Determination No. R-2023-88

April 25, 2023

Application by the Canadian National Railway Company (CN) for a variance of Determinations R-2021-64 and R-2022-183, pursuant to section 32 of the Canada Transportation Act, SC 1996, c 10 (CTA)

Case number: 
23-04740

Summary

[1] On January 20, 2023, CN filed an application under section 32 of the CTA to vary the following determinations:

  • Determination R-2021-64, which established the Volume-Related Composite Price Index (VRCPI) applicable to CN and CP for the 2021-2022 crop year, and
  • Determination R-2022-183, which applied their respective VRCPIs in determining their 2021‑2022 Maximum Revenue Entitlement (MRE), their revenues and whether their revenues exceeded their MREs.

[2] These are referred to collectively as the Determinations.

[3] CN claims that it has suffered a significant economic impact due to the difference between the forecast in the 2021-2022 VRCPI and the actual data for that period. CN holds that the Agency itself recognized that the VRCPI for the 2021-2022 crop year should have been 7.44% higher when it established the VRCPI for the following crop year in Determination R-2022-50.

[4] CN also argues that the 2021-2022 VRCPI was not commercially fair or reasonable because shippers paid artificially low rates to ship grain which did not reflect CN’s actual costs, yet they benefitted from large increases in world prices for the export of grain and grain products.

[5] CN claims that its MRE would have been approximately $43.8 million higher if the Agency had corrected the forecasting error. It points out the VRCPI used to determine the 2021-2022 MRE was adjusted by Determination R-2022-28 to account for CN’s investment in hopper cars, but did not make any allowance or correction to reflect the forecasting discrepancy.

[6] CN seeks a refund of $3,221,492, which consists of the $3,068,088 in excess revenues that it paid to the Western Grain Research Foundation (WGRF) and a $153,404 penalty for exceeding its MRE with respect to the 2021-2022 crop year. CN also seeks recognition of its lost revenue for that crop year, which it claims is $40.8 million, and argues that this lost revenue should be deducted from its revenues in the current 2022‑2023 crop year and subsequent crop years if necessary.

[7] CN argues that the Determinations should be varied because the circumstances which led to 7.44% difference between forecasted and actual costs did not exist when the Agency established the VRCPI for the 2021-22 crop year. It points out that the Agency stated in Determination R-2022-50 that much of this price change is linked to recent world events. The determination cites increases in crude oil costs in 2021 and after the start of the conflict in Ukraine in 2022, as well as global supply chain challenges and supply/demand imbalances in 2021 which led to higher than expected price changes for railway material inputs such as steel, fabricated metals and petroleum-related products.

[8] CN asserts that the magnitude of the change is a contributing factor in the case because there has never been a difference of this magnitude between the forecast and the actual data since the beginning of the MRE program. CN submits that there will not likely be a similar positive forecasting difference to offset it in the future.

[9] This determination addresses the question of whether the Agency should vary the Determinations pursuant to section 32 of the CTA.

[10] For the reasons set out below, the Agency finds that there has not been a change in facts and circumstances within the meaning of section 32 of the CTA in this case, and therefore declines to vary the Determinations as requested by CN.

Background

[11] The MRE program under the CTA prescribes the maximum revenue for moving western grain that CN and CP are entitled to receive in a crop year, which runs from August 1 of one year to July 31 of the subsequent year. As part of this program, the Agency must determine the VRCPI applicable to each railway company for each upcoming crop year by April 30.

[12] The VRCPI is an inflation index that forecasts price changes for railway inputs such as labour, fuel, material and other capital items, based on historical price information provided by CN and CP, including actual price changes for the previous calendar year, and well-established forecasting models which incorporate forecasts by expert third parties available at the time of the determination. The Agency develops price forecasts for two calendar years for each crop year, which provides an opportunity to adjust the forecast for the current calendar year. These forecasts are then prorated to arrive at the crop year forecasts.

[13] By December 31 of each year, the Agency must apply the VRCPIs established for the completed crop year to a legislated formula for determining the MREs applicable to CN and CP for that crop year. The Agency also makes a number of reductions and adjustments to CN’s and CP’s reported revenue earned from moving western grain during the completed crop year. If the Agency determines that a railway company’s revenue exceeds its MRE for that crop year, the company must pay the excess amount and any penalty specified in the Railway Company Pay Out of Excess Revenue for the Movement of Grain Regulations, SOR/2001-207.

[14] There is limited authority to change these annual determinations once made. Options include paragraph 151(4)(c) of the Act, a ministerial direction or section 32 of the CTA:

  • Paragraph 151(4)(c) of the CTA empowers the Agency to make adjustments to the VRCPI to reflect the costs incurred by the railway companies to obtain hopper cars for the movement of western grain, as the Agency did for CN in R‑2022‑28.
  • The Minister directed the Agency to make an adjustment to the calculation of the VRCPI for the 2007-2008 crop year related to the maintenance of hopper cars (see 67-R-2008).
  • Under section 32 of the CTA, the Agency may review, rescind or vary a decision or order if it is of the opinion that there has been a change in the facts or circumstances since the decision or order was made. The Agency has granted a small number of section 32 applications in the past. In the majority of these cases, the variances corrected errors in calculations (for example Determination R‑2019‑221 and Decision 374-R-2015 [paragraphs 6-13]). In Determination R-2018-225 (paragraphs 19-21), the Agency denied CN’s request to vary the 2018-2019 VRCPI to take into account forecasted investments in locomotives. The Agency stated that it would take CN’s actual investments in locomotives into account when it determined the VRCPI for the following crop year.

Request for confidentiality

[15] CN asked the Agency to grant confidentiality for three appendices to its submissions, arguing that it could suffer specific direct harm if the confidential information were disclosed. The appendices consist of Agency Determinations R-2020-207, R-2021-197 and R-2019-245 that were issued on a confidential basis because they contain commercially sensitive information. The Agency therefore confirms the confidentiality of these determinations and places CN’s appendices 14, 15, and 16 on the confidential record of this proceeding.

Analysis and determination

[16] In deciding whether to vary the Determinations pursuant to section 32 of the CTA, the Agency considers whether there has been a change in facts or circumstances, and if so, whether the change is sufficient to warrant a variance.

[17] The Agency determines the VRCPIs for CN and CP for the upcoming crop year on or before April 30, based partly on historical data, and partly on forecasts using the best data available at the time of the determination. Given the legislative framework for the MRE program, it is highly likely that there will be differences between the forecasts used to determine the VRCPI in April and the actual experience of the railway company in the crop year that follows. This results in either an under-forecast or an over-forecast of certain price changes, either to the detriment or benefit of CN and CP in a given crop year. However, the difference between the forecasted data and the actual data will be reflected in the following year’s VRCPI calculation. In this particular case, the under-forecast of 7.44% for the 2021-2022 crop year was taken into account in the 2022-2023 crop year, as articulated in Determination R-2022-50.

[18] Determination R-2022-50 used the actual 2021 price changes and revised 2022 forecasts to develop the 2022-2023 VRCPI. As CN points out, the Agency recognized that the volatility of petroleum prices and increasing costs of material-related commodities such as fabricated metals and refined petroleum and coal products, which are key inputs into the Agency’s material price forecasting model, were the major contributing factors to the net difference in forecasting from one crop year to the next. The Agency also recognized that the prices of fuel and materials increased further because of the war in Ukraine, which started in February 2022, and increased economic activity due to global relaxation of COVID-19 restrictive measures. These factors were very difficult to predict. It is possible that discrepancies of similar magnitude could occur again in the future to the benefit or detriment of the railway companies or shippers, given the volatility of petroleum pricing, and the potential economic impacts of climate change and unexpected world events such as pandemics, wars and other geopolitical tensions.

[19] However, CN’s claim that it lost revenues of $43.8 million in the 2021-22 crop year is misleading. The VRCPI adjustment for the 2022-23 crop year provides CN with a higher revenue entitlement in the 2022-2023 crop year, which allows CN to earn additional revenue during this crop year, including the amount paid to the WGRF in the 2021-2022 crop year, consistent with past Agency jurisprudence. The Agency is therefore of the view that the commercial fairness and reasonableness of the MRE program for railway companies and shippers cannot be evaluated based on market performance during a single crop year.

[20] CN also contends that the under-forecasting of 7.44% for the 2021-22 crop year is exceptional and that it is unlikely that over-forecasting of the same magnitude would occur in the future. However, there have been instances where the Agency materially over-forecasted price increases. For instance, the Agency over-forecasted the VRCPI by 4.1% for the 2014-2015 crop year and adjusted the index downward by the same amount when it established the 2015-2016 VRCPI in Determination 120-R-2015. CN was allowed a higher MRE than it should have been entitled to in the 2014-2015 crop year due to this over-forecast and was not required to pay the excess grain revenue with a penalty to the WGRF.

[21] The Agency finds that the fact that the forecasts used in the 2021-2022 VRCPI determination were ultimately different than the actual price data due to extraneous events unfolding during the 2021-2022 crop year does not equate to a change in facts or circumstances that requires a variance pursuant to section 32 of the CTA. The MRE program already provides a mechanism to address any discrepancy between the forecasted figures and the actual data by taking these differences into account in the following year’s VRCPI determination.

[22] For these reasons, the Agency finds that it is both unnecessary and inappropriate to use section 32 of the CTA to vary the VRCPI when the forecast does not align with subsequent data, whether it be to increase or decrease the index within a given crop year. The Agency therefore declines to vary the Determinations as requested by CN.

Member(s)

Mark MacKeigan
Heather Smith
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