Decision No. 669-R-2001

Amended by Decision No. 667-R-2003

File No. T6650-2

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INTRODUCTION

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 2000-2001. These determinations, which must be completed by December 31, 2001, 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. There were two prescribed railway companies during the 2000-2001 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.

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 2000-2001.

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 two Agency Decisions concerning the interpretation of a number of items that are to be considered when the Agency determines a prescribed railway company's grain revenue for revenue cap purposes: 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 and Decision No. 664-R-2001 dated December 21, 2001 (In the matter of CP's revised grain port demurrage rules which took effect on July 1, 2001).

AGENCY DECISION

1.0 CN's and CP's western grain traffic statistics for crop year 2000-2001

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 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;

[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.

The Agency's determination of CN's and CP's volume and length of haul statistics for western grain movements for crop year 2000-2001 is shown in Table 1 below. This determination was based on detailed traffic submissions by CN and CP. The submissions were audited to ensure that the traffic qualified as western grain movements and that the related revenue, tonnage and mileage statistics were accurate. Compliance testing, on a sample basis, and editing of the railway company's data was performed by Agency staff. A number of minor anomalies were found and corrected.

TABLE 1
..... TONNES MOVED .....

	RAILWAY
DESTINATION	CN	CP	TOTAL
TOTAL	15,221,728	14,013,048	29,234,776
Vancouver	8,022,268	7,461,129	15,483,397
Prince Rupert	2,346,392	63,631Note 1	2,410,023
Churchill	0	0	0
Thunder Bay	3,050,254	5,542,232	8,592,486
Eastern Canada	1,802,814	946,056	2,748,870
AVERAGE LENGTH OF HAUL (MILES)	952	897	926

As shown in the above table, 29,234,776 tonnes of western grain were moved in the 2000-2001 crop year. This figure is in line with the average western grain volume for the last five crop years. While CP's average length of haul is in line with recent years' values, CN's average length of haul has continued to decline, to an average of 952 miles. This is the result of increased volumes originating from short-line railway companies and a lower proportion of movements terminating at Prince Rupert. While Churchill is an eligible western grain destination, the Churchill-bound movements which took place did not qualify as western grain. 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 2000-2001

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.

For CN, in respect of crop year 2000-2001, the values for A, B, C, D, E and F are as follows:

A

= $348,000,000

B

= 12,437,000

C

= 952

D

= 1,045

E

= 15,221,728

F

= 1.0

The source of CN's values for A, B and D is subsection 151(2) of the CTA. As shown earlier in section 1.0 of this Decision, the 2000-2001 crop year values for C and E were 952 miles and 15,221,728 tonnes respectively. The value of 1.0 for the volume-related composite price index for crop year 2000-2001 is provided in paragraph 151(4)(a) of the CTA.

Substitution of these CN values into the revenue cap formula results in a CN revenue cap for crop year 2000-2001 of $394,775,887. In other words, after accounting for the actual tonnage and actual length of haul in crop year 2000-2001, CN's revenue cap is $394,775,887.

For CP, in respect of crop year 2000-2001, the values for A, B, C, D, E and F are as follows:

A

= $362,900,000

B

= 13,894,000

C

= 897

D

= 897

E

= 14,013,048

F

= 1.0

The source of CP's values for A, B and D is subsection 151(3) of the CTA. As shown earlier in section 1.0 of this Decision, the 2000-2001 crop year values for C and E were 897 miles and 14,013,048 tonnes respectively. The value of 1.0 for the volume-related composite price index for crop year 2000-2001 is provided in paragraph 151(4)(a) of the CTA.

Substitution of these CP values into the revenue cap formula results in a CP revenue cap for crop year 2000-2001 of $366,009,437. In other words, after accounting for the actual tonnage and actual length of haul in crop year 2000-2001, CN's revenue cap is $366,009,437.

3.0 Determination of CN's and CP's western grain revenue for crop year 2000-2001

The determination of a prescribed railway company's grain revenue requires clear definitions 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 items 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. Decision No. 664-R-2001 provided clarification concerning the treatment of revisions to CP's demurrage rules.

As a brief summary, a prescribed railway company's 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 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; a portion of grain port demurrage charges. A railway company's grain revenue does not include: any amounts paid or allowed for incentives, rebates or any other similar reductions; amounts that are earned and that the Agency determines as reasonable to characterize 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 for running rights.

Allowable reductions to a railway company's grain revenue include; the amortized amounts of contributions (found reasonable by the Agency) for the development of grain-related facilities to a grain handling undertaking that is not owned by the company; and amounts paid or allowed for interswitching or exchange switching. The following items do not reduce a railway company's grain revenue: amounts paid or allowed as dispatch; amounts paid by railway companies resulting from the discontinuance of grain dependent branch lines; or amounts paid by the railway companies to municipal or district governments as performance penalties.

Taking all of the above into account, the Agency has determined CN's and CP's western grain revenue for crop year 2000-2001 to be: CN = $391,720,907; CP = $363,323,473.

Items contributing or affecting 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 on a per movement basis. Both were verified, on a test basis, against company accounting records and source documents. Numerous onsite visits were made to both CN and CP offices to ensure that all western grain revenue was captured and that revenue exclusions or reductions were legitimate and accurate. Special attention was given to Industrial Development Fund contributions to ensure their eligibility and the accuracy of their reporting.

4.0 Comparison of CN's and CP's revenue caps and revenue

The Agency has determined western grain revenue caps and revenue for CN and CP for the crop year 2000-2001 as summarized below. The grain revenue for both railway companies was below their respective revenue cap.

TABLE 2

CROP YEAR 2000-2001	REVENUE CAP	REVENUE	EXCESS	AMOUNT BELOW REVENUE CAP
CN	$394,775,887	$391,720,907	-	$3,054,980
CP	$366,009,437	$363,323,473	-	$2,685,964

Subsection 150(2) of the CTA provides that if a prescribed railway company's revenue, as determined by the Agency, for the movement of grain in a given crop year exceeds the company's revenue cap for that year as determined under subsection 151(1) of the CTA, the company shall pay out the excess amount, and any penalty that may be specified in the regulations, in accordance with the regulations.

Privy Council Order No., P.C. 2001-1051 dated June 7, 2001 established the Railway Company Pay Out of Excess Revenue for the Movement of Grain Regulations. The Regulations provide that:

• if the Agency concludes that a prescribed railway company's revenue for the movement of grain in a crop year exceed the company's maximum revenue entitlement for that year, the Agency must make a decision or order requiring the company to pay out the excess amount and the applicable penalty.
• the penalty is:
  

  5 percent 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.

  the excess amount and the penalty is to be paid to the Western Grains Research Foundation, within 30 days after the date on which it receives the Agency's decision or order.

As CN's and CP's revenues fell below their respective revenue caps, no penalties or payouts apply in respect of the 2000-2001 crop year.

5.0 Source of revenue reductions

There is no legislative requirement for the Agency to provide a breakdown, or analysis, as to how the prescribed railway companies achieved their revenue reductions for western grain movements in respect of the 2000-2001 crop year. Furthermore, a detailed breakdown cannot be provided given that much of the accounting and revenue information is either confidential or commercially sensitive. Nevertheless, the Agency has decided to provide some general indications as to the source and extent of the revenue reductions and they are provided below.

When the federal government announced its new revenue cap regime for western grain, to take effect August 1, 2000, it indicated that a railway grain revenue for crop year 2000-2001 would be 18 percent lower (or $5.92 per tonne lower for a movement of 967 miles) than what would have resulted in the absence of reform legislation. Based on an estimated annual movement of 30 million tonnes, annual revenue reductions for western grain were estimated, at that time, to be $178 million.

Railway revenues vary according to the length of haul from traffic origin to destination. As noted in section 1.0 of this Decision, the average length of haul for CN's and CP's combined movements for the crop year 2000-2001 was 926 miles. An 18 percent reduction applied to revenue associated with this length of haul translates to a per tonne revenue reduction of about $5.72. As 29.23 million tonnes of western grain actually moved in the crop year 2000-2001, the reductions due to reform legislation amount to approximately $167 million. Additional savings of about $6 million resulted as CN's and CP's revenues were below their respective revenue cap.

The major sources of the $5.72 per tonne revenue reduction for the crop year 2000-2001 are provided below. Items have been grouped together to preserve confidentiality to the railway companies and to protect commercially-sensitive information.

1. Elimination of scheduled rate increases: On April 26, 2000, the Agency, acting in accordance with legislation at that time, determined that rates for the upcoming 2000-2001 crop year should increase by 4.5 percent. Given the actual crop year's average length of haul of 926 miles, the scheduled rate increase was to be $1.37 per tonne. As the federal government's new revenue cap legislation cancelled these rate increases, a revenue reduction of $1.37 per tonne resulted.
2. General rate reductions: When CN and CP published new tariffs - to take effect July 1, 2000, the tariffs included general rate reductions which averaged about 3 percent for CN and CP combined. As the 2000-2001 crop year progressed, a number of additional minor adjustments took place. The overall effect of these general rate reductions totalled about $29 million, or about $1.00 per tonne.
3. The combined impact of lower charges due to multi-car block incentives, volume rebates and other similar reductions and allowances for industrial development fund contributions: For the crop year 2000-2001, these reductions and allowances amounted to about $92 million, or about $3.15 per tonne.
4. The net impact of numerous other items: Section 3.0 of this Decision listed a number of items (in addition to those identified above) which affect revenue. These items, as well as the impact of proportionately higher grain volumes from short lines and rate reductions stemming from competition including interswitching, had the combined affect of lowering grain revenue by about $ 0.20 per tonne.

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Subject to my dissent to Decision No. 664-R-2001, I agree with the findings in this matter. (Keith Penner - Member)