Determination No. R-2020-68
DETERMINATION by the Canadian Transportation Agency (Agency) regarding the Canadian National Railway Company’s (CN) application for an adjustment to the 2019–2020 Volume‑Related Composite Price Index (VRCPI) pursuant to paragraph 151(4)(c) of the Canada Transportation Act, S.C., 1996, c. 10, as amended (CTA).
SUMMARY
[1] The Agency set the 2019–2020 VRCPI in Determination No. R-2019-68, issued on April 30, 2019, and subsequently varied it in Determination No. R-2019-221, issued on November 26, 2019.
[2] On February 3, 2020, CN filed an application requesting that its VRCPI be adjusted, pursuant to paragraph 151(4)(c) of the CTA, to reflect costs it incurred for acquiring hopper cars, pursuant to 12 lease arrangements, and an additional amount for the maintenance of hopper cars it obtains from its U.S. subsidiary companies.
[3] This determination addresses the following issues:
- Should the Agency make an adjustment, pursuant to paragraph 151(4)(c) of the CTA, to existing short-term lease expenses that are currently used to calculate price changes for the leased car component of the VRCPI as a car acquisition cost?
- Should the Agency recognize the expenses incurred by CN in acquiring cars by way of revised contracts entered into with certain customers?
- Should the Agency make an adjustment, pursuant to paragraph 151(4)(c), to the 2019-2020 VRCPI to reflect additional maintenance expenses for CN’s U.S. subsidiary cars?
[4] For the reasons set out below, the Agency adjusts CN’s 2019‑2020 VRCPI upwards from the value set in Determination No. R-2019-221 of 1.4384 to 1.4498.
[5] Pursuant to subsection 151(6) of the CTA, the Agency makes the adjustments to CN’s 2019–2020 VRCPI effective as of August 1, 2019.
[6] The Agency finds that an adjustment to the 2019–2020 VRCPI pursuant to paragraph 151(4)(c) of the CTA to add an additional amount for the maintenance costs for CN’s U.S. subsidiary hopper cars that are used in moving regulated grain is not warranted in the circumstances.
THE LAW
[7] Paragraph 151(4)(c) of the CTA states:
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.
[8] Subsection 151(6) of the CTA states:
Despite subsection (5), the Agency shall make the adjustments referred to in paragraph (4)(c) at any time that it considers appropriate and determine the date when the adjusted index takes effect.
ANALYSIS AND DETERMINATIONS
Should the Agency make an adjustment, pursuant to paragraph 151(4)(c) of the CTA, to existing short-term lease expenses that are currently used to calculate price changes for the leased car component of the VRCPI as a car acquisition cost?
[9] Five of the twelve short-term lease agreements for hopper cars, which were submitted for consideration in support of an adjustment, were previously used in calculating the leased car index for the 2019–2020 VRCPI.
[10] The leased car index component of the VRCPI captures changes in the price of leasing hopper cars. The price change is calculated by comparing the prices reflected in existing short-term lease agreements entered into by CN from one year to the next. The five identified short-term lease agreements were used for this purpose.
[11] CN is requesting that the Agency re-allocate the expenses for these five short-term lease agreements from the leased car index to an adjustment under paragraph 151(4)(c) of the CTA. As a result, rather than being used to inflate the amount embedded in the base year through price changes, the leasing costs would be recognized as an expense under paragraph 151(4)(c) of the CTA.
[12] The Agency finds that the proposed change is reasonable given that CN has entered into the short-term lease agreements with third-party lessors to obtain hopper cars for use in moving regulated grain, and paragraph 151(4)(c) of the CTA allows for an adjustment to recognize these expenses. As a result, and in order to avoid double counting of expenses, the Agency adjusts the 2019–2020 leased car index to negate the price change previously afforded to CN in Determination No. R-2019-221, and re‑allocates the expenses by adjusting the car acquisition weight in the cost component section of the VRCPI.
[13] The net effect of this portion of the adjustment on the 2020–2021 VRCPI will be combined and quantified with the adjustment below.
Should the Agency recognize the expenses incurred by CN in acquiring cars by way of revised contracts entered with certain customers?
[14] The remaining 7 of the 12 short-term lease agreements for hopper cars submitted in support of an adjustment are revised contracts, or car supply agreements, related to cars CN obtains from certain customers for use in its integrated fleet in exchange for monthly lease payments and a guaranteed car supply.
[15] The Agency notes that prior to the existence of the car supply agreements, CN obtained these cars as part of its Fleet Integration Program (FIP) wherein customers provided CN with a predetermined number of hopper cars to be integrated into its general grain fleet in exchange for a volume commitment rebate (used to reduce revenues under the maximum revenue entitlement) [MRE] and guaranteed car spots. CN has indicated that the FIP, as it existed, has been phased out and replaced with car supply agreements and that rebates are no longer offered. CN has provided copies of the agreements.
[16] The Agency finds that an adjustment pursuant to paragraph 151(4)(c) of the CTA is warranted in this instance in that CN has obtained hopper cars for use in moving regulated grain. The Agency notes that the agreements were entered into prior to, or at the beginning of, the 2019–2020 crop year, such that CN has incurred the costs for the acquisition of the cars for the entire crop year.
[17] In light of the above, the Agency, pursuant to paragraph 151(4)(c) of the CTA, adjusts CN’s 2019–2020 VRCPI in Determination No. R-2019-221 from 1.4384 to 1.4498 and, pursuant to subsection 151(6) of the CTA, makes this adjustment effective as of August 1, 2019.
Should the Agency make an adjustment to the 2019–2020 VRCPI to reflect additional maintenance expenses for CN’s U.S. subsidiary cars?
[18] CN is seeking an adjustment to reflect additional costs associated with maintaining the cars it obtains from its U.S. subsidiaries for use in moving western grain. CN is claiming that when the Agency calculated these maintenance amounts in Determination No. R‑2019-68 (varied in Determination No. R-2019-221), the Agency understated the amount CN was due when it based the costs allotted for the maintenance of the U.S. subsidiary cars on amounts embedded within the MRE. CN provides an analysis that shows that the maintenance costs it incurs are higher than what is embedded in the MRE.
[19] However, contrary to CN’s claim, the Agency does not base the maintenance amounts on amounts embedded within the MRE, but rather on full service lease rates submitted by CN that are negotiated on current commercially agreed upon terms that include compensation for the maintenance of the cars it obtains from its U.S. subsidiary companies. As set out in Determination No. 304-R-2015, the maintenance amounts for the cars obtained from its U.S. subsidiary companies are based on the average leased car rate used in developing the leased car index component of the VRCPI.
[20] The Agency notes that the leases used in calculating the average leased car rate for the 2019-2020 VRCPI were all full service leases, meaning that they include, among other things, the cost of maintaining the cars.
[21] In light of the above, the Agency finds that an adjustment to the 2019–2020 VRCPI, pursuant to paragraph 151(4)(c) of the CTA, to add an additional amount for the maintenance costs for CN’s U.S. subsidiary hopper cars for use in moving regulated grain is not warranted in the circumstances.
CONCLUSION
[22] The Agency adjusts CN’s 2019–2020 VRCPI upwards from the value set in Determination No. R-2019-221 of 1.4384 to 1.4498.
[23] Pursuant to subsection 151(6) of the CTA, the Agency makes the adjustments to CN’s 2019–2020 VRCPI effective as of August 1, 2019.
[24] An adjustment to the 2019–2020 VRCPI to add an additional amount for the maintenance costs for CN’s U.S. subsidiary hopper cars that are used in moving regulated grain is not warranted in the circumstances.
Member(s)
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