Determination No. R-2021-197
DETERMINATION by the Canadian Transportation Agency (Agency), for the 2020-2021 crop year, of the Canadian National Railway Company’s (CN) and the Canadian Pacific Railway Company’s (CP) Maximum Revenue Entitlement (MRE), revenue and whether their revenue exceeds their MRE, for the movement of western grain, pursuant to sections 150 and 151 of the Canada Transportation Act, SC 1996, c 10 (CTA).
SUMMARY
[1] The Agency has determined CN’s and CP’s MREs and revenues covered by the MRE for the 2020‑2021 crop year. CN’s revenues were above its MRE while CP’s were below its MRE.
[2] Table 1 summarizes the MRE, revenue, the amount above or below the MRE and the payout of excess revenue plus penalty (where applicable) for each of CN and CP:
Railway Company | MRE | Revenue | Revenue in Excess of MRE | Payout of Excess Revenue plus Penalty* |
---|---|---|---|---|
CN | $1,042,509,669 | $1,044,909,345 | $2,399,676 | $2,519,660 |
CP | $1,035,175,212 | $1,014,927,140 | -$20,248,072 | N/A |
*Calculated as the overage plus 5 percent.
BACKGROUND
[3] The CTA sets out the MRE regime, in which the Agency determines the maximum revenue that prescribed railway companies can earn for the movement of western grain by rail as well as the revenue earned.
[4] The statutory determination is made after a crop year ends and must be announced no later than December 31 of each year.
[5] Consistent with the Agency’s established approach, industry participants, including railway companies, shippers, producers and Government organizations, were given until April 30, 2021, to propose any methodological changes or new issues of interpretation that would have a material impact on the determination of the MRE, for the Agency’s consideration, for application to the 2020-2021 crop year. No such proposals were received from industry participants.
ANALYSIS AND DETERMINATIONS
ISSUE 1: WHAT ARE CN’S AND CP’S MRE AND REVENUE COVERED BY THE MRE FOR THE 2020-2021 CROP YEAR?
CN’s and CP’s Tonnage and Average Length of Haul
[6] CN and CP are prescribed railway companies pursuant to section 147 of the CTA.
[7] In determining CN’s and CP’s MRE, the Agency must also determine each railway company’s average length of haul for the movement of western grain and the number of tonnes of grain moved for the crop year.
[8] Section 147 of the CTA defines “movement”, “grain” and “crop year” as follows:
“movement”, in respect of grain, means the carriage of grain by a prescribed railway company over a railway line from a point on any line west of Thunder Bay or Armstrong, Ontario, to
(a) Thunder Bay or Armstrong, Ontario,
(b) Churchill, Manitoba for export,
(c) a port in British Columbia for export, other than export to the United States for consumption in that country, or
(d) a point west of Thunder Bay or Armstrong, Ontario, if the grain is to be carried to a port in British Columbia for export, other than export to the United States for consumption in that country;
“grain” means
(a) any grain or crop included in Schedule II that is grown in the Western Division, or any product of it included in Schedule II that is processed in the Western Division, or
(b) any grain or crop included in Schedule II that is grown outside Canada and imported into Canada, or any product of any grain or crop included in Schedule II that is itself included in Schedule II and is processed outside Canada and imported into Canada;
“crop year” means the period beginning on August 1 in any year and ending on July 31 in the next year.
[9] The Agency determined CN’s and CP’s tonnage and average length of haul, for the movement of western grain for the 2020-2021 crop year, to be as follows:
Destination | CN Tonnes Moved | CP Tonnes Moved | Total Tonnes Moved |
---|---|---|---|
Vancouver | 15,955,842 | 18,915,424 | 34,871,266 |
Prince Rupert | 5,236,563 | 0 | 5,236,563 |
Thunder Bay | 2,603,596 | 5,914,563 | 8,518,159 |
Eastern Canada | 2,598,214 | 1,110,593 | 3,708,807 |
Exchange Switching Adjustment | (34,666) | 34,666 | 0 |
Total | 26,359,549 | 25,975,246 | 52,334,795 |
Average length of haul (miles) | 1,018 | 913 | 966 |
[10] The Agency’s determination is based on detailed traffic submissions by CN and CP, which were reviewed by the Agency to verify that the traffic qualified as western grain movements and that the related revenue, tonnage and mileage amounts were accurate. This review led to the addition, deletion and modification of a number of records.
[11] CN and CP moved a record-setting combined 52.33 million tonnes of western grain in the 2020-2021 crop year, 9.0 percent higher than the previous crop year.
[12] CN’s and CP’s combined weighted average length of haul for the crop year was 966 miles, 0.1 percent higher than the previous crop year.
[13] While Churchill is an eligible western grain destination, there were no Churchill-bound movements during the crop year by a “prescribed railway company” and hence, volumes to Churchill are not reflected.
CN’s and CPʼs MRE
[14] Subsection 151(1) of the CTA states that the following formula is to be used by the Agency in its determination of CN’s and CP’s MRE:
[A/B + ((C-D) x $0.022)] x E x F where
A is the company’s revenues for the movement of grain in the base year;
B is the number of tonnes of grain involved in the company’s movement of grain in the base year;
C is the number of miles of the company’s average length of haul for the movement of grain in that crop year as determined by the Agency;
D is the number of miles of the company’s average length of haul for the movement of grain in the base year;
E is the number of tonnes of grain involved in the company’s movement of grain in the crop year as determined by the Agency; and
F is the volume-related composite price index that applies to the company, as determined by the Agency.
[15] The Agency, for the 2020-2021 crop year, determines CN’s MRE to be $1,042,509,669 and CP’s MRE to be $1,035,175,212. The Agency’s inputs into the formula and the MREs are summarized in the following table:
CN | CP | Comments | |
---|---|---|---|
A | $348,000,000 | $362,900,000 | Prescribed in subsections 151(2) and (3) of the CTA |
B | 12,437,000 | 13,894,000 | Prescribed in subsections 151(2) and (3) of the CTA |
C | 1,018 | 913 | Established by the Agency in this Determination |
D | 1,045 | 897 | Prescribed in subsections 151(2) and (3) of the CTA |
E | 26,359,549 | 25,975,246 | Established by the Agency in this Determination |
F | 1.4441 | 1.5055 | Established by the Agency in Determinations No. R-2021-63 (CP) and No. R-2021-105 (CN) |
MREs | $1,042,509,669 | $1,035,175,212 | Established by the Agency in this Determination |
CN’s and CP’s Western Grain Revenue
[16] In order to determine a prescribed railway company’s revenue from western grain, the Agency considers revenue reductions and adjustments to revenue.
REVENUE AND REVENUE REDUCTIONS
[17] The determination of a prescribed railway company’s revenue from western grain requires many assessments by the Agency as to what can be included as, or deducted from revenue. The parameters for this are set out in subsections 150(3), (4) and (5) of the CTA, and Agency Decision No. 114-R-2001.
[18] A prescribed railway company’s revenue from western grain, as identified in the CTA, is primarily derived from billings by the prescribed railway company generated by the application of rates contained in published tariffs or in confidential contracts applicable to western grain movements. A railway company’s statutory grain revenue also includes:
- a portion of amounts received for ensuring car supply through the car ordering process;
- amounts received for providing premium service;
- amounts received for performing exchange switching; and
- amounts received for additional switching requested by the shipper.
[19] In addition, the prescribed railway companies’ statutory western grain revenue is net of any amounts paid or allowed for incentives, rebates or any other similar reductions, and also does not include:
- amounts that are earned as part of a performance penalty or in respect of demurrage or for the storage of rail cars loaded with grain;
- amounts earned for staging of rail cars in transit;
- amounts for additional car switching, necessary due to shipper error or failure to meet obligations;
- compensation received for running rights;
- amounts earned for interswitching at rates determined in accordance with section 127.1 of the CTA; or
- amounts earned for the movement of grain in containers on flat cars.
[20] Allowable reductions to a railway company’s statutory western grain revenue include:
- the amortized amounts of contributions to a grain handling undertaking that is not owned by the company (i.e., Industrial Development Fund contributions or IDF) for the development of grain-related facilities; and
- amounts paid or allowed for interswitching or exchange switching.
[21] The following items do not reduce a railway company’s statutory western grain revenue:
- amounts paid or allowed as dispatch;
- amounts paid by railway companies resulting from the discontinuance of grain‑dependent branch lines;
- amounts paid by railway companies as a performance penalty; and
- amounts paid for running rights.
ADJUSTMENTS TO REVENUE
[22] Initial freight revenue data, including payments to other railway companies involved in the carriage of grain, were submitted by CN and CP on a per movement basis. The Agency conducted general verifications on a record-by-record basis. In addition, and based on sample testing, the Agency performed more detailed analysis to confirm that all western grain revenue has been appropriately captured, and that revenue exclusions or reductions are appropriate and accurate.
[23] Adjustments were made to the revenue figures provided by the railway companies in various submissions. The revenue and MRE adjustments are summarized below.
[24] For CN, the following adjustments resulted in an increase to CN’s reported western grain revenue and its calculated MRE:
- revenue reductions related to payments made to short lines were adjusted to correct a slight overstatement;
- a small adjustment was made to the amount claimed by CN as a revenue reduction due to an uncollectable account; and
- adjustments were made to the effective date of amounts claimed by CN for certain IDF contributions.
[25] The following adjustments resulted in a reduction to CN’s reported western grain revenue and/or its calculated MRE:
- records that contained erroneous information, such as movements reported with zero tonnage, duplicate records, low tonnage, or erroneous revenue per tonne, were removed from CN’s grain traffic database (GTDB), which lowered both CN’s revenue and MRE; and
- a correction was made to the equivalent tonnes calculation related to exchange switching activities, which decreased CN’s MRE.
[26] For CP, the following adjustments resulted in an increase to CP’s reported western grain revenue and its calculated MRE:
- reported amounts related to CP’s IDF contributions were adjusted to correct an error.
[27] The following adjustments resulted in a reduction to CP’s reported western grain revenue and/or its calculated MRE:
- records that contained erroneous information, such as movements reported with zero tonnage, duplicate records, low tonnage, or erroneous revenue per tonne, were removed from CP’s GTDB, which lowered both CP’s revenue and MRE;
- reported amounts related to CP’s IDF contributions were adjusted to correct technical errors;
- a reduction in tonnage related to the equivalent tonnes calculation reduced CP’s MRE;
- reported revenues were adjusted downwards to account for unclaimed short line cost reductions; and
- volume rebate amounts not originally claimed by CP were included.
[28] Agency staff will provide CN and CP with further details on these adjustments to their revenue and MRE in separate confidential reconciliation letters as the letters contain commercially sensitive information.
[29] In light of the above, the Agency determines CNʼs and CP’s western grain revenue for crop year 2020-2021 to be as follows:
- CN = $1,044,909,345; and
- CP = $1,014,927,140.
ISSUE 2: IS EITHER RAILWAY COMPANY ABOVE ITS RESPECTIVE MRE AND THEREFORE SUBJECT TO A PAYOUT?
[30] CN’s revenues were above its MRE. Subsection 150(2) of the CTA provides that if a prescribed railway company’s revenue, as determined by the Agency, for the movement of grain in a given crop year exceeds the company’s MRE for that crop year, the company shall pay out the excess amount and any penalty that may be specified in the Railway Company Pay Out of Excess Revenue for the Movement of Grain Regulations, SOR/2001‑207 (Regulations).
[31] Section 2 of the Regulations provides that:
The penalty that a prescribed railway company shall pay out pursuant to subsection 150(2) of the Act, if the company’s revenues for the movement of grain in a crop year exceed the company’s maximum revenue entitlement for that year, as determined under subsection 151(1) of the Act, is
(a) five per cent of the excess amount, if that excess amount is one per cent or less of the company’s maximum revenue entitlement; or
(b) 15 per cent of the excess amount, if that excess amount is more than one per cent of the company’s maximum revenue entitlement.
[32] Furthermore, subsection 4(1) of the Regulations provides that:
The excess amount and the penalty that a prescribed railway company shall pay out pursuant to subsection 150(2) of the Act must be paid out to the Western Grains Research Foundation in the form of a certified cheque, money order or bank draft.
[33] The Western Grains Research Foundation is a farmer-financed and directed organization set up to fund research that benefits Prairie farmers.
[34] Given that CN’s statutory grain revenue exceeds its MRE for the 2020-2021 crop year by an amount of $2,399,676, which represents 0.23 percent of CN’s determined MRE, the Agency, pursuant to subsection 3(1) of the Regulations and subsection 150(2) of the CTA, orders CN to pay to the Western Grains Research Foundation, within 30 days from the date of this Determination, the amount of $2,519,660, which represents the sum of the excess revenue amount of $2,399,676, and the prescribed penalty of $119,984 as provided for under paragraph 2(a) of the Regulations.
[35] Upon payment of the excess amount and the applicable penalty, CN is to notify the Agency, in writing, of the amount paid out and the date on which it was paid.
CONCLUSION
[36] The Agency determines that CN has exceeded its MRE and is therefore subject to a payout, while CP has not exceeded its MRE and is therefore not subject to a payout.
[37] Table 1 summarizes the MRE, revenue, and the amount above/below the MRE and the payout of excess revenue plus penalty for CN:
Railway Company | MRE | Revenue | Revenue in Excess of MRE | Payout of Excess Revenue plus Penalty* |
---|---|---|---|---|
CN | $1,042,509,669 | $1,044,909,345 | $2,399,676 | $2,519,660 |
CP | $1,035,175,212 | $1,014,927,140 | -$20,248,072 | N/A |
*Calculated as the overage plus 5 percent.
Member(s)
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