Determination No. R-2021-161

SUMMARY

[1] The Agency finds that there has been a change in facts pertaining to Determination No. R‑2020-194 which established the 2021 interswitching rates (2021 interswitching rates determination) and that this change warrants a review and variance of that determination. Accordingly, the Agency varies the interswitching rates for 2021, effective prospectively from the date of this Determination.

[2] The Agency calls for comments on whether the 2022 interswitching rates should contain an adjustment to account for the Agency’s re-determination of the Canadian Pacific Railway Company’s (CP) cost of capital rate for the 2020-2021 crop year, which was required by order of the Federal Court of Appeal (FCA). The Agency specifically seeks comments on whether such an adjustment will ensure that interswitching rates set by the Agency are commercially fair and reasonable to all parties and that they account for the long-term investment needs of railways, as required by the CTA.

BACKGROUND

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

[4] In developing the interswitching rates, the Agency must ensure that they are commercially fair and reasonable to all parties as per section 112 of the CTA. The CTA, in paragraph 127.1(2)(b), also requires the Agency to consider any long-term investment needed in the railways.

[5] In Determination No. R-2018-254, the Agency explained that it accounts for long-term investment needs by including the cost of capital and depreciation of the railway company’s assets in the interswitching rates.

[6] The Agency makes three separate cost of capital determinations annually:

1. Cost of capital rate for the transportation of western grain, to be used in the composite price index calculation;
2. Cost of capital rate for the development of interswitching costs and rates; and
3. Cost of capital rate to be used for regulatory purposes other than for calculating the western grain composite price index and establishing regulated interswitching rates.

[7] As stated in Decision No. 425-R-2011 and reiterated in Determination No. R-2019-229, the cost of capital rates that are developed for interswitching rates are based on the annual determinations of Canadian National Railway Company’s (CN) and CP’s cost of capital rate for the transportation of western grain.

[8] Using the cost of capital rates determined for the 2020-2021 crop year, the Agency calculated the 2021 cost of capital rates for interswitching to be 4.64 percent for CN, and 4.60 percent for CP. These rates were in turn used to calculate the 2021 regulated interswitching rates, with an adjustment to the risk-free rates, as set by the Agency in the 2021 interswitching rates determination, issued on November 30, 2020.

[9] On April 9, 2021, in Canadian Pacific Railway Company v Canada (Transportation Agency), 2021 FCA 69, the FCA quashed the Agency’s determinations of CP’s cost of capital rate and CP’s Volume-Related Composite Price Index (VRCPI), which incorporates the cost of capital rate, for the 2020-2021 crop year. The FCA returned the matters to the Agency with the direction that CP’s cost of capital rate be determined on the same basis as it was for the 2019-2020 crop year and that its VRCPI be re-determined accordingly.

[10] On April 28, 2021, the Agency re-determined CP’s cost of capital rate with an amended capital structure in Decision No. LET-R-33-2021 and CP’s VRCPI on April 29, 2021, in Determination No. R-2021-63.

[11] On August 9, 2021, the Agency notified stakeholders that because an input into the 2021 interswitching rates calculation—namely CP’s cost of capital rate for the 2020-2021 crop year—had been re-determined as required by the FCA, the 2021 interswitching rates determination no longer accurately reflected that input. The Agency sought comments on whether this constitutes a change in facts or circumstances warranting a variance of the 2021 interswitching rates, pursuant to section 32 of the CTA.

THE LAW

[12] Section 32 of the CTA states:

The Agency may review, rescind or vary any decision or order made by it or may re-hear any application before deciding it if, in the opinion of the Agency, since the decision or order or the hearing of the application, there has been a change in the facts or circumstances pertaining to the decision, order or hearing.

[13] The Agency must first determine whether there has been a change in facts or circumstances pertaining to the decision. If no such change exists, the decision stands. If, however, the Agency finds that there has been a change in the facts or circumstances since the issuance of the decision, it must then determine whether such a change is sufficient to warrant a review, rescission, or variance of the decision.

SUBMISSIONS IN RESPONSE TO THE AGENCY’S CALL FOR COMMENTS

[14] In response to its August 9, 2021, call for comments, the Agency received submissions from CN and CP.

[15] CN indicates that it firmly believes that the FCA decision is a change in facts or circumstances that could not have been foreseen by the Agency when it made the interswitching rates determination for the 2021 year. In CN’s view, the Agency can use its power under section 32 of the CTA to re-determine the interswitching rates for 2021 using CP’s re-determined cost of capital rate for 2020-2021.

[16] With respect to the timing of implementation of the re-determined interswitching rates, CN submits that the variance should be effective as of January 1, 2021. CN states that after re-determining CP’s cost of capital rate for 2020-2021, the Agency issued Determination No. R-2021-63, which revised CP’s VRCPI for the 2020-2021 year retroactively to August 1, 2020. CN submits that it would be inconsistent for the Agency to revise the interswitching rates only prospectively, when it re-determine CP’s VRCPI retroactively.

[17] CP takes no position on whether a review and variance of the interswitching rates for 2021 is warranted.

[18] However, CP submits that any re-determination would represent a substantive change and should only be applied on a prospective basis, with reasonable notice of no less than 30 days from the Agency’s decision. CP indicates that this approach is in keeping with the principle of natural justice, regulatory due process and the Agency’s own guidance, for instance in Decision No. 305-R-2015. CP states that it and its shippers have organized their affairs based on the current regulated interswitching rates and that shipments already made based on the current rates cannot be undone, making it inappropriate to make any changes retroactively. 

ANALYSIS AND DETERMINATIONS

[19] The Agency finds that there has been a change in facts pertaining to Determination No. R‑2020-194 since its issuance. One of the inputs the Agency used to establish the 2021 interswitching rates was the CP capital structure embedded in CP’s cost of capital rate for interswitching. This input originated from the CP cost of capital rate determination for the 2020-2021 crop year, which was quashed by order of the FCA and subsequently re-determined by the Agency. As a consequence, an input into the 2021 interswitching rates determination has changed.

[20] The Agency is of the opinion that this change in facts warrants a review and variance of the 2021 interswitching rates determination. The variance is warranted in order to ensure the accuracy of inputs used in determining interswitching rates. In this case, the determination must be varied to reflect CP’s capital structure as re-determined by the Agency in Decision No. LET-R-33-2021.

[21] Recalculating the 2021 interswitching rates to account for the re-determined CP cost of capital rate would mean using a cost of capital rate for CP of 6.64 percent  instead of the 4.60 percent that was approved in the 2021 interswitching rates determination.

[22] Using an updated cost of capital rate for CP of 6.64 percent, the re-determined interswitching rates are seen in the table below:

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	$305	$80
2	Zone 2	$425	$125
3	Zone 3	$315	$70
4	Zone 4A	$270	$100
5	Zone 4B	$270 + $8.50 per additional km	$100 + $1.05 per additional km

[23] 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 $8.50 per car for single-car movements or by $1.05 per car for car-block movements. 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.

[24] 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.

[25] 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.

[26] The Agency has considered CN and CP’s comments with respect to whether the varied rates should be applied retroactively to January 1, 2021. CN submits that it would be inconsistent to apply revised interswitching rates prospectively when the Agency applied its re-determination of CP’s VRCPI retroactively to the beginning of the 2020-2021 crop year. However, the FCA quashed the Agency’s determination of CP’s VRCPI, such that there was in effect no VRCPI determination for the 2020-2021 crop year. In that context, the Agency’s re-determination of CP’s VRCPI necessarily applied from the beginning of the crop year. By contrast, the FCA did not quash the 2021 interswitching rates determination; instead, the Agency is varying these rates pursuant to its own statutory powers and must consider the timing of implementation of its decision in that context.

[27] The Agency concludes that the varied interswitching rates will apply prospectively. The Agency acknowledges that transactions involving various parties have already been completed using the rates set out in the 2021 interswitching rates determination. To minimize commercial complexity, the Agency will not order that the rates associated with these completed transactions be recalculated using the varied rates.

[28] The Agency further finds that the varied rates should take effect as of the date of this Determination. The Agency provided notice to the industry on August 9, 2021, that it was considering whether to review and vary its 2021 interswitching rates. In that notice, the Agency explicitly set out what the rates would be if varied. The Agency received no objections to its proposal to use section 32 of the CTA in this case, nor to the varied rates that it proposed.

[29] Accordingly, the Agency does not consider it necessary to delay the implementation of this Determination.

CALL FOR COMMENTS ON A POSSIBLE ADJUSTMENT TO THE 2022 INTERSWITCHING RATES METHODOLOGY

[30] While the Agency has found that stakeholders should not be required to re-open completed transactions to apply varied rates, the Agency recognizes that the rates associated with these transactions included an input that was quashed by the FCA and re‑determined by the Agency. The Agency is seeking comments on whether it has an obligation to account for the period during which these rates were in force in order to ensure respect for its methodological approach and statutory obligations related to interswitching.

[31] The Agency must ensure that regulated interswitching rates adhere to the interswitching methodology as described in paragraph 18 of Determination No. R-2018-254. This methodology aims to capture the economic costs of providing interswitching services, including both the accounting costs and the implicit costs of a railway. The Agency indicated in that Determination that “[c]ompensating railway companies with the full economic costs of their operations supports their long-term economic viability in the market.”

[32] The Agency must also ensure that interswitching rates as determined by the Agency are commercially fair and reasonable to all parties as required by section 112 of the CTA, and that it considers the long-term investment needs of the railway companies as required by paragraph 127.1(2)(b) of the CTA.

[33] The Agency seeks comments on whether a methodological adjustment would be appropriate to account for instances such as this, where an input into the interswitching rates determination changes during the course of the year. Specifically, the Agency seeks comments on whether to include an adjustment to the methodology used to calculate the 2022 interswitching rates to account for the change in CP’s cost of capital rate that occurred during the course of 2021 and that is not captured by the period during which the varied rates for 2021 will apply.

[34] In responding to this call for comments, the Agency asks that stakeholders address whether including this adjustment in the 2022 interswitching rates determination would ensure compliance with the methodological approach and statutory obligations that relate to interswitching rates, while providing adequate notice to stakeholders of the adjustment.

ORDER

[35] Pursuant to section 32 of the CTA, the Agency varies the 2021 regulated interswitching rates to the following, effective prospectively as of the date of this Determination:

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	$305	$80
2	Zone 2	$425	$125
3	Zone 3	$315	$70
4	Zone 4A	$270	$100
5	Zone 4B	$270 + $8.50 per additional km	$100 + $1.05 per additional km

[36] The Agency calls for comments on the following question:

In light of the Agency’s statutory obligation to ensure commercially fair and reasonable rates to all parties and to account for the long-term investment needs of railways, should the Agency make an adjustment to the 2022 interswitching rates calculation to account for the change in CP’s cost of capital rate that occurred in 2021 and that is not captured by the varied 2021 interswitching rates?

Stakeholders have until November 5, 2021, to provide comments.