Letter Decision No. LET-R-53-2014

Pursuant to section 156 of the Canada Transportation Act (CTA), the Canadian Transportation Agency (Agency) amends the current Uniform Classification of Accounts and Related Railway Records (UCA). A copy of the UCA, as amended, is attached.

The UCA, as amended, takes effect on January 1, 2015, for reporting of results beginning with the 2015 Annual Report to the Minister of Transportation.  As provided for in subsection 156(5) of the CTA, federally regulated railway companies shall keep their accounts in accordance with the prescribed classification and system.

Reasons explaining the details related to the amendments will follow by no later than September 30, 2014.

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REASONS FOR DECISION NO. LET-R-53-2014

September 30, 2014

REVISIONS TO THE UNIFORM CLASSIFICATION OF ACCOUNTS AND RELATED RAILWAY RECORDS.

INTRODUCTION

[1]

In  Decision No. LET-R-53-2014 dated August 14, 2014, the Canadian Transportation Agency (Agency) amended the Uniform Classification of Accounts and Related Railway Records (UCA). The Agency also directed that the amended UCA take effect on January 1, 2015 for reporting of results beginning with the 2015 Annual Report to the Minister of Transport. Further, all federally-regulated railway companies were directed to keep their accounts in accordance with the prescribed classification and system. The reasons explaining the details related to the amendments are set out below.

CONSULTATION

[2] 

The Agency undertook a review of the UCA which begun in late 2012. This review was focused on the structure and rules related to operating costs as set out in the UCA. UCA accounts were assessed, and changes were proposed to improve and clarify the reporting of railway information.

[3] 

Agency staff conducted consultations with all interested parties to provide them with an opportunity to comment on the UCA and to review Agency staff’s proposals for the UCA. The consultation proceeded in three stages, with final input from stakeholders received by staff on January 31, 2014.

[4] 

During the review, some participants asked that railway company information be made available to them and/or be publicly released.

[5] 

The information that the Agency receives when railway companies make filings under the Canada Transportation Act, S.C., 1996, c. 10, as amended (CTA) are financial and/or corporate information, the disclosure of which may prejudice the railway companies. The confidential nature of such information, and the means that must be put in place to avoid their disclosure, is explicitly recognized under section 51 of the CTA. The Agency considers that the information submitted by railway companies pursuant to the requirements of the UCA should be treated as confidential and only disclosed in accordance with the law. In the context of this UCA review, disclosure of railway company information was not required. The Agency therefore denied the participants’ request for railway information disclosure.

[6] 

A range of small administrative and technical proposals received no substantive comments from parties and therefore staff’s recommendations were accepted and integrated in the UCA. These changes were made to ensure the clarity and ongoing relevance of the document.

[7] 

The following describes the assessment and recommendations related to the more substantive changes to the UCA. This is the basis upon which the Agency amended the UCA.

1. ASSESSMENT OF THE METHOD OF RECOGNITION FOR REGULATORY COST ACCOUNTS

[8] 

The Agency examined the method of recognition for regulatory cost accounts for Labour Restructuring, Injuries to Employees, and Environmental Remediation, taking into account the principles previously established in 97-R-2012">Decision No. 97-R-2012 (Pension Decision) and 176-R-2009">Decision No. 176-R-2009 (Stock Based Compensation).

[9] 

For most accounts, the expense under Generally Accepted Accounting Principles (GAAP) is the amount paid out in a given year to settle the account, and satisfies the Agency criteria for regulatory cost recognition. GAAP-based accounting is the standard approach for railway companies in North America and the Agency generally defaults to GAAP as the appropriate cost recognition method.

[10] 

However, in very few cases, the GAAP expense recorded for an account in a given year is not based on the amount actually paid out to settle that account in that  year. An example of such a divergence is in pension expenses, which prompted the review that led to the Agency’s Pension Decision. In such a case, the Agency considers whether another recognition method could be used.

[11] 

In accordance with the principles set out in the Pension Decision, for accounts with divergent expense amounts, the Agency first assesses whether the difference in the expense amounts is of such a magnitude that using a method of cost recognition other than GAAP could create a meaningfully different regulatory outcome. If so, the Agency considers the following criteria in selecting the best recognition method:

Assessment criteria

Criterion  No. 1 - Use of real economic resources

[12] 

Recognize costs that reflect the use of real economic resources incurred for the purpose of providing rail transportation service.

Criterion No. 2 - Matching principle

[13] 

Reasonably match the costs to the time period over which the work was performed.

Criterion No. 3 - Fair and reasonable

[14] 

A regulatory cost must be:

1. consistent with the objective of being fair and reasonable to all parties;

2. transparent (by relying as much as possible on a structured methodology and by minimizing the use of judgmental factors); and,

3. reliable and reasonably responsive to a broad range of economic and financial conditions.

[15] 

During this review, it was determined that the method of recognition for Labour Restructuring Expense would have a meaningful impact on regulatory cost determinations. As a result, the Agency applied the assessment criteria and determined that payments made in a given year to employees to settle the railway company’s labour restructuring obligation were a better measure of regulatory costs than GAAP.

[16] 

In the case of Environmental Remediation and Injuries to Railway Employees, the Agency has determined that the method of recognition would not have generated a meaningfully different regulatory outcome. Therefore, the Agency has retained GAAP reporting for these accounts and no further assessment was performed at this time.

2. REPORTING SPECIFIED ACCOUNTS FOR REGULATORY COSTING AND OTHER PURPOSES

[17] 

There are two distinct objectives for which information is collected by the Minister; namely for the purposes of regulatory cost evaluations and for monitoring rail activity in Canada.

[18] 

The Agency considers that the reporting of accounts, on a basis that is appropriate for regulatory costing purposes and on a basis that is appropriate for other purposes, is essential to the effective regulation and monitoring of federally-regulated railway companies in Canada.

[19] 

Therefore, for accounts for which the Agency has determined that regulatory costs diverge meaningfully from GAAP expenses, railway companies are  required under the UCA to report those accounts on both a regulatory cost basis and a GAAP basis. The balance sheet used for regulatory purposes will also need to reflect these adjustments.

[20] 

Refer to Appendix A for the list of accounts that will be reported on a dual basis under the UCA.

3. INFORMATION REQUIREMENTS FOR CLASS II AND CLASS III RAILWAY COMPANIES

[21] 

The Agency has considered the potential costs and benefits of requiring Class II and Class III railway companies to report on a different basis than GAAP for regulatory purposes. As a result, the Agency has maintained certain exemptions from the reporting rules set out for CN and CP when determining the reporting requirements of Class II and Class III railway companies.

[22] 

This approach is in keeping with subsection 156(2) of the CTA which gives the Agency the authority to prescribe for any other railway company a uniform classification and system of accounts as set out for CN and CP, or in a condensed form.

[23] 

Section 1206 of the UCA continues this approach to the reporting of Class II and Class III railway companies by exempting them from the requirement to submit costs on a regulatory basis as required by section 1201 of the UCA.

[24] 

In addition, the Agency has maintained the existing exemptions of Class II and Class III railway companies from reporting of accounts by geographic cost centre, and from the division of investment in rail into first and other than first position.

[25] 

These three exemptions are provided in recognition of the uneven balance between the administrative costs that may be incurred by Class II and Class III railway companies to provide these details, and the likely marginal improvements this would represent in terms of the accuracy of regulatory cost determinations in providing these numbers.

4. TARGETING THE USE OF GEOGRAPHIC COST CENTRE REQUIREMENTS IN THE UCA

[26] 

A geographic cost centre is a geographic area over which railway companies can reasonably match their costs to the relevant operating activities. These could be provinces, regions, or some other geographic separation based on railway operations. Historically, such matching was required annually for the majority of accounts, and used in calibrating the Agency’s costing system.

[27] 

The Agency has maintained the requirement for geographic reporting for the UCA accounts related to Ways and Structures, but has removed the requirement for accounts related to the Equipment, Railway Operations, and General cost categories.

[28] 

For Ways and Structures accounts, the expenses and operations happen in a single identifiable geographic area. For example, the action of maintaining a unit of track structure is done at a specific physical point in the rail network. For these accounts, there is thus a direct link between the expenses and the operating activities as they are occurring in that same geographic area.

[29] 

By contrast, freight car maintenance is required at a specific point in time, with the location of the repair being anywhere in the railway network. Car maintenance is required due to the distance travelled across the network, not the distance travelled within a specific sub-region. A geographic breakdown of costs and miles travelled would not reliably demonstrate the relationship between equipment costs and operations, as the repair costs incurred are a function of the miles travelled over the entire system.

[30] 

Where geographic costs centres are not maintained, the analysis of breakdowns by equipment type (as required in the UCA for locomotives and freight cars) or of system expenses and operations (with no subdividing of costs and operations) may be used.

CONCLUSION

The above constitutes the reasons for Decision No. LET-R-53-2014.

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Appendix A

List of Dual Reporting Accounts

The following table contains the accounts that will be reported both on a regulatory costing basis and a GAAP basis.

Account Number	Title
820	Stock Based Compensation and Profit Sharing
821	Pension Costs
835	Labour Restructuring Expense