Determination No. R-2019-230

SUMMARY

[1] This is the Agency's determination of the 2020 regulated interswitching rates pursuant to Part III, Division IV of the CTA. It builds on the methodology set out in Determination No. R‑2018‑254 (2019 interswitching rates determination), and is informed by the most extensive review of the Agency's interswitching rate methodology since 2007. The review included public and stakeholder consultations on the interswitching rate methodology, held from June 20, 2019 to August 21, 2019.

[2] Subsection 127.1(1) of the CTA requires that, no later than December 1 of each year, the Agency determine the rate per car to be charged for interswitching traffic for the following calendar year.

[3] Subsection 127.1(4) of the CTA requires the Agency to publish the method that it followed for determining the rate.

[4] Section 128.1 of the CTA requires the railway companies to provide to the Agency the information or documents that the Agency considers necessary to exercise its powers or perform its duties or functions under section 127.1.

[5] The Agency will address the following issues:

1. Should there be any changes to the interswitching rate methodology?
2. What are the 2020 regulated interswitching rates?

[6] For the reasons set out below, the Agency reaffirms the methodology set out in the 2019 interswitching rates determination for the determination of the 2020 interswitching rates.

[7] The methodology used by the Agency in the determination of the 2020 interswitching rates is presented in Appendix A.

[8] In addition, the Agency has also identified potential changes to the Railway Interswitching Regulations, SOR/88-41, as amended (Interswitching Regulations) that could provide more precision in how interswitching rates are calculated and communicated. The Agency will launch consultations on potential regulatory changes in early 2020.

[9] Further, pursuant to section 128.1 of the CTA, the Agency orders the Canadian National Railway Company (CN) and the Canadian Pacific Railway Company (CP) to submit to the Agency's Chief Strategy Officer the following data for the previous year, no later than March 31^st of each year:

1. Carload data by yard and road assignments in Canada, including the following fields:
   1. Assignment identification number;
   2. Interchange location; and
   3. Date and time of movement.
2. Daily recorded train departure and train arrival events from AEI readers by yard and road assignments in Canada, including the following fields:
   1. Assignment identification number;
   2. Interchange location; and
   3. Date and time of movement.
3. Daily recorded crew start and end times by yard and road assignments in Canada, including the following fields:
   1. Assignment identification number; and
   2. Interchange location.
4. Carload data of regulated and non-regulated interswitching within regulated interswitching limits, received and delivered by the local carrier, by:
   1. Interchange;
   2. Event date;
   3. Event time;
   4. Connecting railway company;
   5. Shipper name;
   6. Consignee name;
   7. GPS coordinates of shipper siding of originating and terminating cars of the local carrier;
   8. Commodity shipped;
   9. Interswitching zone (including railway company traffic that has been interswitched and may be identified in some other manner other than the defined interswitching zones [e.g., CP's "zone 6"], haulage, exchange switching and confidential contracts); and
   10. Interswitching rate received.

[10] Finally, the Agency determines the regulated interswitching rates for 2020 under subsection 127.1(1) of the CTA as follows:

Schedule of regulated interswitching rates for 2020

Item	Column I - Interswitching distance zone	Column II - Rate per car for interswitching traffic to or from a siding(single car)	Column III - Rate per car for interswitching a car block (60 cars or more)
1	Zone 1	$310	$60
2	Zone 2	$440	$95
3	Zone 3	$305	$60
4	Zone 4A	$280	$50
5	Zone 4B	$280 + $10 per additional KM	$50 + $1.25 per additional KM

BACKGROUND

[11] Regulated in Canada since 1904, interswitching is part of the competitive access provisions that gives some shippers access to the services of railway companies that do not directly serve their facilities or sidings. The interswitching provisions require that a railway company that does provide such direct service transfer cars with a shipper's traffic at an interchange to a different railway company with which the shipper has made transportation arrangements, and that the transportation to the interchange be done at a prescribed rate. The Agency is responsible for calculating and publishing that rate.

[12] Under the CTA, the Agency must have regard to certain considerations in setting the rate, including the following:

• Section 112 requires a rate to be commercially fair and reasonable to all parties.

• Paragraph 127.1(2)(a) requires the Agency to take into consideration any reduction in costs that, in the Agency's opinion, results from moving a greater number of cars or from transferring several cars at the same time.

• Subsection 127.1(3) requires the Agency to consider the average variable costs of all movements of traffic that are subject to the rate and that the rate shall not be less than the variable costs of moving the traffic.

[13] The Transportation Modernization Act, S.C. 2018, c. 10, which received royal assent on May 28, 2018, made several amendments to the regulated interswitching provisions in the CTA. Paragraph 127.1(2)(b) of the amended CTA now requires the Agency to also take into consideration any long-term investment needed in the railways. The following amendments were also made:

• Subsection 127.1(1) requires the Agency to determine the interswitching rates no later than December 1 of every year.

• Subsection 127.1(4) requires the Agency to publish the method that it followed for determining the rate.

• Section 128.1 requires the railway companies to provide to the Agency the information or documents that the Agency considers necessary to exercise its powers or perform its duties or functions under section 127.1.

[14] Prior to these amendments, updates to interswitching rates were done by regulation, which resulted in a relatively significant lag time between updates. The shift to annual updates will help to ensure that rates are up-to-date and fully compensatory.

[15] The 2019 interswitching rates determination was the first update to the regulated interswitching rates since 2013. It also set forth how the Agency considered the new factor added to the CTA; namely, the long-term investment needs of the railway companies. This is outlined in more detail below.

2019 Methodology

[16] The methodology used to calculate the 2019 regulated interswitching rates was presented in Appendix A of the 2019 interswitching rates determination—which is reproduced in this determination, again as Appendix A—and was based on four components:

• Interswitching service units;
• Unit cost for each service unit, including overheads;
• Volumes of interswitched cars; and
• Contribution to fixed costs.

[17] In response to the addition of paragraph 127.1(2)(b) of the CTA, the Agency, in the 2019 interswitching rates determination, outlined how it considered this new factor. In particular, the Agency provided an allowance for cost of capital and depreciation for the consideration of the long-term investment needs of the railway companies in the calculation of the 2019 interswitching rates. Paragraphs 18 to 25 of that determination read as follows:

The Agency's interswitching methodology follows the standard Agency costing model, which captures the economic costs of providing interswitching service. This serves to capture both the accounting costs and the implicit costs of a railway, including labour costs, fuel costs, material and other costs, and capital costs, which include depreciation of assets, and the returns on investment in those assets.

By comparison, accounting costs only capture the explicit costs of a firm. Accounting costs are the actual cash outlays of a company that is providing a service or good such as labour, fuel and materials. Compensating railway companies with the full economic costs of their operations supports their long-term economic viability in the market. The Agency captures the implicit costs of the Canadian National Railway Company (CN) and the Canadian Pacific Railway Company (CP) through the cost of capital allowance and a depreciation allowance in its costing methodology.

The cost of capital is defined as an estimate of the total return on net investment required by debt holders (cost of debt) and shareholders (cost of common equity) such that debt costs can be paid and shareholders can be provided with a return on investment consistent with the risks assumed for the period under consideration.

The cost of debt portion of the cost of capital is measured by the Agency using the coupon rate method, which represents the actual interest paid to financial institutions or bond holders for loans made to the railway companies, as recorded in the most recent financial statements of the railway companies. If the allowance for the cost of debt was less than the actual cost of debt paid, the businesses would have difficulty meeting their debt obligations and securing additional debt to fund future long-term investments. On the other hand, if the allowance for the cost of debt was more than the actual cost of debt, this would result in an unjustifiable windfall and not be in keeping with section 112 of the CTA, which states that a rate established by the Agency must be commercially fair and reasonable to all parties.

The cost of the common equity portion of the cost of capital is calculated using the traditional Capital Asset Pricing Model (CAPM) as presented in the 2011 cost of capital decision. From 2009‑2011, the Agency conducted a comprehensive public review of different cost of common equity models including the Discounted Cash Flow (DCF) Model, the Equity Risk Premium Model, and combinations of different models including the averaging of the CAPM and the multi‑stage DCF Model. After reviewing the merits of all models, as well as considering stakeholder views, the Agency concluded that the traditional CAPM best met requirements.

An allowance for depreciation costs uses the remaining life technique of the Group Plan method. In the remaining life technique, the depreciation rate for a group of assets, such as locomotives, divides the cost of locomotives (gross investment less net salvage value) by the number of years in its whole life calculation to determine a yearly depreciation value. Any imbalances in total annual depreciation (due to early or later retirements) are adjusted over the remaining life of all the locomotives.

The whole life and remaining life of each asset are estimated by CN and CP and verified by the Agency through the analysis of historical data, comparisons between CN and CP, and with public data of other railway companies.

This method of calculating the depreciation ensures that the costs of employing the assets used in providing rail service can be fairly apportioned between the railway companies and shippers.

[18] In the 2019 interswitching rates determination, the Agency also stated its intention to launch consultations on the methodology used to set interswitching rates. While there was no requirement pursuant to the Transportation Modernization Act to review the entire interswitching methodology, the Agency considered it timely to do so given that the 2019 interswitching rates determination represented the first update to the rates since 2013. The Agency accordingly sought input on a broad array of items impacting the methodology, in order to hear from stakeholders on what, if any, changes might be appropriate.

ISSUE 1: SHOULD THERE BE ANY CHANGES TO THE INTERSWITCHING RATE METHODOLOGY?

[19] The Agency launched consultations on June 20, 2019, asking stakeholders to comment on a broad range of methodological questions and factors, all of which could have an impact on the interswitching rate methodology. The consultation items relevant to this determination were the following:

• Item 1: Federally regulated short-line railway companies;
• Item 2: Regional and commodity-specific regulated interswitching rates;
• Item 3: Interswitching zones up to 30 km;
• Item 4: Long-term investment needs of the railway companies (cost of capital methodology);
• Item 5: Contribution to fixed costs;
• Item 6: Productivity factors;
• Item 7: Volume discount rate categories;
• Item 8: Collecting interswitching service units; and
• Item 9: Transparency of the regulated interswitching rates and methodology

[20] Item 4 directly related to paragraph 127.1(2)(b) of the CTA. The cost of capital allowed for railway companies is, effectively, the mechanism by which long-term investment in the railway will be considered by the Agency. As explained below, a significant component of the cost of capital methodology is the cost rate of common equity, which the Agency has addressed in a separate determination (R-2019-229).

[21] The consultation process included eight bilateral meetings with representatives from Canadian Class I railway companies, a short-line railway companies association, industry associations, grain shipper associations, associations representing logistics and freight management, businesses who are users of rail, and other industry experts.

[22] The deadline for written submissions on the consultation, with the exception of items 5 and 6, was August 21, 2019. The Agency received 11 written submissions, which can be found on the Agency's consultation website, from the following stakeholders:

• Agricultural Producers Association of Saskatchewan;
• CN;
• CP;
• Chemistry Industry Association of Canada;
• Fertilizer Canada;
• Forest Products Association of Canada;
• Freight Management Association of Canada;
• Government of Saskatchewan;
• Linear Grain;
• Teck Resources, the Western Grain Elevator Association, the Canadian Canola Growers Association, the Mining Association of Canada, and the Western Canadian Shippers Coalition, as represented by McMillan LLP (McMillan); and
• Western Canadian Short Line Railway Association.

[23] The Agency has carefully considered the input received and based on this consultation process, the Agency has determined that the methodology established in the 2019 interswitching rates determination should continue to be applied. The reasoning underlying this determination is explained below.

[24] Stakeholders have until January 20, 2020 to make submissions on items 5 and 6. The Agency will consider those two items in the 2021 interswitching rates determination.

Consultation Item 1: Federally regulated short-line railway companies

Description

[25] The Agency sets interswitching rates based on the CN's and CP's costs. Some stakeholders have suggested that this is methodologically problematic as it does not take into account short-line railway companies' (short-lines) unique cost structure. Although short-lines may have lower labour costs than larger railway companies, they generally cannot benefit from the economies of scale enjoyed by CN and CP because of lower traffic volumes.

[26] The existing approach dates to Decision No. LET-R-66-2010, which determined that consideration of short-lines' costs was not warranted, given that the majority of interswitching movements were performed by CN and CP.

[27] Currently, no short-lines submit their financial and operating data according to the Uniform Classification of Accounts And Related Railway Records (2014) (UCA) to the Agency. The Agency has only required short-lines to submit their financial and operating statistics according to the UCA in the context of cases requiring short-lines' costing analysis.

[28] Consultation participants were asked whether, in their view, it was necessary to develop interswitching rates to include short-lines' costs or to develop separate interswitching rates for short-lines.

Consultation feedback

[29] The Government of Saskatchewan and Linear Grain were in favour of distinct interswitching rates for short-lines.

[30] The Western Canadian Short Line Railway Association membership includes one federally regulated railway company; however, that member does not have any shippers located on its line within 30 km of an interchange, and therefore is not required to provide regulated interswitching service. Despite not having any members who are affected by the interswitching provisions of the CTA, the Western Canadian Short Line Railway Association submitted that the Agency should not develop regulated interswitching rates based on short-line costs.

[31] Other short-lines or their associations did not respond to this consultation.

Analysis and determinations

[32] Given that the short-lines that are subject to regulated interswitching did not provide input to this consultation and do not submit financial and operating data, the Agency has no information on whether interswitching rates are fully compensatory for the short-lines.

[33] To properly calculate the variable costs of railway companies, the Agency requires railway companies to file their financial and operating data according to the UCA under subsection 157(5) of the CTA. This information needs to be broken down further than the annual report information collected for all federal railway companies, as it requires the assessment of causal relationships.

[34] Such reporting requirements would impose a significant burden on the short-lines. Since the Agency has not received any indication that short-lines have concerns, nor which short-lines (if any) have customers within the 30 kilometre interswitching limit, the Agency is not persuaded that any resulting increase in the accuracy of cost calculations would justify this burden.

Consultation Item 2: Regional and commodity-specific regulated interswitching rates

Description

[35] The Agency currently averages the interswitching costs determined for individual shippers to a national average interswitching rate using weighted averages based on the number of cars moved through interswitching. A national average interswitching rate is straightforward to administer and places the least burden on railway companies and shippers.

[36] In the past, some stakeholders have argued that a national average rate is not consistently compensatory and does not provide an adequate contribution to fixed costs. They have also suggested that the relatively low cost of interswitching in certain locales brings down the "average" cost, to the detriment of railway companies performing frequent switches in locales where the costs of doing so are much higher.

[37] In addition, a system-wide average rate of all commodities may lead to some "low cost" terminals subsidizing "high cost" terminals. As the consultation discussion paper noted, such cross-subsidization could occur between, on the one hand, grain terminals using automated equipment or track mobiles to unload and load cars and, on the other hand, commodities that require additional handling.

[38] Consultation participants were asked whether, in their view, the Agency should continue to determine a single system average rate per zone, or whether multiple rates per zone are required based on different regions or commodities.

Consultation feedback

[39] Most participants submitted that the current national average rate is fair, predictable, and places the least burden on railway companies and shippers.

[40] The Government of Saskatchewan recommended that the Agency develop a methodology to establish interswitching rates specific to different regions and commodities, which would provide better insight to shippers into how railway companies treat different regions and commodities.

[41] McMillan urged the Agency to distinguish between:

• variable costs incurred because of the nature of the traffic subject to interswitching (which consists of characteristics attributed to both carriers and shippers); and

• variable costs CN and CP incur because of the nature of the interchange.

[42] McMillan submitted that there may be a justification for interswitching rates that distinguish between interswitching shipments that use adequate infrastructure, versus those that have to use inadequate infrastructure.

[43] CN submitted that:

• an alterative approach that places interchanges into separate categories, based on volume of interswitching, should be considered;

• adjustments could be made to have a component of the rate increase when specific investments occur, reflecting the higher-than-average capacity capital demands stemming from highly intensive traffic levels;

• there is insufficient justification for differentiating by commodity since the cost of interswitching does not vary by commodity; and

• certain shipments requiring extra handling incur additional cost, and should have premiums added to the standard interswitching rates to adequately compensate for these handling requirements.

Analysis and determinations

[44] In order to adopt McMillan's proposal, the Agency would need to develop criteria to determine what is an "adequate" versus "inadequate" current state for every component of railway company investment, as well as to determine the "adequate" service for an average interswitching movement. Once it determined this "adequate" level of service, the Agency would then need to audit every interswitching movement to determine if any particular circumstance of inadequate service was a result of the railway company's inadequate infrastructure, or if it was due to other factors beyond a railway company's control. These findings would then be used to calculate the variable costs due to "the nature of the traffic" and the variable costs due to '"the nature of the interchange".

[45] The development of criteria would require submissions from railway companies and shippers, who would be unlikely to agree on the cause of the inadequate service, potentially requiring an Agency decision for each interswitching shipper. In addition, any such criteria would likely be perceived as including subjective elements.

[46] The Agency therefore finds McMillan's proposal to be impractical.

[47] With respect to CN's submissions, the Agency notes that data on interswitching service units are collected from all yards that handle regulated interswitching. The sample of interchanges and shippers for the collection of service units in a given year chosen by Agency staff is not exclusive, and railway companies have the option of requesting that certain interchanges or shippers be included in the sample. The current weighted average methodology ensures the railway companies are fully compensated for the costs they have incurred in all yards, despite individual variations between those yards in terms of volumes, and costs.

[48] This also is the case where the costs of serving specific shippers and/or commodities may differ significantly. The weighted average methodology ensures that the railway companies receive the total costs of servicing shippers of all sizes and characteristics.

[49] In addition, the weighted average methodology captures all investments made by the railway companies. Any congestion experienced by a yard would be reflected in higher recorded service units due to increased time spent performing classification, marshalling, or receiving clearance to exit the yard for delivery.

[50] CN's proposal to add commodity-specific premiums would require the Agency to define a standard switching operation at a shipper siding, an interchange, and a yard. The Agency would then need to calculate the average service units of the standard switching operation, calculate switching operations that utilize lower or higher service units compared to the average, and finally compute the discount or premium required to be added to the standard interswitching rate.

[51] This proposal would impose a significant administrative burden on the Agency, railway companies and shippers, with questionable benefit.

[52] CN's proposal to develop interswitching rates based on different categories of interchanges raises three significant difficulties.

[53] First, interchanges could move from category to category in a given year. Based on CN's proposed categorization, between 2013 and 2018, 33 percent of interchanges would have moved between categories. The implication is that in one year, shippers at an interchange could be paying a rate associated with one category, but in the next year, paying a lesser or greater rate despite the absence of any change to the average servicing requirements at the interchange.

[54] Second, yards with vastly different sizes, operations and service units would appear in the same category, resulting in increased cross-subsidization.

[55] Finally, yards with similar service units would appear in different categories. CN suggests that high volume yards would have some of the lowest interswitching rates, while low volume yards would have some of the highest interswitching rates, due to different economies of scale. However, analysis for both CN and CP indicates that this is not accurate, as certain yards with low volumes actually have lower service units than other yards with higher volumes. This result shows that several factors other than volume have substantial impacts on the costs of interswitching service.

[56] The Agency concludes that CN's proposals are not practical and/or would not produce methodological improvements.

[57] The consultation paper suggested that the costs of interswitching service for grain products might be lower than the costs for dangerous goods, given the fact that, for example, many grain terminals use automation equipment while dangerous goods must be transported according to detailed regulations.

[58] The available data show that this is not the case: the average service units for dangerous goods is actually lower than agriculture products. Further, the data show a large variance of service units between different shippers of the same commodity, due in part to different levels of automation at their facilities. Creation of commodity-specific rates would not remove cross-subsidization between shippers within the same commodity group.

[59] Based on the above, the Agency has determined that interswitching rates will continue to be calculated based on a national average rate without differentiation by region or commodities.

Consultation Item 3: Interswitching zones up to 30 km

Description

[60] In Decision No. LET-R-66-2010, the Agency decided to eliminate the use of linear regression techniques that had previously been employed to ensure that rates increased proportionately with an increase in distance from an interchange. Since that time, interswitching rates have never increased proportionately with an increase in distance, which may cause confusion for some stakeholders.

[61] With regard to the linearity of the interswitching rates, the consultation discussion paper asked participants to comment on two options:

1. Should the Agency introduce more factors, such as customer characteristics, train size, or grades of track characteristics?
2. Should the Agency reinstitute the use of linear regression to produce rates that increase proportionately by zone?

[62] Consultation participants were also asked whether, due to the complexity of creating multiple factors and the fact that the interswitching costs are not driven primarily by distance, the four zones should be collapsed into one zone.

Consultation feedback

[63] The majority of participants do not want the Agency to create a broader range of rates by introducing additional factors such as shipper characteristics or grades of track. Their common concern is the complexity of any such rate structure.

[64] Notwithstanding concerns about complexity, many participants also argued against a single zone and rate. The general consensus is that the current zone structure is easy to understand and, due to its long history, has been accepted, adopted and helped shaped the industry. Participants further submitted that any change to the current rate structure could introduce uncertainty or economic inefficiency.

[65] All participants opposed the reinstitution of a weighted linear regression to produce rates that increase proportionately by zone.

Analysis and determinations

[66] A set of rates taking account of factors such as customer characteristics, train size, or grades of track characteristics would more closely tie the rates paid by shippers to the costs of servicing them, potentially aligning rates with distance as well as minimizing cross-subsidization.

[67] This added accuracy, however, would entail substantial additional administrative burden for many participants. Given this, and the lack of stakeholder support, the Agency will not develop such a rate structure.

[68] As the current zone rates show, distance is not a major factor in the determination of costs, as the rates do not increase in a linear fashion with distance. In light of this and the lack of participant support, the Agency will not adopt the use of linear regression.

[69] An alternative that would recognize the weak link between distance and costs and increase simplicity would be to collapse the current four zones into one zone. In fact, analysis indicates that the imposition of a one zone rate would result in a lower margin of error (in comparison to actual costs) overall than is observed when comparing actual costs to the current rate structure. This shows that cross-subsidization is lower with the one zone rate.

[70] Despite the concerns of consultation participants, it is unlikely that a shift to one zone would cause significant confusion or disruption after a short adjustment period, and it would have no impact on shippers' ability to access regulated interswitching. Indeed, because it would obviously be simpler than a four-zone structure, it could reduce administrative complexity and actually facilitate access.

[71] In light of the above, the Agency will explore the possibility of a regulatory amendment to move to a single zone with consultations in 2020. Stakeholders will have the opportunity to review and comment upon any proposed amendment.

Consultation Item 4: Long-term investment needs of the railway companies

Description

[72] Railway companies have suggested that the current cost of capital calculated by the Agency is too low and that it leads to underinvestment, while other stakeholders have suggested that the existing cost of capital methodology contributes to compensatory rates.

[73] Consultation participants were asked whether the Agency's current methodology is appropriate for determining an adequate rate of return on investment, and whether the inclusion of a cost of capital and depreciation allowance appropriately inform the consideration of long-term investment needed in the railways.

[74] Based in part on the responses received, the Agency issued Determination No. R‑2019‑229 (2019 cost of equity determination) on November 29, 2019.

Consultation feedback

[75] The majority of participants agree that the cost of capital and depreciation allowance appropriately reflects the consideration of the long-term investment needs of the railways.

[76] CN argues that in order for the interswitching rates to satisfy section 112 and paragraph 127.1(2)(b) of the CTA, the return to investors must be considered to be (or equivalent to) market returns.

[77] CN also states that what it perceives as the Agency's low cost of capital allowance leads to under-investment and requires government funding, such as federal grants in Vancouver.

Analysis and determinations

[78] CN's position that unregulated market returns are the measure of commercially fair and reasonable rates is inconsistent with both the purpose of interswitching, as a competitive access remedy for shippers, and the statutory role of the Agency in setting the interswitching rates.

[79] The Agency sets those rates to cover total operating costs (marginal costs plus a contribution to fixed costs)—which includes an allowance for cost of capital—so that the railway companies can operate indefinitely while being able to continue to raise capital in the markets.

[80] With respect to CN's assertions regarding under-investment and federal grants, the Agency notes that such grants are provided for an array of reasons and are not a relevant consideration in setting rates.

[81] The Agency also notes that railway companies have a service level obligation to carry all traffic on offer and must furnish a level of service for interswitching equal to the level of service of line haul traffic. Railway companies are expected to make the necessary investments in infrastructure supporting regulated interswitching to ensure that they can meet these legal requirements.

[82] In light of the above considerations, the Agency will continue to consider the long-term investment needs of the railway companies through the cost of capital and depreciation allowance.

[83] The Agency has reviewed its cost rate of common equity model to ensure its model provides the required rate of return by investors so that they will continue to provide funds to the railway companies for their long-term investment needs. The 2019 cost of equity determination has made adjustments to the risk-free rate from a medium term of 3-5 years to a longer term of 5-10 years to reflect the long-term investment horizon of the railway companies and has removed the beta adjustment to reflect a market observed beta.

[84] Based on the cost of capital methodology set out in the 2019 cost of equity determination, Determination No. R-2017-198 (determination of methodology to determine working capital amounts and capital structure for regulatory purposes), and Decision No. 425‑R‑2011 (2011 cost of capital decision), the Agency determines, for the purposes of developing the 2020 interswitching rates, a cost of capital rate of 4.70 percent for CN and 7.16 percent for CP.

Consultation Item 5: Contribution to fixed costs

Description

[85] The Agency currently multiplies the variable costs obtained through the measurement of the interswitching activities by a factor to account for each railway company's fixed costs. The Agency estimates this factor as the mark-up on system average variable costs required to equate them to total economic costs for the system.

[86] Consultation participants were asked whether the Agency should continue to use the system average total to variable cost ratio as the contribution to fixed costs or should it use an alternative approach such as a full Ramsey pricing model.

[87] At the request of several participants, the Agency has extended the deadline for submissions on this matter to January 20, 2020. Following the completion of the consultation process on this item, the Agency will consider whether to adopt an alternative approach.

Consultation Item 6: Productivity factors

Description

[88] The Agency applies a productivity factor to the estimated interswitching costs since the Agency's unit costs, which reflect the cost incurred by the railway companies to perform a unit of activity, are not current to the reference year of the regulated interswitching rates.

[89] The unit costs are adjusted for changes in each railway company's input prices and the way the inputs are used to produce the outputs (for example, the amount of labour used to move a gross-ton mile of traffic), which is the productivity adjustment. Making this productivity adjustment provides a better estimate of costs for the year in which the Agency is calculating regulated interswitching rates.

[90] The current productivity model used by the Agency is based on the Ideal Fisher methodology using input quantities and prices that are approximated. The underlying assumptions of the Ideal Fisher methodology are that there is perfect competition and constant returns to scale (no efficiency gains when the size of the railway company increases).

[91] The consultation paper provided participants with an alternative productivity model and asked whether it would be preferable to the Ideal Fisher methodology, or whether there is another model that the Agency should consider.

[92] At the request of several participants, the Agency has extended the deadline for submissions for Item 6 to January 20, 2020. Following the completion of the consultation process on this item, the Agency will consider whether to adopt an alternative approach.

Consultation Item 7: Volume discount rate categories

Description

[93] The current car block category of 60 cars or more was introduced by the Agency in 1988. It was determined, through consultation with stakeholders, that shipments moving in blocks of 60 cars or more would not typically be required to enter a yard to be classified or marshalled. Instead, they would be handled through would be a "hook and haul" operation from the interchange to the shipper siding, resulting in a considerable reduction in costs in comparison with movements that require classification or marshalling in a yard.

[94] Railway operations now include shipments of blocks of 170 cars or more, which produce greater economies of scale than operations that only contain blocks of 60 cars.

[95] Some stakeholders have argued that there are also cost savings to railway companies if a shipper ships groups of cars of less than 60; for example, 30 or 50. They suggest that these shipment sizes require less switching in yards than movements of one to two cars.

[96] Consultation participants were asked whether the car block size minimum of 60 cars is sufficient for recognizing the efficiencies gained from moving cars in a block, and whether the Agency should determine rates for smaller or larger shipment sizes.

Consultation feedback

[97] Most participants deferred to the Agency on whether different car block thresholds should be established.

[98] CN proposed an alternative methodology with the following block categories:

• 1-10 cars
• 11-30 cars
• 31-60 cars
• 61-100 cars
• 101 cars or more

[99] CN submitted that these categories better reflect the efficiencies of moving cars in blocks than the current two sizes of "1 to 59" and "60 or more".

Analysis and determinations

[100] There are a number of potential challenges related to the creation of a larger number of car block categories for movements which require classification or marshalling at a yard.

[101] First, the number of cars arriving at an interchange for a particular shipper is often not the same as the number of cars that will be delivered to the shipper siding, or released at the shipper siding. There are many reasons for this pattern, including:

• railway companies' efficiency-based decisions on how to move traffic (e.g., allowing cars for a particular shipper to build up in their yards so that they require fewer trips to travel to the shipper's facility);
• shippers choosing to send parts of a car block to different destinations, with only some cars needing to be interchanged with the other railway company while other cars remain with the host railway company; and
• delays based on the timing of shippers' cars orders from the railway company (e.g., when a shipper siding may not have the capacity to receive all cars).

[102] Second, specifically with respect to smaller car block categories (under 60 cars), there is a risk, depending on the rates for the different categories, that some shippers may find it advantageous to retain cars at their siding until a car block threshold that achieves an optimum balance between cost savings and the need to get their products to market is reached. This would create uncertainty for the railway companies and make it difficult to plan for crewing needs and consistent delivery plans.

[103] For interswitching movements that are a "hook and haul" operation from the interchange to a shipper siding, there has been an increase in the average number of cars being moved in a single block between shipper sidings and interchanges over the past 10 years. This increase typically reduces the cost per car, since the crew size and the number of locomotives used in the delivery of these larger blocks have remained comparable to those used to move smaller blocks in the past.

[104] The Agency simulated movements of a hypothetical 60 car train for current car block shippers and found that, holding other factors constant (e.g., time to set hand brakes, time to spot cars), the current cost per car of actual larger car block movements of 131 cars are on average 38 percent lower than the costs for moving the same traffic using car blocks of 60 cars.

[105] The implications of the significant cost difference is that absent some differentiation in rates, shippers capable of sending larger (and, thus, more efficient) car blocks will get charged the same rate per car as those shippers sending smaller (and comparatively less efficient) car blocks.

[106] This could discourage investment, as shipper investment in facility upgrades would not yield concomitant interswitching cost savings, resulting in a less efficient national transportation system.

[107] The need to reflect the increasing length of trains and size of car blocks informed the establishment of the 60-car category in 1988. It is appropriate, more than three decades later, to consider establishing one or more additional categories to reflect the continued growth in train and block sizes and to create appropriate incentives for investments that enhance system efficiency.

[108] Based on the foregoing, the Agency determines that the establishment of five different car block categories, as proposed by CN, would add significant complexity and administrative burdens that would not be justified by any associated benefits, and that the evidence and expected efficiency implications do not support the establishment of different car block categories of less than 60 cars, but do support the establishment of one or more car block categories of more than 60 cars.

[109] In light of its analysis, and the input received through the stakeholders consultation process described above, the Agency will explore the possibility of a regulatory amendment to add one or more block categories above the current 60 car block threshold with consultations in 2020. Stakeholders will have the opportunity to review and comment upon any proposed amendment.

Consultation Item 8: Collecting interswitching service units

Description

[110] The Agency currently ensures that the regulated interswitching rates are no less than the variable costs of moving the traffic, as required by subsection 127.1(3) of the CTA, by collecting service units of actual interswitching movements and applying those service units to Agency-approved system average unit costs based on submitted financial and operating data from CN and CP.

[111] Each year, Agency officials visit a sample of interchanges and speak with railway company personnel to gather information on how they serve a sample of interswitching shippers. This sample is selected in order to ensure the collection of service units from all interchanges in Canada within a two year period (although some interchanges may be reviewed annually depending on volume fluctuations). Railway company staff estimate service units based on their experiences of car volume fluctuations.

[112] Consultation participants were asked if there is another way to collect service units to accurately calculate the average variable costs of all interswitching movements.

Consultation feedback

[113] The majority of stakeholders were in agreement with the Agency's current approach to collecting service units.

[114] On the other hand, CN submitted that it is extremely unlikely, if not impossible, for railway operating personnel to accurately estimate the service units of an interswitching movement for a given year. In its submission, CN further notes:

[115] "In addition, operating employees often view productivity and efficiency as a measure of job performance and have a natural (but unintentional) tendency to underestimate timing averages and overestimate car counts on a train."

[116] CN submitted that the anecdotal information currently obtained from railway operating personnel should be replaced by a formula that divides the total number of minutes for an entire assignment by the total number of cars handled – using data from its electronic systems.

[117] CN proposes the Agency take the view that the handling requirements of interswitching traffic are not different from those of all other traffic worked at the same yard and thus, the average service units for entire assignments can be used to develop the regulated interswitching rates.

[118] CP does not recommend that the current service unit methodology be replaced with an approach based only on systems data, stating in is submission:

"Due to the nature of how railway traffic moves, and how the traffic data is recorded, train movement records for "local area operations" (i.e. gathering and switching of traffic) are not as good as that for mainline operations. Therefore, we do not recommend that the current service unit methodology be supplanted with a systems-data only based approach."

Analysis and determinations

[119] With respect to CN's proposal to assume that non-interswitching shippers have the same service units as interswitching shippers, the Agency has observed, through analysis of CN-submitted data during the interswitching service unit collection process over the past two years, that the inclusion of data which is not related to the servicing of interswitching shippers has consistently supported only increases in service units.

[120] One reason for this consistently upward skewing of the calculation of service units stems from the fact that yard or road assignments that carry regulated interswitching traffic and non-regulated interswitching traffic may in some cases, travel to shipper sidings which are located well beyond the interswitching radial limit of 30 km. CN's proposal to assume that all service units for interswitching movements and non-interswitching movements are the same cannot be validated based on data received over the past two years.

[121] The implications of factoring in the historically higher service units of non-interswitching movements in the calculation of the interswitching rates, is that this would capture additional costs for which the railway company has already been compensated through its own charges and tariffs. By including these costs in the interswitching rate, the railway companies would be receiving additional compensation above what has already been charged for non-regulated interswitching movements while interswitching shippers would be paying for additional costs that are not related to their service. This would not be consistent with section 112 of the CTA.

[122] In light of the issues noted above as well as the lack of evidence to support CN's proposal to assume similar service units of non-regulated interswitching movements and regulated interswitching movements, the Agency has determined that it will not replace its current service unit collection process with CN's proposal.

[123] However, the Agency recognizes that the use of electronic data has the potential to improve the accuracy of estimates of service units. Currently, railway operating personnel will estimate, based on their experience, an average number of cars on a train and the average number of minutes required for the handling of those cars. If electronic data on the average number of cars on a train for the entire year is available, it may help guide railway operating personnel in providing a more accurate estimate of the time required to handle those cars. Likewise data recorded for the total running time of a crew assignment may assist railway operating personnel in providing more accurate estimates of the average amount of time a train assignment is delayed in a year.

[124] At the same time, past site visits have revealed that electronically recorded data does not record all relevant details (e.g., whether or not the train assignment is carrying cars for interswitching shippers during its entire trip due to the positioning of AEI recorders, or if an assignment that only serves regulated interswitching shippers has been called to assist another assignment that has been delayed) and therefore it cannot be considered a substitute for the current Agency process.

[125] In light of the above, pursuant to subsection 128.1 of the CTA, the Agency orders CN and CP to submit to the Agency's Chief Strategy Officer the following data for the previous year, no later than March 31^st of each year:

1. Carload data by yard and road assignments in Canada, including the following fields:
   1. Assignment identification number;
   2. Interchange location; and
   3. Date and time of movement.
2. Daily recorded train departure and train arrival events from AEI readers by yard and road assignments in Canada, including the following fields:
   1. Assignment identification number;
   2. Interchange location; and
   3. Date and time of movement.
3. Daily recorded crew start and end times by yard and road assignments in Canada, including the following fields:
   1. Assignment identification number; and
   2. Interchange location.
4. Carload data of regulated and non-regulated interswitching within regulated interswitching limits, received and delivered by the local carrier, by:
   1. Interchange;
   2. Event date;
   3. Event time;
   4. Connecting railway company;
   5. Shipper name;
   6. Consignee name;
   7. GPS coordinates of shipper siding of originating and terminating cars of the local carrier;
   8. Commodity shipped;
   9. Interswitching zone (including railway company traffic that has been interswitched and may be identified in some other manner other than the defined interswitching zones [e.g., CP's "zone 6"], haulage, exchange switching and confidential contracts); and
   10. Interswitching rate received.

Consultation Item 9: Transparency of the regulated interswitching rates and methodology

Description

[126] Consultation participants were asked what measures the railway companies can take to ensure shippers are aware of the applicable rate, such as requiring railway companies to show the regulated interswitching rate as a separate charge on the waybill, and being paid directly by the shipper to the railway company providing the interswitching service.

Consultation feedback

[127] Participants were split on whether to require the interswitching rate to be listed as a separate charge on the waybill. While some shippers were in favour, others preferred that such a practice be on a voluntary basis, or believed the publication of the interswitching rates in Agency determinations is sufficient to understand what they are being charged.

[128] One railway company submitted that it already provides the interswitching rate as a separate line item on request from the shipper.

Analysis and determinations

[129] Currently, the railway companies compensate each other for performing interswitching. In some cases, the Agency has been asked to adjudicate disputes between railway companies with respect to the applicability of certain rates, including car block rates (Decision No. CONF-6-2017).

[130] As noted by some consultation participants, the appearance of a separate line item on waybills showing the regulated interswitching rates would help ensure that the proper rates are being charged to shippers and proper compensation is provided to the railway companies performing regulated interswitching. Moreover, the fact that at least one railway company already voluntarily lists interswitching rates separately upon request suggests that a requirement to do so, in the interests of transparency, would not be unduly onerous.

[131] The Agency will, therefore, explore the option of regulatory amendments to require railway companies to provide shippers, upon request, with a waybill that includes, as a separate item, the interswitching rate settled between the railway companies. Pending such an amendment, the Agency encourages the railway companies to do so, or continue to do so, on a voluntary basis.

ISSUE 2: WHAT ARE THE 2020 REGULATED INTERSWITCHING RATES?

[132] The calculation of the 2020 regulated interswitching rates relies on available data, and uses well-established costing methodologies, some elements of which are used in other Agency determinations. It also reflects relevant methodological determinations, including the 2019 cost of equity determination, the determination of methodology to determine working capital amounts and capital structure for regulatory purposes, Order No. 2015‑R‑91 and the 2011 cost of capital decision.

[133] The Agency determines the 2020 interswitching rates as follows, based on the determinations made after the consultation process and on the application of the methodology outlined in Appendix A to the data.

2020 REGULATED INTERSWITCHING RATES

[134] The data used in the development of the interswitching rates are as follows (Appendix A describes these components in greater detail):

1. Interswitching service units (obtained through conducting annual Agency staff site visits with complementary electronic data from CN);
2. 2017 unit cost for CN and 2014 unit costs for CP for each service unit, including overheads (approved by the Agency on November 29, 2019);
3. Contribution to fixed costs (the data required for this calculation is from CN's 2017 and CP's 2014 annual report to the Minister of Transport and was obtained by the Agency through Transport Canada on March 8, 2019);
4. 2020 CN and CP forecasted component costs (obtained through the Agency's calculation of the 2019-2020 Volume-Related Composite Price Indices in Determination No. R-2019-68);
5. 2020 cost of capital rate for regulated interswitching (data obtained pursuant to Determination No. R-2019-229, the determination of methodology to determine working capital amounts and capital structure for regulatory purposes, and the 2011 cost of capital decision;
6. 2020 CN and CP productivity rate (data from CN and CP annual reports to the Minister of Transport from 1999-2008); and
7. 2018 volumes of interswitched cars (submitted by CN on February 7, 2019 and by CP on February 4, 2019).

[135] The current approach to determining interswitching rates is based on actual service units within each zone. Costs are affected by a range of factors that can include train length, customer siding characteristics, and train yard activities, any of which can vary considerably from one situation to another.

[136] The Agency determines the regulated interswitching rates for 2020 in the following schedule, according to the interswitching distance zones and car block as defined in the Interswitching Regulations:

Schedule of regulated interswitching rates for 2020

Item	Column I - Interswitching distance zone	Column II - Rate per car for interswitching traffic to or from a siding (single car)	Column III - Rate per car for interswitching a car block (60 cars or more)
1	Zone 1	$310	$60
2	Zone 2	$440	$95
3	Zone 3	$305	$60
4	Zone 4A	$280	$50
5	Zone 4B	$280 + $10 per additional KM	$50 + $1.25 per additional KM

[137] Where a siding is located in Zone 4B, the interswitching rate for each car is increased from Zone 4A for each kilometre over 40 km by $10 per car for single car movements or by $1.25 per car for car block movements.

[138] Any required additional kilometres are calculated, by identifying the shortest distance, along the line of track of a terminal carrier, from an interchange to the point of connection with the siding.

[139] For all other zones, the interswitching rate charged by a terminal carrier for traffic originating in, or destined to, an interswitching distance zone set out in column I of the schedule is the interswitching rate set out in column II or III, as the case may be.

[140] For the movement of intermodal containers, the rate per car is based on the number of platforms, which is the most comparable traffic unit for localized intermodal rate determination purposes.

CONCLUSION

[141] The Agency has conducted a full review of its approach to setting regulated interswitching rates. The consultation allowed stakeholders to comment on all aspects of the Interswitching Regulations as well as the Agency's interswitching rates methodology, with the exception of the cost of debt portion of the cost of capital and the use of market values in determining the capital structure/net rail investment which was deemed out of scope in the consultation discussion paper. After a thorough review of the 11 written submissions from participants, as well as its own analysis on the items presented in the consultation discussion paper, the Agency has determined the following:

• Item 1 – Federally regulated short-line railway companies

No change from the current approach.

• Item 2 – Regional and commodity-specific regulated interswitching rates

No change from its current approach.

• Item 3 – Interswitching zones up to 30 km

The Agency will explore the possibility of a regulatory amendment to move to a single zone with consultations in 2020. Stakeholders will have the opportunity to review and comment upon any proposed amendment.

• Item 4 – Long-term investment needs of the railway companies

Long-term investment needs will continue to be considered by providing an allowance for cost of capital and depreciation in the calculation of the interswitching rates. The Agency has adjusted the inputs of its cost rate of common equity model to reflect the long-term investment needs of the railways.

• Item 5 – Contribution to fixed costs

The deadline for submissions for this item is January 20, 2020. Following completion of the consultation process on this item, the Agency will consider whether to adopt an alternative approach.

• Item 6 – Productivity factors

The deadline for submissions for this item is January 20, 2020. Following completion of the consultation process on this item, the Agency will consider whether to adopt an alternative approach.

• Item 7 – Volume discount rate categories

The Agency will explore the possibility of a regulatory amendment to add one or more block categories above the current 60 car block threshold with consultations in 2020. Stakeholders will have the opportunity to review and comment upon any proposed amendment.

• Item 8 – Collecting interswitching service units

Pursuant to subsection 128.1 of the CTA, the Agency orders CN and CP to submit to the Agency's Chief Strategy Officer the following data for the previous year, no later than March 31^st of each year:

1. Carload data by yard and road assignments in Canada, including the following fields:
   1. Assignment identification number;
   2. Interchange location; and
   3. Date and time of movement.
2. Daily recorded train departure and train arrival events from AEI readers by yard and road assignments in Canada, including the following fields:
   1. Assignment identification number;
   2. Interchange location; and
   3. Date and time of movement.
3. Daily recorded crew start and end times by yard and road assignments in Canada, including the following fields:
   1. Assignment identification number; and
   2. Interchange location.
4. Carload data of regulated and non-regulated interswitching within regulated interswitching limits, received and delivered by the local carrier, by:
   1. Interchange;
   2. Event date;
   3. Event time;
   4. Connecting railway company;
   5. Shipper name;
   6. Consignee name;
   7. GPS coordinates of shipper siding of originating and terminating cars of the local carrier;
   8. Commodity shipped;
   9. Interswitching zone (including railway company traffic that has been interswitched and may be identified in some other manner other than the defined interswitching zones [e.g., CP's "zone 6"], haulage, exchange switching and confidential contracts); and
   10. Interswitching rate received.

• Item 9 – Transparency of the regulated interswitching rates and methodology

The Agency will explore the possibility of a regulatory amendment to require railway companies to provide shippers, upon request, with a waybill that includes, as a separate item, the interswitching rate settled between the railway companies. Pending such an amendment, the Agency encourages the railway companies to do so, or continue to do so, on a voluntary basis.

Appendix A to Determination No. R-2019-230 - The Canadian Transportation Agency's methodology for calculating regulated interswitching rates

The 2020 interswitching rates calculated by the Agency are based on a methodology that captures the economic costs of providing interswitching services. These economic costs include explicit costs such as operating costs, including the depreciation of assets, as well as the implicit costs associated with the returns on investment in those assets. The returns on investment are a weighted average of the returns on debt and the returns on equity, and are determined by the Agency according to its cost of capital methodology based on Decision No. 425-R-2011, Determination No. R-2017-198 and Determination No. R-2019-229.

For explanatory purposes, the Agency has calculated interswitching rates based on the following simplified formula:

Interswitching rates$(A\times B)\times \genfrac{}{}{0.1ex}{}{C}{D}$

Where:

• A is interswitching variable costs
• B is contribution to fixed costs
• C is a factor to account for price inflation, and
• D is a productivity adjustment factor

Interswitching variable costs$\left(A\right)=(\genfrac{}{}{0.1ex}{}{E}{F}\times G)\times H$

Where:

• E is system costs
• F is system service units
• G is variability of costs, and
• H is interswitching service units

The expression $(\genfrac{}{}{0.1ex}{}{E}{F}\times G)$ is referred to below as the unit cost for each service unit, including overhead.

A more detailed explanation can be found in Appendix B. In the following sections each of these variables is described in further detail.

1.0 Interswitching service units

Every year, Agency staff visit interchange locations across Canada to meet with CN and CP yard supervisors to review interswitching operations at each location. For each interchange location, all of the steps required to provide interswitching services for the major interswitching shippers in each zone and to estimate the service units involved in each step are verified. Agency staff visits interchanges of different sizes, volumes and characteristics to capture the unique operations of interchanges across Canada. Over a two year period, Agency staff will update service units from all interchanges that are providing regulated interswitching service.

The service unit estimates for single-car rates and block train rates are described in further detail in sections 1.1 and 1.2 respectively.

1.1 Single-car service units

There are two different types of interswitching operations for single-car movements (interswitching 59 cars or less):

• Yard switching; and,
• Road switching.

Under yard switching, a yard crew will pick up the interchange cars at the interchange and will bring them back to the yard for classification (sorting) and marshalling (placing cars in order for delivery). Cars are then delivered to the customer. On the return trip, the cars return to the yard where they are classified and marshalled again before returning to the interchange.

Road switching occurs in locations where switching in a yard is not possible, or in situations where only minimal classification or marshalling is required. Road switching involves either a line-haul train or a road crew picking up cars at the interchange. The cars may or may not be classified or marshalled at the interchange before being delivered to the customer. On the return trip, the cars are brought back to the interchange with little or no classification or marshalling.

Service unit estimates for road switching include:

• Gross ton-miles – which drive costs, such as track maintenance;
• Car-miles – which drive costs, such as car inspection;
• Train-miles – which drive costs, such as signals maintenance;
• Carloads – which drive costs, such as marketing and sales;
• Fuel consumed;
• Crew wages; and
• Diesel unit miles – which drive costs such as those for locomotive maintenance and investment.

Yard switching is more complex in terms of classification and marshalling. In most major yards, there would be a dedicated yard assignment with crews classifying or marshalling hundreds of cars. Since tracking specific cars and mileage at the yard is not possible in all circumstances, mileage at the yard is simplified as yard switching minutes.

Yard switching minutes captures the amount of time that it takes to service a customer, including the process of classification and marshalling. The associated unit cost for this service unit captures all of the expenses incurred for yard switching, including crew wages, locomotive fuel expenses, locomotive maintenance expenses, and track and roadway maintenance.

1.2 Block train service units

Service unit estimates for block trains for the development of rates includes:

• Gross ton-miles;
• Car-miles;
• Train-miles;
• Carloads;
• Fuel consumed;
• Crew wages; and
• Diesel unit miles.

Block movements involve a "hook and haul" operation where blocks of cars are hooked on at the interchange and delivered directly to the customer. On the return trip, cars are hooked and delivered directly to the customer. However, additional handling either at the interchange or at the shipper siding may be required. If, for example, the siding or the interchange is not long enough to handle the block, the railway must perform one or multiple cuts to the block in order to complete the movement. Where additional handling is identified during site visits, the costs are reflected in the final interswitching rate.

2.0 Unit cost for each service unit, including overheads

Derived service units are multiplied by their corresponding unit cost to obtain a cost per car for each shipper in each zone. CN and CP submit their detailed financial and operating data to the Agency each year based on the Agency's Uniform Classification of Accounts And Related Railway Records (2014) (UCA). The UCA defines the method of accounting for railway companies subject to regulation by the Agency. It provides accounting instructions and the framework of accounts for the rail operations of such railway companies. It also provides instructions for recording operating statistics and defines the categories for these data.

The Agency approves each railway company's cost to produce a unit of defined railway activities such as: track and roadway maintenance, signals investment, etc., based on system expenses for each activity and the observed system service units.

The costing model developed by the Agency then determines the total variable cost, including direct activities as well as indirect supervisory, management, and administration activities, to produce a unit cost for each service unit. These indirect costs are referred to as overhead, as they do not relate to service units directly, but instead relate to the direct costs of those service units. (e.g. When a train moves one gross ton mile it will incur track maintenance labour costs directly, as well as indirect costs or overhead for the management of, and equipment used by track maintenance labourers).

For the 2020 interswitching rates, the Agency has used the 2017 CN and 2014 CP unit costs. An index factor (using indices from the volume-related composite price index) and productivity factor is applied (based on the Agency's current productivity model ^{Footnote 1} ) in order to estimate costs in 2020. The Agency applied an average productivity value of 96.80%.. This is based on the Agency's calculation of the average total factor productivity growth of each railway company over this period.

The table in Appendix C lists all of the variable cost accounts (as defined by the UCA) that factor into the 2020 interswitching rates.

3.0 volumes of interswiched cars

The volumes of interswitched cars are required to calculate a weighted system average of costs starting at each interchange, then for each zone, and finally for CN and CP, to come up with the aggregated weighted system average interswitching costs. The hypothetical example below illustrates the weighting that is applied:

1. For each interchange, the costs per car for each shipper within a zone are weighted by the carloads interswitched to produce an average cost per interchange.

   Table 1: Calculating costs for Vancouver zone 1 interswitching for railway ABC

   Vancouver zone 1 for railway ABC Period	2017 carloads Old Database (A)	% weight (share of traffic)	Variable cost per car	Weighted zone 1 cost
   Shipper A	800	80%	$100.00	$80.00
   Shipper B	200	20%	$80.00	$16.00
   Vancouver zone 1 cost per car for railway ABC	1,000	100%	-	$96.00

2. For each zone, the average costs for each interchange are then weighted by the traffic interswitched to produce an average cost per car for each zone. For example, the results from Table 1, are found in the first row below.

   Table 2: Calculating zone 1 Interswitching costs for railway ABC

   Zone 1 for railway ABC Period	2017 carloads Old Database (A)	% weight (share of traffic)	Variable cost per car	Weighted zone 1 cost
   Vancouver	1,000	62.50%	$96.00	$60.00
   Toronto	600	37.50%	$150.00	$56.25
   Zone 1 cost per car for railway ABC	1,600	100%	-	$116.25

3. The costs for each railway in each zone are then averaged, based on the interswitching traffic of each railway company in that particular zone, to generate a system average variable cost measure per car for each of the four distance zones. For example, the results from Table 2, are found in the first row of Table 3.

   Table 3: Calculating zone 1 Interswitching costs

   Zone 1 Period	2017 carloads Old Database (A)	% weight (share of traffic)	Variable cost per car	Weighted zone 1 cost
   Railway ABC	1,600	44.44%	$116.25	$51.66
   Railway XYZ	2,000	55.56%	$125.00	$69.45
   Zone 1 cost per car	3,600	100%	-	$121.11

The Zone 1 variable cost per car in this example is $121.11.

4.0 Contribution to fixed costs

Finally, a system average contribution to fixed costs is added to the variable costs for each zone to arrive at the interswitching rate for the zone. Fixed costs include items that are completely non variable, such as the maintenance of bridges and snow removal. The costs related to the maintenance of bridges and snow removal do not vary with railway traffic volumes, but are caused by weather and age.

The Agency calculates the system average contribution to fixed costs separately for each railway company. The amount of fixed costs is calculated as the total system cost (which is derived from financial reports provided to the Agency) less the system variable cost (calculated by the Agency costing model). The system contribution to fixed costs is the amount of fixed costs expressed as a proportion of the system variable costs.

For 2020, the average contribution to fixed costs is 59.07%, compared to the 2019 value of 60.17% as set out in Determination No. R-2018-254.

Appendix B to Determination No. R-2019-230 - Detailed interswitching calculation

Variable costs per shipper

At year $\left(t0\right)$

$V{C}^{t0}(s,i,z,r)={\displaystyle \sum _j}\genfrac{}{}{0.1ex}{}{C_j^{t0}}{y_j\left(r\right)}{v}_j\left(r\right)y_j^{*}(s,i,z,r)$

• s : is a shipper;
• i : is an interchange;
• z : is a zone ;
• r : is a railway company;
• $C_j^{t0}$ is the cost for a specific expense category j for a railway r at time t0;
• $y_j\left(r\right)$ is a system service unit that drives expenses of category j;
• $v_j\left(r\right)$ is the variability factor for the expense category j;
• $y_j^{*}(s,i,z,r)$ is the interswitching service unit that corresponds to category j, it is specific to a shipper (s) that belongs to a specific interchange (i) in a specific zone (z). In addition, the shipper (s) is a client of a railway (r).

To obtain variable costs at the year of the decision (t), inflation factors $(1+p_j)$ are applied to each cost categories j as follows:

$V{C}^t(s,i,z,r)={\displaystyle \sum _j}\genfrac{}{}{0.1ex}{}{C_j^{t0}\left(r\right)\times (1+p_j)}{y_j\left(r\right)}{v}_j\left(r\right)y_j^{*}(s,i,z,r)$

Inflation factors $(1+p_j)$ that are specific to each expense category j are inserted into the above formula. These inflation factors are developed each year by the Agency.

Variable costs per shipper

Variable costs per shipper are then averaged over the interchange they belong to and the railway that was used. Shippers, interchanges and railways are weighted based on their relative share of total carloads.

$VC\left(z\right)={\displaystyle \sum _{rϵz}}\left[{\displaystyle \sum _{iϵz}}\left({\displaystyle \sum _{sϵi}}V{C}^t\right(s,i,z,r\left){\omega }_s\right){\omega }_i\right]{\omega }_r$

 

Weights:

 

${\chi }_s$ is the volume of cars (measured with carloads) related to a specific shipper (s);

 

${\omega }_s=\genfrac{}{}{0.1ex}{}{{\chi }_s}{{\displaystyle \sum _{sϵi}}{\chi }_s}$ is the weight of each shipper (s) in a specific interchange (i);

 

${\omega }_i=\genfrac{}{}{0.1ex}{}{{\displaystyle \sum _{sϵi}}{\chi }_s}{{\displaystyle \sum _{iϵz}}{\displaystyle \sum _{sϵi}}{\chi }_s}$ is the weight of each interchange (i) in a specific zone (z);

 

${\omega }_r=\genfrac{}{}{0.1ex}{}{{\displaystyle \sum _{iϵz}}{\displaystyle \sum _{sϵi}}{\chi }_s}{{\displaystyle \sum _{rϵz}}{\displaystyle \sum _{iϵz}}{\displaystyle \sum _{sϵi}}{\chi }_s}$ is the weight of each railway (r) in a specific zone (z).

 

Section 3.0 (Volume of interswitched cars) of Appendix A provides examples of how the weighted averages are calculated.

 

Final rates per zone:

 

The final rates per zone are obtained by applying a contribution to fixed costs ($Contr$) and a productivity factor ($1+g$) to each variable cost per zone $VC\left(z\right)$

 

$R\left(z\right)=\genfrac{}{}{0.1ex}{}{VC\left(z\right)Contr}{1+g}$

 

Appendix C to Determination No. R-2019-230 - Accounts from the uniform classifcation of accounts (UCA) that factor into the 2020 interswitching rates

 

Cost complex	UCA account number	Description of account
102cx	102	Grading
102cx	103	Rail
102cx	105	Ties
102cx	106	Paved Concrete Trackbed (PACT System)
102cx	107	Other Track Material
102cx	109	Ballast
102cx	111	Track Laying and Surfacing
102cx	123	Public Improvements
102cx	125	Other Right-of-Way Property
102cx	139	Roadway Buildings
102cx	141	Roadway Building Machines and Moveable Equipment
131cx	131	Office and Common Buildings
131cx	133	Office and Common Buildings Moveable Equipment and Machinery
143	143	Equipment Repair Shops
145	145	Shop Machinery and Moveable Equipment
149	149	Signals
151	151	Rail Communication Systems
163	163	Fuel Stations
171	171	Locomotives
183	183	Roadway Machines
187cx	187	Work Equipment
187cx	189	Other Non-Revenue Rolling Stock
195	195	Miscellaneous Equipment
400cx	400	Administration
400cx	463	Injuries to Railway Employees: Maintenance of Way and Structures
400cx	479	Other Way and Structure Expense
401cx	401	Track and Roadway Maintenance
401cx	403	Rails – Maintenance
401cx	405	Ties - Maintenance
401cx	406	Paved Concrete Trackbed - Maintenance
401cx	407	Other Track Material - Maintenance
401cx	409	Ballast - Maintenance
401cx	419	Tools and Supplies
401cx	423	Crossing Maintenance
401cx	435	Roadway Buildings - Maintenance
401cx	461	Vehicles
431	431	Office and Common Buildings - Maintenance
437	437	Equipment Repair Shops - Maintenance
441cx	441	Track Signals - Maintenance
441cx	442	Hump Yard Devices - Maintenance
441cx	443	Crossing Protection - Maintenance
441cx	444	Other Signal Devices - Maintenance
441cx	671	Dispatching
441cx	673	Line Operators and Signal Operation
445cx	445	Rail Communication Systems - Maintenance
445cx	701	Rail Communication System Operation
457	457	Fuel Stations - Maintenance
500cx	500	Administration
500cx	571	Injuries to Railway Employees: Equipment Maintenance
500cx	579	Other Equipment Expense
501	501	Locomotive Maintenance
503	503	Locomotive Servicing
517	517	Lubrication, Inspection and Coupling Hose - Freight Cars
537	537	Work Equipment - Maintenance
539	539	Roadway machines - Maintenance
563cx	563	Work Equipment and Roadway Machine Rents - Dr.
563cx	564	Work Equipment and Roadway Machine Rents - Cr.
573	573	Shop Machinery - Maintenance
600cx	600	Administration
600cx	709	Building Operating Expenses
600cx	711	Other Rail Operations
600cx	743	Injuries to Railway Employees: Rail Operations (Yard and Train)
600cx	745	Clearing Wrecks
600cx	747	Third Party Injuries and Damage to Property (excluding Freight)
600cx	751	Miscellaneous Operating Expense
600cx	607	Train Crews - Freight
619	619	Train Locomotive Diesel Fuel - Freight
631	631	Train Other Expenses - Freight
635	635	Crew Accommodation
637	637	Crew Transportation
641cx	641	Controlling Yard Operations
641cx	643	Yard and Terminal Clerical
645cx	645	Yard Engine Crews
645cx	647	Yard Train Crews
645cx	649	Operating Yard Devices
645cx	655	Yard Other Expense
651	651	Yard Locomotive Diesel Fuel
681cx	681	Freight Customer Service Centres
681cx	703	Weighing, Inspection and Demurrage Bureaus
741	741	Loss and Damage: Freight Train Accidents
749	749	Loss and Damage - Other Accidents
800cx	800	General Administration
800cx	801	Management Services
800cx	809	Accounting and Finance
800cx	811	Personnel and Public Relations
800cx	817	Other Administrative Expenses
800cx	861	Injuries to Railway Employees: General (and unallocated)
803	803	Marketing and Sales - Carload Freight
813	813	Environmental Remediation Expense
819	819	Employee Incentive Compensation
821	821	Pension Costs
823cx	823	Health and Welfare
823cx	825	Canada Pension Plan
823cx	827	Quebec Pension Plan
823cx	829	Employment Insurance
831	831	Other Employee Benefits
835	835	Labour Restructuring Expense
843	843	Provincial Sales Taxes
845cx	845	Municipal Property Taxes
845cx	849	Other Taxes
851	851	Insurance
902cx	902	Grading - Amortization
902cx	903	Rail - Amortization
902cx	905	Ties - Amortization
902cx	906	Paved Concrete Trackbed - Amortization
902cx	907	Other Track Material - Amortization
902cx	909	Ballast - Amortization
902cx	911	Track Laying and Surfacing - Amortization
902cx	923	Public Improvements - Amortization
902cx	925	Other Right-of-Way Property - Amortization
902cx	939	Roadway Buildings - Amortization
902cx	941	Roadway Building Machines and Moveable Equipment - Amortization
931cx	931	Office and Common Buildings - Amortization
931cx	933	Office and Common Buildings Moveable Equipment and Machinery - Amortization
943	943	Equipment Repair Shops - Amortization
945	945	Shop Machinery and Moveable Equipment - Amortization
949	949	Signals - Amortization
951	951	Rail Communication Systems - Amortization
963	963	Fuel Stations - Amortization
971	971	Locomotives - Amortization
983	983	Roadway Machines - Amortization
987cx	987	Work Equipment - Amortization
987cx	989	Other Non-Revenue Rolling Stock - Amortization
995	995	Miscellaneous Equipment - Amortization