Determination No. R-2021-176
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).
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):
- Interswitching service units (obtained through conference calls and complementary electronic data from CN and CP);
- 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);
- 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);
- 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);
- 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);
- 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
- 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:
|
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:
|
Source : Output quantity and price from S40 submitted annually by CN to the Agency
Input price and quantity data
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
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
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
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
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
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
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)=∑r∈z[∑i∈z(∑s∈iVCt(s,i,z,r)ωs)ωi]ωr
Weights:
χs is the volume of cars (measured with carloads) related to a specific shipper (s);
ωs=xs∑s∈ixs is the weight of each shipper (s) in a specific interchange (i);
ωi=∑s∈ixs∑i∈z∑s∈ixs is the weight of each interchange (i) in a specific zone (z);
ωr=∑i∈z∑s∈ixs∑r∈z∑i∈z∑s∈ixs 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,t1∑Ni=1pi,t0×yi,t0=∑Ni=1yi,t1yi,t0×wi,t0
Paasche Output Index= POutputt0,t1= ∑Ni=1pi,t1×yi,t1∑Ni=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,t1∑Mj=1wj,t0×xj,t0=∑Mj=1xj,t1xj,t0×zj,t0
Paasche Input Index= PInputt0,t1= ∑Mj=1wj,t1×xj,t1∑Mj=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,t0∑Ni=1pi,t0×yi,t0;
wi,t1 is the share of ithoutput commodity in the current period value and wi,t1=pi,t1×yi,t1∑Ni=1pi,t1×yi,t1
zj,t0 is the share of jth input commodity in the base period value and zj,t0=wj,t0×xj,t0∑Mj=1wj,t0×xj,t0;
zj,t1 is the share of jth input commodity in the current period value and zj,t1=wj,t1×xj,t1∑Mj=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)
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