty as Tariff CPRS 4312 Item 130 was consistently placed by it within the penalty section of the grain tariffs and in its General Ledger Accounts.
Agency staff's initial views
[57] In the Consultation Document, Agency staff suggested that there is an inconsistency in CP's argument. On one hand, where there is a clear failure to meet a MCB condition (or obligation), CP applies a performance penalty under its Tariff CPRS 4312 Item130. On the other hand, the same failure to meet the MCB condition is, according to the argument, to be ignored when determining the amount of MCB discount attributable to this movement. Allowing for the full amount of a MCB discount is equivalent to acknowledging that all of the conditions (or obligations) have been met, when they have not. This inconsistency is indicative of a double benefit in CP's favour.
[58] As well, the full paragraph in the Decision of Justice Pelletier referenced by CP reads:
The CTA concluded that there was a direct link between the amounts payable and the IDF contributions made by the appellant and that the amounts received were therefore a clawback of the IDF contribution. This conclusion is unreasonable for several reasons. First, the connection between the payment and the contributions made appeared in only one of the two groups of contracts. The payments made pursuant to that group of contracts were a small proportion of the total amounts received by the appellant under this heading. It was unreasonable for the CTA to characterize the entire group of payment on the basis of the mode of calculation of a small part of those payments. Secondly, the payments only became due upon the failure of the shipper to meet its contractual obligations such that it would be entirely possible for the shipper to escape payment of these amounts altogether. In other words, there was no certainty that the payments would ever be made which is inconsistent with the notion of cost recovery by way of clawback. Finally, the only link between the payments and the IDF contributions was in the calculation in the amount of penalty payable. There were other ways of setting that amount, as is clear from the other group of contracts. [emphasis added]
[59] The bolded sections of the reasons are important because they indicate that central to its ruling was the absence of a solid link or connection between the return of IDF contributions and the amount of penalty payable. As for the current issue, Agency staff suggested in the Consultation Document that the link between the MCB discounts (defined in Tariff CPRS 4311 Item 20000) and Tariff CPRS 4312 Item 130 (penalties for delayed unloading) appears to be clear as Tariff CPRS 4312 Item130 begins with the sentence:
If the cars are shipped as a ‘multiple car block' according to Tariff CPRS 4311-Series Item 20000 but the block is not unloaded and released empty within the 24 hours of actual or constructive placements, as per paragraph L [P] of Tariff CPRS 4311-Series Item 20000 the shipper shall pay a penalty of ...
[60] Finally, staff noted that in its October, 2007 submission, CP stated that, "Fundamentally, the shipper must meet the performance standard" - referring to the 24 hour condition for the unloading cars to receive the full MCB discount. However, Agency staff postulated that CP's "standard" time for unloading cars, the time before demurrage penalties take effect, is not 24 hours, but approximately 60 hours (2.5 days consisting of 48 hours of free time plus an average of 12 additional hours as the clock counting the two-days of free time does not start until midnight following placement). Agency staff felt that the 24-hour MCB unloading condition is, therefore, a condition that far exceeds normal standards. It is a condition that is used to incent special behaviour on the part of the shipper (for the shipper to receive a reward, while the railway company incurs lower costs) and does not by virtue of its attainment, become the new, or accepted "standard". If this were true, the 24-hour condition would apply to the unloading of all cars (and not just cars moving under MCB conditions).
CP's comments on the Consultation Document
[61] CP states that it "takes exception to the information provided in the Agency's Consultation Document in relation to this issue, as it was originally provided to the Agency on a ‘private and confidential' basis by CP. By virtue of releasing the Consultation Document, the Agency has breached its obligation to maintain confidential information in confidence and has placed the information in the public domain, a result that CP maintains is inappropriate in the circumstances."
[62] CP also submits that "The CPR system does not work as a system, as wrongly implied by the Agency in its description, whereby an incentive is reduced for failure to meet obligations. Rather, the CPR program establishes a reduced rate for MCB's and a system of performance penalties that apply when shippers do something that is proscribed or fail to do something. ...The penalties do not alter the rate but are, very simply, penalties aimed at incenting or disincenting particular behaviours or actions."
[63] CP indicates that the MCB program can be viewed in two different ways: "First, it can be viewed as a rate, with a variety of terms and conditions including penalties for particular performance, actions or failures. ...Under this view, the Revenue to the railway is the effective rate paid by the shipper and the performance penalties received by the railway cannot be included in "Revenue" under the Revenue Cap by virtue of subsection 150 of the Canada Transportation Act. Secondly, the CP MCB program can be viewed as incentives paid to the shipper through reductions off the single car rate with penalties applied (or avoided) based on whether there have been performance failures. ...In that case as well, pursuant to subsection 150, any performance penalties that may be collected also cannot be included in "Revenue"."
[64] CP adds that, "Essentially, the Agency is suggesting that it may consider including in "Revenue" incentives and/or performance penalties. The Agency can not do so. The provisions of subsection 150 of the CTA are clear that performance penalties and incentives, rebates or any similar reductions paid or allowed by the company shall not be included in revenue under the Revenue Cap."
[65] According to CP, "This was confirmed in the clearest terms by the Federal Court of Appeal in its Decision Canadian Pacific Railway Company v. Canadian Transportation Agency (2007) FCA 240. In that FCA Decision, the Court made it clear that the Agency's clawback approach and analysis were not correct and supportable and that performance penalties were not to be included in revenue."
[66] CP states that, "There is no concept of netting out incentives and penalties. Rather, the sort of netting out of the MCB incentives and penalties is inconsistent with the CTA and with the Decisions of the Federal Court of Appeal concerning the Revenue Cap."
[67] CP adds, "We note and disagree with the Agency interpretation of the Federal Court of Appeal Decision on performance penalties. The Agency wrongly argues that the Court set aside the Agency Decision because there was not a sufficient link between the industrial development funds and the performance penalties. There were a few reasons for the Court setting aside the Agency Decision but, most fundamentally, it was set aside because the Agency cannot include performance penalties in ‘Revenue' under the Revenue Cap."
[68] Finally, CP clarifies its use of the word "standard" in its October 10, 2007 submission in that it simply referred to the 24-hour requirement to unload cars, and did not suggest that it was an industry standard, or standard for normal single-car traffic. CP then adds that the 24-hour standard is in fact reasonable for MCB incentive movements as 99 percent of cars under MCB's unload within 24 hours time.
Non-railway party comments
[69] Five non-railway parties provided comments on the MCB incentive issues: Alberta Agriculture and Food, the Canadian Wheat Board, Keystone Agriculture Producers, the Farmer Rail Car Coalition and the Western Grain Elevator Association.
Alberta Agriculture and Food (hereinafter AF)
[70] AF expressed the opinion that the Agency has the right to determine whether the amounts CP collects for the failure of a shipper to meet a condition to receive the full MCB incentive is a performance penalty, referring to paragraph150(3)(b) of the CTA. AF referred to the June, 2003 Federal Court of Appeal Decision related to demurrage [Canadian Pacific Railway and Canadian Transportation Agency and Canadian Wheat Board, dated June 23, 2003, FCA 271], where the Court confirmed that while a railway company may submit an amount to be in respect of a performance penalty, it is the Agency's role to determine whether such amount can reasonably be characterized as being in respect of performance penalties.
[71] AF added that it agrees with Agency staff's view that there is an inconsistency in CP's argument such that it is not reasonable to characterize the amounts in question as a performance penalty. AF is of the opinion that CP is receiving a double benefit by allowing for the full amount of the MCB discount to be claimed when all of the conditions have not been met, but at the same time applying a performance penalty for the failure to meet a condition. AF indicated that this contention is consistent with the reasoning of the Court in the referenced Decision when it stated:
Therefore, the Agency may consider the level of charges, and the revenue earned from imposition of those charges. However, its mandate is not to determine the reasonableness of the charges or revenues. It is to determine if the level of charges or the manner of imposing the charges indicates that any part of the revenues arising therefrom is not reasonable to be characterized as being in respect of demurrage. (emphasis added by AF)
[72] AF concluded that CP is imposing the charges in a manner that gives itself a double benefit. Consequently, AF submits that this manner of imposing the charges indicates that the revenues arising therefrom are not reasonable to be characterized as being in respect of a performance penalty. It is thus AF's position that the Agency cannot reasonably characterize the amount CP collects for the failure of a shipper to meet a condition to receive the full MCB incentive as a performance penalty.
Canadian Wheat Board (hereinafter the CWB)
[73] The CWB indicated that in cases where the shipper does not fulfill the requirements of the multi-car rate and is charged the single car tariff, the rate difference should be identified as revenue and included as revenue under the Revenue Cap Program. The railway companies are able to offer incentive rates because of a reduction in their operating costs through providing rail transportation services in larger-scale blocks. If the shipper is unable to utilize the larger-sized car block with its corresponding rate incentive, then the higher overall freight rate will compensate for the higher operating costs relating to the smaller-sized car block. The CWB concluded that the revenue resulting from the scenario where the shipper is unable to capture the incentive rate must be accounted for as revenue within the Revenue Cap Program. This determination would maintain the balance between the railway company's revenue and costs within the Revenue Cap Program as it was intended. The alternative suggested by CP effectively allows it the best of both worlds and the CWB indicated it simply cannot support this.
Farmer Rail Car Coalition (hereinafter the FRCC)
[74] The FRCC indicated that it is in complete agreement with the view that an inconsistency exists in CP's argument, resulting in a double benefit for CP. Accepting CP's argument that the entire MCB discount should be deducted from revenue is implicitly accepting that all of the conditions of the tariff have been met – which is not the case according to the FRCC. CP has chosen to design the tariff to give the appearance of a performance penalty. In fact, effectively two tariffs exist – one if all the obligations are met and one if all but one of the obligations are met.
[75] The FRCC noted that it concurs that the 24 hour unloading condition is a condition that far exceeds normal industry standard. It is a condition designed to promote a specific behaviour – the rapid unloading of cars. The manner in which the Agency accounted for the reduced MCB discounts from crop year 2000-01 to crop year 2005-06 is entirely appropriate.
Keystone Agricultural Producers (hereinafter KAP)
[76] KAP's view on this issue stems from general comments applicable to both MCB issues raised in the Consultation Document. It noted that after reviewing the background material, it is clear that CP - and potentially CN - are using creative ways to try to circumvent the revenue cap. The cap was introduced at the railway companies' suggestion as a check against the market power of a duopoly, in return for deregulation of freight rates. This resulted in variable rates and multiple car block incentives.
[77] KAP raised concerns that the criteria for achieving MCB incentives continues to get tighter for the shipper. This ultimately leads to higher costs for the grain and oilseed producers. When loading or unloading times are shortened to an unreasonable level, there is less chance of meeting the performance standards, thus resulting in higher shipping rates.
Western Grain Elevator Association (hereinafter the WGEA)
[78] The WGEA noted that the CP MCB program establishes a rate as a per tonne reduction off the single car rate. The reduced MCB rate is what the shipper pays if all tariff conditions are met. This is an incentive for shippers to ship in MCBs under the CP MCB program. The CP tariffs also contain penalties to address shipper actions and behaviour. According to the WGEA, the penalties do not alter the rate but are penalties aimed at providing incentives or disincentives for particular behaviours or actions. The WGEA concluded that the penalties imposed by CP for failure to meet unloading standards are performance penalties and as such do not constitute revenue under the Revenue Cap Program.
Agency analysis and findings
[79] The Agency takes note of the concern raised by KAP, which stated "The cap was introduced at the railways' suggestion as a check against the market power of a duopoly, in return for deregulation of freight rates".
[80] With respect to CP's assertion that the Agency breached its obligation to maintain as confidential the CP submission, most of what CP submits to the Agency and its staff has some type of confidential label on it. CP's letter of transmission that was sent by e-mail and accompanied its October 10, 2007 Revenue Cap submission contains a standard notice at the bottom indicating that "any dissemination, distribution, copying or action taken in reliance on the contents of this email by anyone other than the intended recipient is strictly prohibited." In addition, the part of the October 10, 2007 submission related to the MCB incentive issues contained a small-print label at the bottom of each page indicating "Private and Confidential".
[81] Simply labelling a submission to be confidential does not necessarily make it so. The Agency made this clear to CP in Decision No. LET-R-69-2007 dated April 5, 2007 in respect of the process commencing the Agency's 2006-07 Revenue Cap determination where the Agency cautioned CP that if it wants certain information it submits to be treated as confidential, it must file a written claim, with reasons, for the request. Specifically, the Agency advised CP of the following:
Claims for confidentiality
If CP is of the opinion that certain information being provided to the Agency, either directly or indirectly through ASSA or the Rail Economics Directorate, is to be considered confidential, the railway company shall, in respect of that information, make a written claim of confidentiality which shall include the reasons why the information claimed as being confidential should be regarded and treated as such.
[82] CP did not file any written claim for confidentiality containing reasons why the information claimed as being confidential should be regarded and treated as such. As a result, the Agency did not breach any confidentiality obligation.
[83] Nevertheless, the Agency has reviewed the portion of CP's October 10, 2007 submission relating to the MCB incentive issues, and which CP says was wrongly disclosed. This review was undertaken to assess whether the impugned information is inherently confidential in nature. CP's submission consists of arguments and proposed interpretations of terms contained in legislation and public tariffs, and discussed in public decisions. The letter does not reveal any information that is commercially sensitive or otherwise financially harmful to CP. The Agency thus finds that CP's October 10, 2007 submission relating to the MCB incentive issues does not contain any information that should be regarded as confidential.
[84] The Agency will next address the question as to whether the amounts collected by CP under its Tariff CPRS 4312 Item 130 qualify as a "performance penalty". Paragraph 150(3)(b) of the CTA gives the Agency the authority to determine whether amounts claimed by a railway company as a performance penalty can be reasonably characterized as such. The Federal Court of Appeal, in Canadian Pacific Railway and Canadian Transportation Agency and Canadian Wheat Board, dated June 23, 2003, FCA 271, provides guidance concerning this kind of determination, concluding therein that the role of the Agency is to determine if the level of charges or the manner of imposing the charges indicates that any part of the revenues arising therefrom is not reasonable to be characterized as being in respect of demurrage. While the present issue relates to the characterization of something other than demurrage as potentially being a performance penalty, the task placed on the Agency under paragraph 150(3)(b) of the CTA requires comparable assessments under each.
[85] Firstly, paragraph 150(3)(b) of the CTA makes reference to "performance penalties" and not just to "penalties". An amount collected as a penalty does not necessarily mean that the amount relates to a performance penalty. Ostensibly, in the Canadian railway industry it means that the shipper has failed to fulfil an operating obligation (as opposed for example to a financial payment obligation).
[86] The conditions contained within the MCB tariffs are conditions that must be met to receive the MCB rate (and related discount). They are conditions that, in some cases, far exceed the normal standards that apply to non-MCB movements. For example, a non-MCB movement has, on average, 60 hours to unload at destination. If it requires more time than this, it becomes subject to a performance penalty charge, called demurrage. However, a MCB movement attempting to achieve a MCB incentive discount must be unloaded within 24 hours at destination. This 24-hour condition is used by the railway companies to incent special behaviour on the part of the shipper - for the shipper to qualify for its incentive reward in return for the railway company incurring lower costs. It does not, by virtue of its attainment, become the new norm or performance standard for the unloading of grain.
[87] The 24-hour unloading condition allows only 40 percent of the time to unload compared to the normal industry or standard time allowed for non-MCB movements. Therefore, if a shipper fails to meet the 24-hour unloading condition, it simply fails to meet one of the necessary conditions required to obtain its MCB incentive discount. It follows that the shipper thereby does not qualify to receive its MCB incentive discount and that the discount should be cancelled in full, or in part. CP, by its actions, confirms that the latter treatment is appropriate because it applies a charge of about $2 per tonne specifically related to the failure to unload MCB within 24 hours; this charge being defined in its Tariff CPRS 4312 Item 130 which clearly shows its linkage to the MCB incentive tariffs. The Agency accepts that it is more reasonable not to cancel the full amount of the incentive discount, because while the shipper failed to meet the 24-hour unloading condition, it satisfied the major requirement to load and unload a block of cars and met other, lesser, requirements.
[88] CP asserts that the Agency cannot follow its past Revenue Cap determinations where it reduced the amount of MCB incentives by an amount that CP collects from shippers for failing to meet MCB conditions. CP asserts that the Agency must now allow CP to reduce its revenue by the full amount of the MCB incentives even though terms and conditions to meet the MCB incentives have not all been met in accordance with paragraph 150(3)(a) of the CTA, and at the same time, allow CP to treat the amounts it collects as performance penalties related to the failure to meet terms and conditions required for MCB incentives, in accordance with paragraph 150(3)(b) of the CTA, thus, not constituting revenue under the Revenue Cap Program.
[89] The Agency finds otherwise. First, where a shipper significantly fails to meet MCB incentive conditions (for example, only 30 cars are loaded when attempting to achieve a 50-car [CN] or 56-car [CP] block incentive), CP, and CN for that matter, apply the single-car rate. There is no dispute that the increased revenue resulting from the failure to meet this MCB incentive condition, is revenue. Where a shipper fails to meet a single condition, being the 24-hour unloading condition, as noted above CP could choose to cancel the entire MCB incentive discount - in which case its revenue would be increased by the full amount of the MCB incentive. Instead, CP recognizes in cases where the 24-hour condition is not met, that the majority of the incentive terms and conditions have nevertheless been met - thereby evidently providing CP with a significant portion of the benefit of lower operational costs related to MCB movements. Accordingly, CP only charges the shipper an amount related specifically to that failure. From the shippers' perspective, the $7 per tonne incentive discount is effectively reduced to about $5 per tonne, because of the loss of the $2 per tonne unloading incentive.
[90] Accepting CP's argument that the entire MCB discount should be deducted from revenue is implicitly accepting that all of the conditions of the tariff have been met – which is not the case. The FRCC purports that CP has so chosen to design tariff CPRS 4312 Item 130 to give the "appearances" of a performance penalty. This is not an issue that the Agency must decide here.
[91] Three of the interveners felt that acceptance of CP's position would lead to a double benefit to CP. One of them submits that CP's manner of imposing the charges indicates that the revenues arising therefrom can not reasonably be characterized as being in respect of a performance penalty.
[92] There are two reasons, each sufficient by itself, to lead the Agency to conclude that the amounts collected under Tariff CPRS 4312 Item130 cannot be reasonably characterized as being in respect of a performance penalty. The first reason stems from the finding that the failure by a shipper to meet the 24-hour MCB unloading condition reflects a failure to meet one of the conditions required to obtain its MCB incentive discount, rather than a failure to meet a less stringent performance standard of 60 hours. As such, it is not a performance penalty. In other words, if the shipper's operating behaviour is incented to greatly surpass industry norms, it is hard to see by any reasonable standard that its failure to meet that special threshold is really a performance penalty. Quite simply, it is only the loss of an incentive, which in this case relates to the approximate amount of $2 per tonne.
[93] The second reason to lead the Agency to conclude that it is not reasonable for amounts collected under Tariff CPRS 4312 Item 130 to be reasonably characterized as being in respect of a performance penalty stems from the fact that allowing CP to declare amounts collected under tariff CPRS 4312 Item 130 to be performance penalties, while at the same time allowing CP to deduct from revenue the full amount related to MCB incentives, is clearly a contradiction in treatment, which would result in a double benefit to CP and therefore potentially twice the cost to farmers who pay for the movement of grain. This manner of imposing charges and assessing revenues indicates that the "penalty" revenue is not a penalty at all. Rather, again the approximate $2 per tonne amount represents the loss of an incentive.
[94] In summary, the Agency finds that it is not reasonable for amounts collected under Tariff CPRS 4312 Item 130 to be reasonably characterized as being in respect of a performance penalty within the meaning of paragraph 150(3)(b) of the CTA. Consequently, the amounts that CP collected under this tariff, where the 24-hour unload condition is not met, will be recognized as revenue under the Revenue Cap Program.
b) MCB incentives and dispatch
[95] This issue, briefly described, raised the question as to whether amounts paid or allowed by CN or CP as Multi-Car Block (MCB) Incentives under the Revenue Cap Program include a portion that is related to dispatch. Conditions within CN and CP MCB incentive tariffs require MCBs to be loaded and unloaded within certain time limits and as such, may constitute dispatch.
[96] The CTA reference to dispatch occurs in subsection 150(4) where it states:
For the purposes of this section, a prescribed railway company's revenue for the movement of grain in a crop year shall not be reduced by amounts paid or allowed as dispatch by the company for loading or unloading grain before the expiry of the period agreed on for loading or unloading grain.
[97] Subsection 150(4) of the CTA indicates that a railway company's revenue for the movement of grain is not to be reduced for amounts paid or allowed as dispatch. The issue is important because if the Agency were to find that a portion of the MCB incentive amounts relates to dispatch, annual railway revenues recorded under the Revenue Cap Program would increase by approximately two to three percent. For the railway companies to remain under their respective Revenue Caps, they would then, for example, have to reduce their single-car rates by the same percentage amount, or increase their MCB or other incentives, or implement some combination of the two.
[98] The feedback from the Consultation Document confirmed that this topic is complex. It involves not only terms and conditions embedded within MCB incentive tariffs relative to the definition of dispatch, but also existing dispatch and demurrage programs as well as industry standards related to performance penalties.
[99] It has now been more than seven years since the Revenue Cap program came into effect. During the first months of the program (i.e., the fall of 2000), the Agency consulted with parties involved in western grain related matters on a wide-range of issues related to definitions and interpretations of the then-new Revenue Cap legislation. However, the grain handling and transportation industry is constantly evolving and considerable change has occurred during the past seven years.
[100] In light of this, the Agency has determined that another review of Revenue Cap provisions is warranted and that such a review should include, among other issues, discussion of MCB incentives and dispatch. The Agency will not rule on this issue at this time. As a result, for the 2006-07 crop year, the amount of MCB incentive discounts determined by the Agency will not be adjusted on account of a portion of it being determined to constitute dispatch.
iii) CN uncollectibles (bad debts)
[101] CN submitted a total amount of $91,447 for uncollectibles for crop year 2006-07, reflecting revenue that was payable to CN, but that has been written off in its accounting records because there is no expectation that the amount will be recovered (for example, due to ceased operations or bankruptcy of the owing parties).
[102] There may be a significant gap in time between the billing for a movement and the date when an uncollectible is written off. The reason is that once a movement takes place and a party becomes liable to pay, it may be many months, or years, before the railway company acknowledges - from an accounting perspective - that the amount will likely never be recovered. While the Agency will review each uncollectible amount submitted by a railway company on a case-by-case basis, the amounts must relate to the movement of western grain and the movements must have taken place after July 31, 2000, the date on which the Revenue Cap Program took effect. The Agency expects that the uncollectibles submitted for a crop year will reflect those amounts written off in the railway company's accounting records during that crop year. The Agency will also ensure that, in future years, if amounts are recovered by the railway companies from previously written-off uncollectibles, such amounts will be captured as revenue under the Revenue Cap Program.
[103] Of the $91,447 total amount for uncollectibles submitted by CN, the Agency rejects an amount of $35,743 because it reflects revenue that was not eligible hence, never reported, under the Revenue Cap Program. Therefore, only $55,704 of the $91,447 claimed by CN as uncollectible, was allowed as an uncollectible.
iv) Inclusion of traffic originating from outside Canada
[104] Effective August 1, 2005 the definition of "grain" in section 147 of the CTA was amended to include grain and crops that are "grown outside Canada and imported into Canada". During last year's Revenue Cap determination, one railway company questioned the Agency's interpretation of what qualified as Revenue-Cap movement and in response, the Agency noted that it would review the matter. To this end, the Agency sought a Legal Opinion of the word "imported" from the Canada Border Services Agency, who receives legal guidance from the Department of Justice Canada. The Legal opinion indicates that grain that is brought by rail from the United States of America and moved in-transit through Canada to be exported by sea is considered imported into Canada under the Customs Act. The Agency notes that this opinion is consistent with the Agency's treatment of such movements in last year's Revenue Cap determination. Nevertheless, both CN and CP have indicated that they question the Legal Opinion, because certain evidence suggests that the Government of Canada's intent may have been otherwise.
[105] In the upcoming year, the Agency will further review this interpretation with the railway companies, Transport Canada, the Canada Border Services Agency and any other necessary interested parties. In the meantime, the Agency has decided to include about 1,800 such movements as "grain" for the purposes of the Revenue Cap determination for the crop year 2006-07.
v) Other issues
[106] There are a number of other issues, of a confidential nature due to their commercial sensitivity, that the Agency must rule on during the course of determining railway revenue and Revenue Caps under the Revenue Cap Program. Because of their confidential nature, the Agency rulings are confidential and privy only to the parties involved and do not form part of the public record.
[107] To date, such rulings have dealt with i) an issue as to whether certain funds returned by a shipper to a prescribed railway company constitute a "return of IDF" ii) an issue as to whether a type of equipment charge should be taken into account when determining the amount of payment a prescribed railway company makes to a shortline railway company and, iii) an issue concerning whether amounts returned by a shipper to a prescribed railway company constitute a cancellation or disqualification of an incentive or rebate, or whether it is reasonably characterized as being a performance penalty.
vi) Review of the railway companies' miscellaneous and ancillary revenue accounts
[108] The Agency intends to continue to review the railway companies' miscellaneous and ancillary revenue accounts annually under the Revenue Cap Program in order to ensure that all qualifying western grain revenue is captured.
4.0 Comparison of CN's and CP's Revenue Caps and Revenue
[109] The Agency has determined the western grain Revenue Caps and revenue for CN and CP for the crop year 2006-2007 as summarized below. CP exceeded its Revenue Cap while CN did not.
CROP YEAR 2006-2007 | REVENUE CAP | REVENUE | EXCESS AMOUNT | AMOUNT BELOW REVENUE CAP |
---|---|---|---|---|
CN | $419,022,943 | $416,917,074 | $2,105,869 | |
CP | $433,347,642 | $437,107,995 | $3,760,353 |
[110] Subsection 150(2) of the CTA provides that if a prescribed railway company's revenues, as determined by the Agency, for the movement of grain in a given crop year exceed 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. The Railway Company Pay Out of Excess Revenue for the Movement of Grain Regulations, SOR/2001-207 (hereinafter 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
- 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
- 15 percent of the excess amount, if that excess amount is more than one per cent of the company's maximum revenue entitlement.
[3.] (1) If the Agency concludes that a prescribed railway 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, the Agency must make a decision or order requiring the company to pay out the excess amount and the applicable penalty, as determined under section 2, in accordance with subsection 150(2) of the Act.
(2) A decision or order in relation to a crop year must be sent to a prescribed railway company no later than 10 days after the Agency determines the company's revenues for the movement of grain and maximum revenue entitlement for that year.
[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.
(2) At the time an excess amount and the applicable penalty are paid out, the prescribed railway company must notify the Agency, in writing, of the amount paid out and the date on which it was paid out.
(3) An excess amount and the applicable penalty must be paid out no later than 30 days after the day on which the prescribed railway company receives the decision or order referred to in section 3.
[111] Given that CP's statutory grain revenue exceeds its Revenue Cap for crop year 2006-07 by an amount of $3,760,353, CP is hereby ordered, pursuant to subsection 150(2) of the CTA and subsection 3(1) of the Regulations, to pay the Western Grains Research Foundation, within 30 days from the date of this Decision, an amount of $3,948,371 representing the sum of the excess amount of $3,760,353 and the prescribed penalty of $188,018 as provided for under paragraph 2(a) of the Regulations.
[112] Upon payment of the excess amount and the applicable penalty, CP, pursuant to subsection 4(2) of the Regulations, is hereby requested to notify the Agency, in writing, of the amount paid out and the date on which it was paid.
Members
- Geoffrey C. Hare
- Beaton Tulk
- Raymon J. Kaduck
- Date modified: