Determination No. R-2018-225
RE-DETERMINATION by the Canadian Transportation Agency (Agency) of the 2018-2019 Volume-Related Composite Price Index (VRCPI) in light of amendments made to Part III, Division VI of the Canada Transportation Act, S.C., 1996, c. 10, as amended (CTA) by the Transportation Modernization Act, S.C., 2018, c. 10.
SUMMARY
[1] In accordance with the provisions of the Transportation Modernization Act, which received Royal Assent on May 23, 2018, the Agency has re-determined:
- Canadian National Railway Company’s (CN) VRCPI for the 2018-2019 crop year to be 1.4114, an increase of 2.1 percent from the 2017-2018 crop year; and
- Canadian Pacific Railway Company’s (CP) VRCPI for the 2018-2019 crop year to be 1.4608, an increase of 5.7 percent from the 2017-2018 crop year.
[2] The Agency will use these amounts to determine CN’s and CP’s maximum revenue entitlement (MRE) for the 2018-2019 crop year, which the Agency must issue by December 31, 2019.
BACKGROUND
[3] The MRE is a statutory limit on the overall revenue that can be earned by a prescribed railway company for certain movements of western grain. This limit is set out in sections 150 and 151 of the CTA.
[4] If a prescribed railway company’s revenue exceeds its MRE, the company must pay out the excess amount plus a penalty to the Western Grains Research Foundation.
[5] There are currently two prescribed railway companies: CN and CP.
[6] Subsection 151(1) of the CTA provides the formula that the Agency is to use in determining a railway company’s MRE. One of the inputs to the formula is the VRCPI, an inflation index that reflects forecasted price changes for CN and CP with regard to labour, fuel, material and other capital items. The Agency is required to determine the VRCPI on or before April 30, prior to the beginning of the crop year to which it relates.
[7] On April 25, 2018, the Agency issued Determination No. R-2018-80 which sets the VRCPI for the 2018-2019 crop year for CN and CP at 1.4197.
[8] On May 23, 2018, the Transportation Modernization Act received Royal Assent. It included a provision that requires the Agency to re-determine CN’s and CP’s VRCPI for the 2018-2019 crop year, including:
- establishing a distinct VRCPI for each of CN and CP;
- adjusting the VRCPI to remove costs associated with regulated interswitching activities and containerized grain movements, which will no longer be included as revenues for the purposes of the MRE program; and
- recognizing costs incurred by the railway companies to obtain and maintain hopper cars that are to be used for the movement of western grain.
THE LAW
[9] The Transportation Modernization Act amended subsection 151(4) of the CTA, which now reads as follows:
151(4) The following rules are applicable to a volume-related composite price index:
(a) in the crop year 2016-2017, each prescribed railway company’s index is 1.3275;
(b) an index shall be determined in respect of each prescribed railway company; and
(c) the Agency shall make adjustments to each prescribed railway company’s index to reflect the costs incurred by the prescribed railway company to obtain hopper cars for the movement of grain and the costs incurred by the prescribed railway company for the maintenance of those hopper cars.
[10] The Transportation Modernization Act also amended section 147 of the CTA to repeal the definition of “government hopper car”.
[11] Section 80 of the Transportation Modernization Act now provides the following with respect to the re‑determination of the 2018-2019 VRCPI for MRE purposes:
(1) For the crop year in which this Act receives royal assent, the value of F in subsection 151(1) of the Act [CTA] that applies to each prescribed railway company is to be the volume-related composite price index for that crop year that was determined by the Agency in accordance with section 151 of the Act as it read immediately before the day on which this Act receives royal assent.
(2) For the purpose of determining the value of F in subsection 151(1) of the Act for the crop year that follows the crop year in which this Act receives royal assent,
(a) immediately before making the determination, the Agency shall adjust the volume‑related composite price index described in subsection (1) to reflect costs incurred by the prescribed railway companies to earn the revenue described in paragraphs 150(3)(d) and (e) of the Act; and
(b) the volume-related composite price index that applies to each prescribed railway company shall be determined by the Agency in accordance with section 151 of the Act as amended by this Act, based on the volume-related composite price index adjusted in accordance with paragraph (a).
(3) If, before the day on which this Act receives royal assent, the Agency has already determined the volume-related composite price index for the crop year that follows the crop year in which this Act receives royal assent, the Agency shall re-determine the volume-related composite price index for that crop year in accordance with subsection (2).
CN’S SUBMISSIONS
Request for a revised 2018-2019 cost of capital (CoC) rate
[12] In August 2017 and on May 24, 2018, CN requested that the Agency re-consider how it determines CN’s CoC rate. CN specifically requested that the Agency consider the use of a North American-based approach or, in the absence of that, suggest how CN might apportion its reported debt between its Canadian and US operations.
[13] While the CoC rate is an important input used in determining the VRCPI, it is determined as part of a separate Agency regulatory process and, as such, the Agency will address CN’s request as part of that process and outside of this Determination.
Requests related to the Transportation Modernization Act
[14] On July 20, 2018, CN requested that the Agency, in re-determining CN’s VRCPI: re-calculate the regulated grain usage factor; eliminate the carrying capacity ratio used in establishing the cost of hopper car acquisitions; update its forecast for investments in locomotives; recognize costs to obtain and maintain newly acquired hopper cars; and recognize costs for hopper cars obtained from its U.S. subsidiary companies.
REGULATED GRAIN USAGE FACTOR
[15] The Agency, in Decision No. 304-R-2015, established that the costs incurred by the railway companies to obtain cars would be adjusted by a regulated grain usage (RGU) factor, which is the ratio of the number of revenue tonne miles spent in regulated grain service versus the total revenue tonne miles of the replacement cars. This ratio ensures that the only cost that is recognized is the cost of the obtained cars considered to be associated with the movement of eligible traffic.
[16] The Transportation Modernization Act has amended Schedule II of the CTA to include the movement of soybeans as an eligible grain product. The Agency, therefore, adjusts the calculation of the RGU factor to include the revenue tonne miles associated with the movement of soybean traffic.
CARRYING CAPACITY RATIO
[17] The Agency, in Decision No. 304-R-2015, also established the carrying capacity ratio which was used to ensure that, no matter how many cars were acquired for the purpose of moving regulated grain, the recognized cost for those cars would be limited to the costs associated with the capacity withdrawn from the retired government-owned hopper cars.
[18] The Transportation Modernization Act has removed the limitation that the cost of cars be recognized only to the extent that the cars are intended to replace government-owned hopper cars and, as such, the Agency finds that the carrying capacity ratio is no longer required with respect to paragraph 151(4)(c) adjustments to the VRCPI.
FORECAST FOR INVESTMENTS IN LOCOMOTIVES
[19] CN has requested that the Agency revise its forecasts to incorporate updated information on its anticipated locomotive acquisitions for the 2018-2019 crop year to what the Agency had forecasted in Determination No. R-2018-80 that it issued on April 25, 2018.
[20] The CTA requires that the Agency determine the railway companies’ VRCPI by April 30 prior to the crop year to which it will apply. The CTA does not provide the Agency the authority to issue a VRCPI after this statutory deadline.
[21] As stated in paragraph 8 above, the Transportation Modernization Act requires that the Agency re-determine the 2018-2019 VRCPI to recognize only changes introduced by the Transportation Modernization Act but it does not provide for the Agency to re-determine the 2018‑2019 VRCPI for any other reasons. The Agency will, therefore, not update its forecasts at this time. However, the Agency notes that when it determines the railway companies’ VRCPI for the 2019-2020 crop year, it will take into account the difference between their actual investments (including in locomotives) and the Agency’s previous forecasted indices increases.
COSTS TO OBTAIN AND MAINTAIN NEWLY ACQUIRED HOPPER CARS
[22] CN has requested that the Agency adjust its 2018-2019 VRCPI to reflect the costs for the purchase of 1,000 new hopper cars that it expects to take possession of within the 2018-2019 crop year. CN has filed an executed purchase agreement within which it has committed to buy the 1,000 cars. The Agency has recognized the cost for the acquisition of the 1,000 cars in determining CN’s 2018-2019 VRCPI.
COSTS FOR HOPPER CARS OBTAINED FROM ITS U.S. SUBSIDIARY COMPANIES
[23] The Transportation Modernization Act removed the condition that provided for the cost to obtain hopper cars to be recognized only to the extent that the obtained hopper cars are replacing government‑owned hopper cars. CN is, as such, requesting that an additional 540 car equivalents (i.e., the total number of cars used adjusted to reflect only the time spent in regulated grain service) be recognized.
[24] The Agency, in Decision No. 304-R-2015, determined that a U.S. subsidiary is a separate and distinct entity and, as such, the costs for obtaining replacement cars from a subsidiary can be recognized as a paragraph 151(4)(c) adjustment.
[25] While Decision No. 304-R-2015 was made in the context of U.S. subsidiary hopper cars being obtained to replace government-owned hopper cars, the approach established in that Decision is nonetheless applicable to the requirement of amended paragraph 151(4)(c), as it established that the U.S. subsidiary cars can be considered to be “obtained” for use in regulated grain activities. It also established the means through which the Agency determines the cost to obtain and maintain the cars.
[26] In determining the cost to be recognized for cars obtained from CN’s subsidiaries, the Agency considered whether costs for the use of U.S. subsidiary cars had already been accounted for in the MRE base year amounts. The Agency did not identify per diem charges for the use of U.S. subsidiary cars in the provision of regulated grain service to have been included in the base year for CN.
CP’S SUBMISSION
[27] On August 10, 2018, CP requested that the Agency recognize CP’s costs to obtain and maintain newly acquired hopper cars as well as hopper cars obtained from its U.S. subsidiary companies.
Costs to obtain and maintain newly acquired hopper cars
[28] CP has requested that the Agency adjust CP’s 2018-2019 VRCPI to reflect the costs for the purchase of 1,960 new hopper cars.
[29] CP filed an executed purchase agreement within which it has committed to purchase 1,000 cars, which are to be delivered within the 2018-2019 crop year. The Agency has recognized the cost for the acquisition of the 1,000 cars in determining CP’s 2018-2019 VRCPI. The Agency notes that CP has not yet fully committed to purchase the remaining 960 cars and, as such, the Agency has not recognized the cost associated with this potential purchase in this Determination. CP can apply to have the cost for any additional purchased cars recognized once it has committed to acquire the cars and filed the appropriate documentation with the Agency.
Costs for hopper cars obtained from its U.S. subsidiary companies
[30] The Transportation Modernization Act removed the condition that provided for the cost to obtain hopper cars to be recognized only to the extent that the obtained hopper cars are replacing government‑owned hopper cars. CP is, as such, requesting that an additional 4,800 car equivalents be recognized.
[31] In determining the cost to be recognized for cars obtained from CP’s subsidiaries, the Agency considered whether the costs for the use of U.S. subsidiary cars had already been accounted for in the MRE base year amounts.
[32] An examination of the 2000-2001 Grain Traffic Database revealed that there were a number of CP U.S. subsidiary cars from the Soo Line Corporation involved in the movement of regulated grain, many of which are the same cars used today. The Agency also confirmed in 1992, which served as the basis for arriving at the 2000-2001 base year amounts, per diem charges were allowed as part of the base year costs for the movement of regulated grain and a portion of those costs would have been attributable to the use of CP’s U.S. subsidiary cars.
[33] The Agency has determined CP’s costs for the use of the U.S. subsidiary cars in the provision of regulated grain service, once adjusted for inflation, to be $6.7 million and, as such, this amount was netted from the cost of the U.S. subsidiary cars put forward by CP.
RE-DETERMINATION
Index shall be determined with respect to each prescribed railway company
[34] In accordance with paragraph 151(4)(b) of the CTA, the Agency determined a VRCPI specific to each of CN and CP that reflects, for the 2018-2019 crop year, forecasted price increases with respect to their respective labour, material, fuel, and other capital items.
Removal of costs associated with interswitching and containerized grain movements
[35] In accordance with paragraph 80(2)(a) of the Transportation Modernization Act, the Agency adjusted CN’s and CP’s VRCPI to exclude costs associated with the revenues earned from regulated interswitching activities and containerized grain movements (excluded activities) that, pursuant to paragraphs 150(3)(d) and (e) of the CTA, will no longer be included in CN’s and CP’s revenues for the purposes of the MRE program.
[36] The Agency identified the costs for the excluded activities that were included in CN’s and CP’s 2000-2001 base year amounts detailed in subsections 151(2) and 151(3) of the CTA. These costs were then indexed to arrive at the inflation adjusted amount for 2017-2018. Removing these costs decreased CN’s and CP’s opening VRCPI by 0.5 percent.
Investment forecast
[37] The Agency’s Determination No. R-2018-80 that originally determined CN’s and CP’s VRCPI for the 2018-2019 crop year included forecasted increases to the railway companies’ investment indices for infrastructure and rolling stock, consistent with the law at the time.
[38] With the passage of the Transportation Modernization Act, the forecasted amounts for the acquisition of new hopper cars, previously included in the other capital-related component of the VRCPI, have been removed, as any such investments will be reflected as paragraph 151(4)(c) adjustments to CN’s and CP’s VRCPI once the costs are incurred.
[39] Subsection 151(6) allows the Agency to make hopper car acquisition-related adjustments to the VRCPI at any time that it considers appropriate and to determine the date when the adjusted index takes effect.
[40] In consideration of the above items and adjustments, the Agency has re-determined:
- CN’s VRCPI for the 2018-2019 crop year to be 1.4114, an increase of 2.1 percent from the 2017-2018 crop year; and
- CP’s VRCPI for the 2018-2019 crop year to be 1.4608, an increase of 5.7 percent from the 2017-2018 crop year.
Member(s)
- Date modified: