Determination No. R-2021-176

December 1, 2021

DETERMINATION by the Canadian Transportation Agency (Agency) of the 2022 regulated interswitching rates pursuant to Part III, Division IV of the Canada Transportation Act, SC 1996, c 10 (CTA).

Case number: 
20-11096

SUMMARY

[1] This is the Agency’s determination of the 2022 regulated interswitching rates pursuant to Part III, Division IV of the CTA.

[2] The methodology used by the Agency in the determination of the 2022 interswitching rates is presented in Appendix A.

[3] The Agency determines the regulated interswitching rates for 2022 under subsection 127.1(1) of the CTA as follows:

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 $335 $90
2 Zone 2 $460 $140
3 Zone 3 $415 $75
4 Zone 4A $475 $95
5 Zone 4B $475 + $10.75 per additional km $95 + $0.98 per additional km

BACKGROUND

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

[5] Prior to amendments made under the Transportation Modernization Act, SC 2018, c 10, updates to interswitching rates were done by regulation, which resulted in a lag time between updates. Following these amendments, the Agency must determine the interswitching rates annually. The shift to annual updates ensures that the rates are up to date and fully compensatory.

THE LAW

[6] Under section 127.1 of the CTA, the Agency must determine the interswitching rates no later than December 1 of every year and must publish the method that it followed for determining the rates.

[7] Pursuant to the CTA, the Agency must have regard to certain considerations in setting the rates, including the following:

  • Section 112 requires the rates 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.
  • Paragraph 127.1(2)(b) requires the Agency to take into consideration any long term investment needed in the railways.
  • Subsection 127.1(3) requires the Agency to consider the average variable costs of all movements of traffic that are subject to the rates, and that the rates shall not be less than the variable costs of moving the traffic, as determined by the Agency.

[8] 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.

METHODOLOGY FOR THE 2022 REGULATED INTERSWITCHING RATES

[9] The calculation of the 2022 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:

  • Determination No. R-2020-194 – Determination by the Agency of the 2021 regulated interswitching rates pursuant to Part III, Division IV of the CTA, dated November 30, 2020;
  • Determination No. R-2019-229 – Review of the methodology used by the Agency to determine the cost rate of common equity for federally-regulated railway companies, dated November 29, 2019;
  • Determination No. R-2019-230 – Determination by the Agency of the 2020 regulated interswitching rates pursuant to Part III, Division IV of the CTA, dated November 29, 2019;
  • Determination No. R-2017-198 – Determination by the Agency of the methodology to be used by federally-regulated railway companies to determine the working capital amounts and capital structure for regulatory purposes, dated December 5, 2017;
  • Order No. 2015-R-91 – Determination by the Agency of the variable portions of railway company cost accounts for CN and CP, dated June 8, 2015; and
  • Decision No. 425-R-2011 – Review of the methodology used by the Agency to determine the cost of capital for federally-regulated railway companies, dated December 9, 2011.

[10] 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 conference calls and complementary electronic data from CN and CP);
  2. 2019 unit costs for CN and 2019 unit costs for CP for each service unit, including overheads (approved by the Agency on November 12, 2021, and November 8, 2021, respectively);
  3. Contribution to fixed costs (the data required for this calculation is from CN’s 2019 and CP’s 2019 annual reports to the Minister of Transport and was obtained by the Agency through Transport Canada on August 17, 2020);
  4. 2022 forecasted component costs for CN and CP (obtained through the Agency’s calculation of the 2021-2022 Volume-Related Composite Price Indices in Determination No. R-2021-64);
  5. 2021 cost of capital rates for regulated interswitching (data obtained pursuant to Determination No. R-2019-229, Determination No. R-2017-198 and Decision No. 425-R-2011);
  6. 2022 productivity rates for CN and CP (data from CN’s and CP’s annual reports to the Minister of Transport from 2017 to 2019, and various tables from Statistics Canada); and
  7. 2020 volumes of interswitched cars (submitted by CN on March 29, 2021, and by CP on April 9, 2021).

[11] 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.

ADJUSTMENT RESULTING FROM A DECISION OF THE FEDERAL COURT OF APPEAL

[12] The Agency has included an adjustment to the 2022 interswitching rates made as a consequence of the Federal Court of Appeal’s decision in Canadian Pacific Railway Company v Canada (Transportation Agency), 2021 FCA 69 (FCA Decision). The adjustment ensures compliance with the Agency’s statutory obligations in setting interswitching rates.

Background

[13] The FCA Decision quashed the Agency’s determination of CP’s cost of capital rate for the 2020-2021 crop year and ordered the Agency to re-determine the rate. The Agency’s re determination is set out in Letter Decision No. LET-R-33-2021.

[14] The change to CP’s cost of capital rate has implications for regulated interswitching. The Agency had set interswitching rates for 2021 in Determination No. R-2020-194 using the cost of capital rate that was later quashed in the FCA Decision.

[15] As a result of the court-ordered re-determination of CP’s cost of capital rate, the Agency initiated a proceeding to determine whether the 2021 interswitching rates should be reviewed and varied. Using its authority under section 32 of the CTA, the Agency varied the rates in Determination No. R-2021-161. It determined that the variance would only apply prospectively from the date of that determination.

[16] The Agency also invited stakeholders to comment on whether a methodological adjustment would be appropriate to account for instances like this, where an input into the interswitching rates determination changes during the course of a year. Since the 2021 interswitching rates included an input that was quashed by a court order, the Agency sought comments on whether it has an obligation to correct for the period during which those rates were in force. The Agency invited input on whether such a correction is necessary to ensure respect for its methodological approach, as well as to meet its statutory obligations (i.e., to set fair and reasonable rates and to consider the long-term investment needs of railways), while providing adequate notice to stakeholders of the adjustment.

Stakeholder comments

[17] The Agency received submissions from CP, the Coalition of Rail Shippers (CRS) and CN.

[18] CP raised concerns about the Agency’s authority to make the adjustment and the regulatory uncertainty it would cause. CP claimed that the adjustment is not necessary as “it does not significantly affect CP’s long-term investment needs in servicing regulated interswitching traffic.”

[19] CRS argued against the adjustment, claiming that it would place a further financial burden on shippers already facing difficulties due to the pandemic; it would depart from past practices; and that only 0.3 percent of CN and CP’s rail revenues are generated by the rates for regulated interswitching.

[20] CN supported the adjustment, claiming it is necessary and complies with the Agency’s statutory obligations in setting interswitching rates.

Analysis and determination

[21] The Agency finds that the proposed adjustment is warranted as a consequence of the FCA Decision, which invalidated an input that was used to determine interswitching rates for 2021. This adjustment also ensures that the Agency takes into consideration the long term investment needs of railways when setting interswitching rates, as required by paragraph 127.1(2)(b) of the CTA. Finally, the Agency finds that the adjustment results in rates that are commercially fair and reasonable to all parties, as required by section 112 of the CTA.

[22] The Agency explained in Determination No. R-2018-254 how it would comply with its statutory obligation to consider the long-term investment needs of railways when it established its methodological approach to setting interswitching rates. The Agency stated that it aims to capture the economic costs of providing interswitching service, which includes both the accounting and the implicit costs of a railway. The Agency stated that “[c]ompensating railway companies with the full economic costs of their operations supports their long-term economic viability in the market” (see paragraph 19). The Agency stated that it would take these investment needs into account by including a cost of capital allowance using CP and CN’s cost of capital rates, as well as a depreciation allowance.

[23] When CP’s cost of capital rate was quashed and re-determined as a result of the FCA Decision, this raised a question as to whether consequential adjustments were required to the 2021 interswitching rates. This is because the interswitching rates that were charged for the better part of 2021 were based in part on an invalidated input the purpose of which is to assist in measuring the railways’ long-term investment needs.

[24] The Agency finds that an adjustment is warranted in this case to account for the period in 2021 during which interswitching rates included an input that was quashed by the FCA Decision. While the FCA did not address interswitching rates, the Agency finds that the adjustment ensures consistency with the FCA’s order.

[25] The Agency also finds that making this adjustment respects its obligation under paragraph 127.1(2)(b) of the CTA to consider the long-term investment needs of railways in setting interswitching rates. This obligation is in addition to the Agency’s general obligation to ensure that rates are commercially fair and reasonable. The Agency finds that the obligation to consider long-term investment needs includes considering whether an adjustment is warranted to correct discrepancies that undermine the goal of compensating railway companies for the full economic costs of their operations, in order to support their long-term viability.

[26] Some stakeholders claim that the adjustment is not permitted under the legislation, causes regulatory uncertainty and departs from past practice. However, this adjustment is designed to ensure consistency with the FCA Decision. Moreover, paragraph 127.1(2)(b) creates a new statutory obligation for the Agency, introduced by the Transportation Modernization Act, to make adjustments to account for long-term investment needs.

[27] The Agency’s past practices concerning interswitching rates or other regulatory adjustments do not serve as guides given this new obligation. The Agency finds that regulatory uncertainty is unlikely as the scope of impact of this adjustment is limited; the obligation to take long-term investment needs into account relates only to interswitching and the reasons that prompted the Agency’s adjustment in this case are clear. The Agency provided stakeholders with the opportunity to comment on the proposed adjustment and notes that they will receive adequate notice of it, as interswitching rates determinations are subject to statutory deadlines and publication requirements before they take effect.

[28] Finally, the Agency finds that the adjustment results in rates that are commercially fair and reasonable to all parties. The adjustment aims, to the extent possible, to capture the variance between the rate that should have been charged throughout 2021 based on the FCA Decision, and the rates actually applied. Moreover, the change reflects a 0.5% increase in costs and applies to single-car rates only, which is a relatively minor adjustment. While the parties suggested that there may be a material change in the carloads interswitched in 2022, no stakeholder provided details to support such claims. The Agency is satisfied that any variance in carloads to be interswitched would not materially alter the adjustment that it has made to address long-term investment needs.

[29] The Agency has adjusted the 2022 interswitching rates by calculating the difference between the rates established by the original 2021 interswitching rates determination and the re-determination of those rates, and multiplying that difference by a factor representing the number of days that the re-determined rates did not account for. The number of days between January 1, 2021, and October 25, 2021, is 298 days, resulting in a factor of 0.82 (298 days divided by 365 days).

[30] Based on this methodology, the 2022 interswitching rates, as a result of the FCA Decision, have been increased by the following amounts:

Item Single-car rates Block-car rates
Zone 1 +$12.30 $0.00
Zone 2 +$16.40 $0.00
Zone 3 +$4.10 $0.00
Zone 4A +$8.20 $0.00
Zone 4B $0.00 $0.00

2022 REGULATED INTERSWITCHING RATES

[31] Based on the application of the methodology outlined in Appendix A to the data, and the adjustment resulting from the FCA Decision, the Agency determines the regulated interswitching rates for 2022 in the following schedule, according to the interswitching distance zones and car block as defined in the Railway Interswitching Regulations, SOR/88-41:

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 $335 $90
2 Zone 2 $460 $140
3 Zone 3 $415 $75
4 Zone 4A $475 $95
5 Zone 4B $475 + $10.75 per additional km $95 + $0.98 per additional km

[32] 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 $10.75 per car for single-car movements or by $0.98 per car for car-block movements.

[33] 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.

[34] 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.

[35] 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.


APPENDIX A TO DETERMINATION NO. R-2021-176

The Canadian Transportation Agency’s (Agency) methodology for calculating regulated interswitching rates

The 2022 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 (2011 Decision), Determination No. R-2017-198 and Determination No. R-2019-229 (2019 Determination).

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

Interswitching rates(A×B)×CD

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 are expressed as:

Interswitching variable costs(A)=(EF×G)×H

Where:

E is system costs;

F is system service units;

G is variability of costs; and

H is interswitching service units.

The expression (EF×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 visits 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 Agency typically determines interswitching service units through conducting a combination of annual staff site visits and conference calls with complementary electronic data from CN and CP.

For 2021, due to the COVID-19 pandemic, Agency staff collected all data regarding interswitching service units via conference calls to minimize the health risks associated with in-person interswitching site visits. The Agency expects to return to a combination of targeted in-person interswitching site visits and conference calls as soon as it is safe to do so.

The service units determined 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 are returned 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 units determined 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 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. As 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 capture 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.

Service units for single-car movements increased on average by 6.22 percent compared to the service units that were used in Determination No. R-2020-194, translating to an average increase of $25.23 per car in the interswitching rates.

Workloads for single-car interswitching in Vancouver increased as a result of fewer cars being interchanged due to various supply chain complications such as the global semiconductor shortage and the shortage of intermodal shipping containers.

1.2 Block-train service units

Service units determined for block trains include:

  • 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 company 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.

For block-car operations, service units decreased by 1.59 percent compared to the service units that were used in Determination No. R-2020-194, translating to an average decrease of $1.83 per car in the interswitching rates.

This decrease was driven by CN running slightly longer block-trains to North Vancouver. The longer trains have not changed the operations since last year, resulting in a lower workload per car.

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, and the like, 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 (for example, 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 the equipment used by, track maintenance labourers).

For the 2022 interswitching rates, the Agency has used the 2019 unit costs for CN and the 2019 unit costs for CP. An index factor (using indices from the volume-related composite price index) and a productivity factor are applied (based on the Agency’s current productivity model1) in order to estimate costs in 2022. The equation for the Agency’s productivity model is presented in Appendix B.

The data used in the productivity model are the following:

Output price and quantity data

CP’s output data  
Price (index 2015 = 1) Price = freight revenue / revenue ton miles
Output quantity Revenue ton miles
CP output data is categorized into 7 commodities:
  1. Grain and grain products
  2. Mine products
  3. Agriculture products
  4. Animal products
  5. Forest products
  6. Intermodal
  7. Manufactured and misc. products

Source : Output quantity and price from F47 submitted annually by CP to the Agency

CN’s output dat  
Price (index 2015 = 1) Price = freight revenue / revenue ton miles
Output quantity Revenue ton miles
CN output data is categorized into 13 commodities:
  1. Agricultural products
  2. Grain
  3. Coal
  4. Forest products
  5. Paper and pulp
  6. Fertilizers
  7. Mineral ores
  8. Metals
  9. Automobiles and parts
  10. Fuel and chemicals
  11. Mine products
  12. Manufactured products
  13. Intermodal

Source : Output quantity and price from S40 submitted annually by CN to the Agency

Input price and quantity data

Labour
Price (index 2015 = 1) Labour price (labour price = annual labour price per hours / annual labour price per hour of base year)
Quantity Hours worked (hours worked = labour expense / labour price)

Source : Schedule 12 submitted by CN and CP

Fuel
Price (index 2015 = 1) Fuel price (fuel price = annual fuel price per litre / annual fuel price per litre of base year)
Quantity Litres consumed (litres consumed = fuel expense / fuel price)

Source : Schedule 13 submitted by CN and CP

Material
Price (index 2015 = 1) Material price index (MPI) (MPI = Agency calculated MPI for a year / Agency calculated MPI of base year)
Quantity Material quantity (material quantity = material expense / MPI)

Source : F-46, Schedule 12 and Schedule 13 submitted by CN and CP

Land
Price (index 2015 = 1) Plandt (please refer to Note 1)
Quantity Material quantity (material quantity = material expense / MPI)

Source : F-46, Schedule 12 and Schedule 13 submitted by CN and CP

Way and structure capital
Price (index 2015 = 1) Pw&st (please refer to Note 1)
Quantity Annual net book value of way and structure

Source : Way and structure quantity from F-49

Owned equipment
Price (index 2015 = 1) Powned_eqpt(please refer to Note 1)
Quantity Annual net book value of owned equipment

Source : Owned equipment quantity from F-49

Leased equipment
Price (index 2015 = 1) Pleased_eqpt (please refer to Note 1)
Quantity Leased equipment expense

Source : Leased equipment quantity from F-46 (551-566)

Note 1:

Service price for land (Plandt)=[11-ut][(1+coct)At-1-At]+StAt

Service price for way and structure (Pw&st)=[1-utdt1-ut][(1+coct)At-1-(1-δt)At]+StAt

Service price for owned equipment (Powned_eqpt)=[(1-kt)(1-utdt)1-ut][(1+coct)At-1-(1-δt)At]+StAt

Service price for leased equipment (Pleased_eqpt)=[(1-kt)1-ut][(1+coct)At-1-At]+StAt

Where:

kt is the investment tax credit rate;

ut is the marginal corporate income tax rate;

At is the asset price;

dt is the present value of all future depreciable deductions for tax purposes;

coct is the annual cost of capital rate as determined by the Agency;

δt is the annual replacement rate; and

St is the property tax rate.

Assumption:

  • The investment tax credit rate (kt) is set to zero.

Data sources:

  • The marginal corporate income tax rate (ut) is submitted annually to the Agency by CN and CP.
  • The asset price At is from Statistics Canada: land (Table 18-10-0205-01); way and structure, owned equipment, leased equipment (Table 36-10-0097-01).
  • (dt)is from schedule F-49 that is submitted annually by CN and CP to Transport Canada.
  • (St)is from schedules F-46 and F-49 that are submitted annually by CN and CP to Transport Canada.

The Agency applied an average productivity value of 99.47 percent as the estimated productivity gain for 2022. This is based on the Agency’s calculation of the average total factor productivity growth of each railway company from 2017 to 2019.

In Determination No. R-2020-194, the Agency calculated an average productivity value of 86.27 percent. The decrease in the productivity of the railway companies is due to labour and other disruptions as well as reduced volumes in some parts of the networks.

In that determination, the Agency used one year of data to develop the 2021 rates, as that was the most recent available data using the updated methods it adopted. For the 2022 interswitching rates and moving forward, the Agency has decided to use a three year average as the volatility of the year-over-year productivity rates may not properly represent future productivity growth.

The table in Appendix C lists all of the variable cost accounts (as defined by the UCA) that factor into the 2022 interswitching rates.

3.0 Cost of capital

The 2011 Decision sets out that with the exception of the risk-free rates of return, all the elements that are necessary for the calculation of the cost of capital rate for the purposes of establishing regulated interswitching rates will be those determined annually in the cost of capital rate for the transportation of western grain.

With respect to the appropriate risk-free rates, the 2019 Determination sets out that for the cost of capital rate for the purposes of establishing regulated interswitching rates:

  • the Canadian risk-free rate will be the average yield on Government of Canada 5 10 year marketable bonds for the month of September of the year prior to the interswitching year, as published by the Bank of Canada; and
  • the U.S. risk-free rates will be the average yields on each of 5-year and 10-year U.S. Treasury bonds for the month of September of the year prior to the interswitching year, as published by the U.S. Federal Reserve.

Based on this, the Canadian risk-free rate of 1.19 percent, the U.S. 5-year risk-free rate of 0.86 percent, and the U.S. 10-year risk-free rate of 1.37 percent were used for the calculation of the 2022 interswitching rates.

The resulting cost of capital rate used in the development of the 2022 interswitching rates is 4.60 percent for CN and 5.89 percent for CP.

The September 2019 risk-free rates used in last year’s interswitching cost of capital rates were 0.48 percent for Canada, 0.27 percent for the U.S. 5-year risk-free rate and 0.68 percent for the U.S. 10-year risk-free rate.

The increase in the risk-free rates was due to the recovery of the global economy from the COVID-19 pandemic.

4.0 Volumes of interswitched 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:

  • 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 company ABC

Vancouver zone 1 for railway company ABC 2017 carloads % weight (share of traffic) Variable cost per car Weighted zone 1 cost
Shipper A 800 80% $100 $80
Shipper B 200 20% $80 $16.00
Vancouver zone 1 cost per car for railway company ABC       $96
  • 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 result from Table 1 is found in the first row below.

Table 2: Calculating zone 1 interswitching costs for railway company ABC

Zone 1 for railway company ABC 2017 carloads % weight (share of traffic) Variable cost per car Weighted zone 1 cost
Vancouver 1,000 62.50% $96 $60
Toronto 600 37.50% $150 $56.25
Zone 1 cost per car for railway company ABC       $116.25
  • The costs for each railway company 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 result from Table 2 is found in the first row of Table 3.

Table 3: Calculating zone 1 interswitching costs

Zone 1 2017 carloads % weight (share of traffic) Variable cost per car Weighted zone 1 cost
Railway company ABC 1,600 44.44% $116.25 $51.66
Railway company XYZ 2,000 55.56% $125 $69.45
Zone 1 cost per car       $121.11

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

5.0 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’s costing model). The system contribution to fixed costs is the amount of fixed costs expressed as a proportion of the system variable costs.

For 2022, the average contribution to fixed costs is 69.49 percent, compared to the 2021 value of 66.85 percent as set out in Determination No. R-2020-194.

The change in the contribution to fixed costs is a function of the difference between the variable unit costs used and the total costs of the railway companies. The Agency updated the unit costs to 2019 and, based on these calculated unit costs, an increase in the contribution to fixed costs was required according to the methodology for allocating constant costs.

APPENDIX B TO DETERMINATION NO. R-2021-176

Detailed interswitching rates calculation

Variable costs per shipper:

At year (t0) for which the last costing information is available:

VCt0(s,i,z,r)=jCt0j(r)yj(r)vj(r)y*j(s,i,z,r)

Where:

s : is a shipper;

i : is an interchange;

z : is a zone ;

r : is a railway company;

Ct0j(r) is the cost for a specific expense category j for a railway r at time t0;

yj(r) is a system service unit that drives expenses of category j;

vj(r) 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+pj) are applied to each cost categories j as follows:

VCt(s,i,z,r)=jCt0j(r)×(1+pj)yj(r)vjy*j(s,i,z,r)

 

Inflation factors (1+pj) 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 zone:

 

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

 

VC(z)=rz[iz(siVCt(s,i,z,r)ωs)ωi]ωr

 

Weights:

 

χs is the volume of cars (measured with carloads) related to a specific shipper (s);

 

ωs=xssixs is the weight of each shipper (s) in a specific interchange (i);

 

ωi=sixsizsixs is the weight of each interchange (i) in a specific zone (z);

 

ωr=izsixsrzizsixs is the weight of each railway (r) in a specific zone (z).

 

Section 4.0 (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(z)

 

R(z)=VC(z)Contr1+g

 

Where the contribution to fixed costs (Contr) is estimated using the following equation:

 

Contribution to Fixed Cost (F)= Total system costSystem variable cost

 

the total system cost is obtained from the annual reports of the railway companies, and the system variable cost is calculated by the Agency’s costing model using submitted financial and operating data from the railway companies annually.

 

The productivity variable (g) is provided by:

 

Productivity Index (g)= Fisher Output IndexFisher Input Index X 100= FOutputt0,t1FInputt0,t1 X 100

 

Fisher Output Index= FOutputt0,t1=LOutputt0,t1×POutputt0,t1

 

Laspeyres Output Index= LOutputt0,t1= Ni=1pi,t0×yi,t1Ni=1pi,t0×yi,t0=Ni=1yi,t1yi,t0×wi,t0 

 

Paasche Output Index= POutputt0,t1= Ni=1pi,t1×yi,t1Ni=1pi,t1×yi,t0=Ni=1yi,t1yi,t0×wi,t1

 

Fisher Input Index= FInputt0,t1=LInputt0,t1×PInputt0,t1

 

Laspeyres Input Index= LInputt0,t1= Mj=1wj,t0×xj,t1Mj=1wj,t0×xj,t0=Mj=1xj,t1xj,t0×zj,t0

 

Paasche Input Index= PInputt0,t1= Mj=1wj,t1×xj,t1Mj=1wj,t1×xj,t0=Mj=1xj,t1xj,t0×zj,t1

 

Where:

 

t0 is the base period;

 

t1 is the current period;

 

i is output commodities, and i ranges from 1 to N;

 

j is output commodities, and j ranges from 1 to M;

 

p is the output commodity price;

 

q is the output commodity quantity;

 

w is the input commodity price;

 

x is the input commodity quantity;

 

wi,t0 is the share of ith output commodity in the base period value and wi,t0=pi,t0×yi,t0Ni=1pi,t0×yi,t0;

 

wi,t1 is the share of ithoutput commodity in the current period value and wi,t1=pi,t1×yi,t1Ni=1pi,t1×yi,t1

 

zj,t0 is the share of jth input commodity in the base period value and zj,t0=wj,t0×xj,t0Mj=1wj,t0×xj,t0;

 

zj,t1 is the share of jth input commodity in the current period value and zj,t1=wj,t1×xj,t1Mj=1wj,t1×xj,t1

 

APPENDIX C TO DETERMINATION NO. R-2021-176

 

Accounts from the Uniform Classification of Accounts and related railway records (2014) [UCA] that factor into the 2022 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
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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Member(s)

Elizabeth C. Barker
J. Mark MacKeigan
Heather Smith
Date modified: