Determination No. R-2023-178

September 18, 2023

Determination by the Canadian Transportation Agency (Agency) of the 2023 regulated interswitching rates applicable to Zone 5 pursuant to subsection 127.1(1.1) of the Canada Transportation Act (CTA)

Case number:

23-32950

Summary

[1] This is the Agency’s determination of the 2023 regulated interswitching rates that apply to the new interswitching zone established by subsection 127.1(1.1) of the CTA, referred to as Zone 5 in this determination.

[2] The methodology used by the Agency to determine the 2023 regulated interswitching rates applicable to Zone 5 is presented in Appendix A, in accordance with subsection 127.1(4.1) of the CTA.

[3] In accordance with Part III, Division IV of the CTA, the Agency determines the regulated interswitching rates applicable to Zone 5 for 2023 as follows:

Schedule of regulated interswitching rates for Zone 5 for 2023
Column 1	Column 2	Column 3	Column 4
Item	Interswitching distance zone	Rate per car for interswitching traffic to or from a siding (single car)	Rate per car for interswitching a car block (60 cars or more)
1	Zone 5	$849 + $4.48 per additional kilometre	$333 + $1.69 per additional kilometre

Background

[4] Regulated in Canada since 1904, interswitching is part of the competitive access provisions of the CTA that give some shippers, based on specific criteria set out in the CTA, 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 with 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] Subsection 127.1(1.1) of the CTA requires the Agency to determine interswitching rates for Zone 5 within 90 days after June 22, 2023, the date this provision came into force. This subsection enables a temporary extension for a period of 18 months of the interswitching limits in the Prairie Provinces, which applies to movements within 160 kilometres of an interchange but outside of the existing 30 kilometres radius covered by the other zones currently prescribed by the Railway Interswitching Regulations (Regulations). The stated objective of this amendment is to “support competition among rail carriers by enabling rail companies to access tracks owned by another rail provider within the limit, under rates regulated by the Canadian Transportation Agency”.¹

The law

[6] The Agency’s authority to determine interswitching rates is provided in sections 112 and 127.1 of the CTA.

[7] Section 128.1 requires the railway companies to provide the Agency with the information or documents that the Agency considers necessary to exercise its powers or perform its duties or functions under section 127.1.

Stakeholder engagement and feedback

[8] In July 2023, the Agency began outreach and discussions with interested stakeholders to explain the process for determining the rates for Zone 5 and to gather comments from stakeholders on relevant considerations for setting these rates.

[9] The Agency identified three main issues which are relevant to this determination:

The use of hypothetical workloads;
The mechanism for addressing distance variances; and
The appropriate contribution margin for extended interswitching.

Hypothetical Workloads

[10] Agency determinations typically rely on observed historical costs to determine interswitching rates. However, recent data was not available at the time of this determination for the area covered by Zone 5, as there are currently no movements in that zone.

[11] To implement subsection 127.1(1.1) of the CTA, the Agency must set rates for moving traffic before that service has actually been performed. Accordingly, this determination relies on hypothetical workloads.

[12] This approach aligns with the methodology that the Agency applied in 2014, when an interswitching zone, which covers the same area as Zone 5, was temporarily added in the Regulations. As no historical costs were available at the time for that zone, the Agency forecasted operational costs to determine the regulated interswitching rates.²

[13] The Agency also determined rates by forecasting operational costs when rates for block traffic were introduced and volumes, including workloads, were not readily available.

[14] The Agency’s approach for establishing Zone 5 rates is otherwise based on the same methodology that is used to calculate rates for the other four zones on an annual basis. The only difference is that, for this initial rate determination, the Agency uses forecasted operating plans as opposed to actual observed operations. Nonetheless, the Agency is satisfied that these hypothetical service units, based on historically collected service unit data for the various estimated activities, provide a commercially reasonable and fair basis for setting Zone 5 rates until data on actual service units are available.

Controlling for Distance Variance

[15] For the four interswitching zones currently prescribed by the Regulations, the operating distances are reasonably similar for virtually all traffic within each zone.

[16] Because Zone 5 is relatively large in size, movements beyond 30 kilometres within Zone 5 could cover a wide range of longer distances, depending upon the track network configuration of the serving railway company. To be commercially fair and reasonable, the rate determined by the Agency must therefore be flexible regarding the variance in distance.

[17] Of note, the Agency already addresses this issue, albeit at a lower range of variances, in Zone 4B. In that zone, movements are greater than 40 kilometres by line of track, and radially within 30 kilometres, but there is no upper bound on the distance by track, creating a similar challenge to that presented in Zone 5.

[18] As a result, the Agency will be using the same approach currently used in Zone 4B and used in 2014 for the zone previously included in the Regulations, by setting a base rate for movements up to 40 kilometres by track within the zone, plus a rate per additional kilometre for the 41st, and each subsequent kilometre of track distance.

Contribution to Fixed Costs

[19] To ensure that the railway companies are fully compensated for all non-variable costs, the Agency calculates the contribution to fixed costs based on a system average contribution. The Agency has used this approach in past determinations to establish rates that are commercially fair and reasonable to both the railway companies and shippers.

[20] Some stakeholders questioned the appropriateness of applying the system average contribution to Zone 5, based on an assumption of lower volumes on this portion of a railway company’s network. In their view, the contribution to fixed costs should be higher in Zone 5 compared to that contribution in the other regulated interswitching rates.

[21] The Agency does not currently collect information on traffic density to allow the contribution to fixed costs to be varied between zones. However, any adjustment should maintain the overall outcome that system average contributions ensure the railway companies are fully compensated for non-variable costs while at the same time, ensuring the margin does not materially exceed total costs of the railway companies. This ensures that the rate set by the Agency is not only fair and reasonable to the railway companies, but is also commercially fair and reasonable to shippers.

Methodology for the 2023 regulated interswitching rates applicable to Zone 5

[22] The calculation of the 2023 regulated interswitching rates applicable to Zone 5 relies on available data and uses well-established costing methodologies, some elements of which are used in other Agency determinations. It also reflects relevant Agency determinations on methodology, including:

Determination R-2020-194 dated November 30, 2020 – the Agency’s determination of the 2021 regulated interswitching rates pursuant to Part III, Division IV of the CTA;
Determination R-2019-229 dated November 29, 2019 – clarifies the Agency’s methodology to determine the cost rate of common equity for federally-regulated railway companies;
Determination R-2019-230 dated November 29, 2019 – the Agency’s determination of the 2020 regulated interswitching rates pursuant to Part III, Division IV of the CTA;
Determination R-2017-198 dated December 5, 2017 – sets out the methodology to be used by federally-regulated railway companies to determine the working capital amounts and capital structure for regulatory purposes;
Order 2015-R-91 dated June 8, 2015 – the Agency’s determination of the variable portions of railway company cost accounts for Canadian National Railway Company (CN) and Canadian Pacific Railway Limited (as Canadian Pacific Kansas City Limited (CPKC) was then known); and
Decision 425-R-2011 dated December 9, 2011 – sets out the methodology used by the Agency to determine the cost of capital for federally-regulated railway companies.

[23] The data used in the development of the 2023 regulated interswitching rates applicable to Zone 5 are as follows:

Interswitching service units, obtained from CN and CPKC;
2020 unit costs for CN and CPKC for each service unit, including overheads, approved by the Agency in Decision LET-R-46-2022 and Decision LET-R-45-2022 respectively on November 10, 2022;
Contribution to fixed costs, based on data included in the 2020 annual reports to the Minister of Transport by CN and CPKC;
2023 forecasted component costs for CN and CPKC, based on the Agency’s calculation of the 2022-2023 Volume-Related Composite Price Indices in Determination R-2022-50;
2023 cost of capital rates for regulated interswitching determined pursuant to methodology set out in Determination R-2019-229, Determination R-2017-198 and Decision 425-R-2011; and
2023 productivity rates for CN and CPKC, calculated using data from CN’s and CPKC’s annual reports to the Minister of Transport from 2018 to 2020, and various tables from Statistics Canada.

[24] These components are described in greater detail in Appendix A.

2023 Regulated interswitching rates applicable to Zone 5

[25] Based on the application of the methodology described in Appendix A to the data, the Agency determines the regulated interswitching rates for Zone 5 for 2023 in the following schedule:

Schedule of regulated interswitching rates for Zone 5 for 2023
Column 1	Column 2	Column 3	Column 4
Item	Interswitching distance zone	Rate per car for interswitching traffic to or from a siding (single car)	Rate per car for interswitching a car block (60 cars or more)
1	Zone 5	$849 + $4.48 per additional kilometre	$333 + $1.69 per additional kilometre

[26] Zone 5 is defined in subsection 127.1(1.1) of the CTA as a zone which includes a point of origin or destination of a continuous movement of traffic that is located in whole or in part in Manitoba, Saskatchewan or Alberta and is within a radius of 160 kilometres of an interchange that is in whole or in part in Manitoba, Saskatchewan or Alberta but outside a radius of 30 kilometres of the interchange.

[27] Where a siding is located wholly or partly within Zone 5 and the point of connection with the siding is less than 40 kilometres from an interchange along the line of track of a terminal carrier, the interswitching rate for each car is $849 for single-car movements or $333 for car-block movements.

[28] Where a siding is located wholly or partly within Zone 5 and the point of connection with the siding is more than 40 kilometres from an interchange along the line of track of a terminal carrier, the interswitching rate for each car is increased for each kilometre over 40 kilometres by $4.48 per car for single-car movements or by $1.69 per car for car-block movements.

[29] 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.

[30] 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.

Legislation or Tariff referenced	Numeric identifier (section, subsection, rule, etc.)
Canada Transportation Act, SC 1996, c 10	112; 127.1(1.1); 127.1(4.1); 127.1(6); 127.1((2)(a); 127.1(2)(b); 127.1(3)
Budget Implementation Act, 2023, No. 1, SC 2023, c 26	443(1) ; 443(2); 444(1); 444(2); 444(3); 444(4); 445; 451
Railway Interswitching Regulations, SOR/88-41	7

Appendix A to Determination R-2023-178

The Canadian Transportation Agency’s (Agency) methodology for calculating regulated interswitching rates for Zone 5

The 2023 interswitching rates for Zone 5 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 425-R-2011 (2011 Decision), Determination R-2017-198, Determination R-2019-229 (2019 Determination), and Determination R-2022-39.

For explanatory purposes, the Agency has calculated interswitching rates for Zone 5 based on the following simplified formula:

Interswitching rates $(A \times B) \times \frac{C}{D}$

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 $(A) = (\frac{E}{F} \times G) \times H$

where:

E is system costs;

F is system service units;

G is variability of costs; and

H is interswitching service units.

The expression $(\frac{E}{F} \times G)$ 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 Canadian National Railway Company (CN) and Canadian Pacific Kansas City Limited (CPKC) 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 video conference calls with complementary electronic data from CN and CPKC.

For the calculation of the interswitching rates for Zone 5, recent service units for actual movements are not available since there are currently no movements in that zone. Therefore, the Agency has developed service units for a broad sample of potential shippers. These service units are based on extrapolations of historical information from CN and CPKC, coupled with updated information provided to the Agency by both railway companies.

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 siding. 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 are dedicated yard assignment 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 shipper, 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.

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 shipper. 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.

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 CPKC 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 their rail operations. 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 2023 interswitching rates for Zone 5, the Agency has used the 2020 unit costs for CN and the 2020 unit costs for CPKC. 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 model³) in order to estimate costs in 2023.

The equation for the Agency’s productivity model is presented in Appendix B.

The data used in the productivity model are the following:⁴

Output price and quantity data

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

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

CN’s output data
Price (index 2015 = 1)	Price = freight revenue / revenue ton miles
Output quantity	Revenue ton miles CN output data is categorized into 13 commodities: Agricultural products Grain Coal Forest products Paper and pulp Fertilizers Mineral ores Metals Automobiles and parts Fuel and chemicals Mine products Manufactured products 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 CPKC

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 CPKC

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 CPKC

Land
Price (index 2015 = 1)	$P_{t}^{l a n d}$ (please refer to Note 1)
Quantity	Land quantity

Source :Land quantity from F-49-1 (101)

Way and structure capital
Price (index 2015 = 1)	$P_{t}^{w & s}$ (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)	$P_{t}^{o w n e d_e q p}$ (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)	$P_{t}^{l e a s e d_e q p}$ (please refer to Note 1)
Quantity	Leased equipment expense

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

Note 1:

Service price for land

$(P_{t}^{l a n d}) = [\frac{1}{1 - u_{t}}] [(1 + {c o c}_{t}) A_{t - 1} - A_{t}] + S_{t} A_{t}$

Service price for way and structure

$(P_{t}^{w & s}) = [\frac{1 - u_{t} d_{t}}{1 - u_{t}}] [(1 + {c o c}_{t}) A_{t - 1} - (1 - δ_{t}) A_{t}] + S_{t} A_{t}$

Service price for owned equipment

$(P_{t}^{o w n e d_e q p}) = [\frac{(1 - k_{t}) (1 - u_{t} d_{t})}{1 - u_{t}}] [(1 + {c o c}_{t}) A_{t - 1} - (1 - δ_{t}) A_{t}] + S_{t} A_{t}$

Service price for leased equipment

$(P_{t}^{l e a s e d_e q p}) = [\frac{(1 - k_{t})}{1 - u_{t}}] [(1 + {c o c}_{t}) A_{t - 1} - A_{t}] + S_{t} A_{t}$

where:

$k_{t}$ is the investment tax credit rate;

$u_{t}$ is the marginal corporate income tax rate;

$A_{t}$ is the asset price;

$d_{t}$ is the present value of all future depreciable deductions for tax purposes;

${c o c}_{t}$ is the annual cost of capital rate as determined by the Agency;

$δ_{t}$ is the annual replacement rate; and

$S_{t}$ is the property tax rate.

Assumption:

The investment tax credit rate ( $k_{t}$ ) is set to zero.

Data sources:

The marginal corporate income tax rate ( $u_{t}$ ) is submitted annually to the Agency by CN and CPKC.
The asset price ( $A_{t}$ ) is from Statistics Canada: land (Table 18-10-0205-01); way and structure, owned equipment, leased equipment (Table 36 10 0097 01).
( $d_{t}$ ) is from schedule F-49 that is submitted annually by CN and CPKC to Transport Canada.
( $S_{t}$ ) is from schedules F-46 and F-49 that are submitted annually by CN and CPKC to Transport Canada.

The Agency applied an average productivity value of 97.24% as the estimated productivity gain for 2023 as per Determination R-2022-164. This is based on the Agency’s calculation of the average total factor productivity growth of each railway company from 2018 to 2020.

The table in Appendix C lists all of the variable cost accounts (as defined by the UCA) that factor into the 2023 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 3.17%, the U.S. 5-year risk-free rate of 3.70%, and the U.S. 10-year risk-free rate of 3.52% were used for the calculation of the 2023 interswitching rates for Zone 5.

The resulting cost of capital rate used in the development of the 2023 interswitching rates for Zone 5 is 6.44% for CN and 7.61% for CPKC as per Determination R-2022-164.

4.0 Averaging of costs for the development of the 2023 interswitching rates for Zone 5

To arrive at the determination of the single-car rate, the Agency developed costs for sidings served by CN and CPKC individually.

The Agency calculated the average relationship between distance and cost (linear regression) for each railway company to arrive at a rate for each railway company.

These rates specific to each railway company were then averaged to arrive at the final determined interswitching rate for Zone 5.

For the determination of the block-car rate, the Agency developed costs for sidings served by CPKC as CN only provided information about single-car shipments.

To ensure both CPKC and CN costs are considered for block-car shipments, the costs for the sample of block-car shipments served by CPKC were developed based on both CPKC and CN unit costs, and a linear regression was applied to those costs to arrive at the final block-car rate.

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 Zone 5. 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 2023, the average contribution to fixed costs is 83.35% as set out in Determination R-2022-164.

6.0 2023 Interswitching rates for Zone 5

The 2023 interswitching rates for Zone 5 are:

Column I	Column II	Column III
Interswitching distance zone	Rate per car for interswitching traffic to or from a siding (single car)	Rate per car for interswitching a car block (60 cars or more)
Zone 5	$849 + $4.48 per additional kilometre	$333 + $1.69 per additional kilometre

The Agency recognizes stakeholder expectations that the current rates reflect a process similar to that undertaken by the Agency in 2014.

While the underlying market conditions differ, the current results for Zone 5 are compared to Zone 4B rates and the 2014 rates as benchmarks:

	2014	2023	2014 Rate for shipper 100 km away	2023 Rate for shipper 100 km away	Change
Zone 5 Single Cars	$325 + $2.10/km	$849 + $4.48/km	$451	$1,118	148%
Zone 4B Single Cars	$251 + $3.38/km	$515 + $6.00/km	$454	$875	93%

	2014	2023	2014 Rate for shipper 100 km away	2023 Rate for shipper 100 km away	Change
Zone 5 Block Cars	$118 + $1.60/km	$333 + $1.69/km	$214.00	$434.40	103%
Zone 4B Block Cars	$74 + $1.20/km	$115 + $1.30/km	$146.00	$193.00	32%

In general, the expected increase in the current zone should reflect the price level inflation experienced in Zone 4B. Other things equal, single-car rate for zone 4B have increased by 93% between 2014 and 2023, and by 32% for block-cars during the same period.

The additional increase in rates is caused by operational differences in serving shippers outside the 30-km radial distance (Zone 4).

Examples of this variance include:

The impact of Transport Canada’s new duty and rest period rules for train crews;
Different track characteristics and restrictions;
Shipper sidings located along a mainline; and
More complex operational plans for shippers outside terminal boundaries.

Transport Canada’s new duty and rest period rules for train crews came into effect on May 2023 for freight railway companies. The new rules states that the maximum on-duty period for a train crew is now 12 hours compared with the previous rule of 16 hours.

The impact of this rule on the interswitching rate is that a second crew is now required if the time needed to service a shipper exceeds 12 hours. In comparison with Zone 4 and Zone 4B, the travel and work time required to service shippers in Zone 5 is more likely to exceed 12 hours, therefore, movements in that zone are expected to incur higher crew costs.

Different track characteristics and restrictions were observed for a number of shippers sampled as they reside on a lower density line where track speeds tend to be lower.

The Agency also received input from the railway companies that shippers along mainlines required more time to service due to the configuration of the sidings and the requirement for additional security features such as the application of derails.

Finally, because shippers at these distances tend to be located outside of terminal boundaries, they do not always have dedicated crews providing service directly in these areas. Rather, they are serviced by through-trains requiring traffic to be switched more often at different locations adding to the overall service requirements.

In each case, this increases the costs in Zone 5 relative to that experienced by Zone 4B shippers and contributes to the additional growth in rates between 2014 and 2023 for Zone 5.

Appendix B to Determination R-2023-178

Detailed interswitching rates calculation

Variable costs per shipper:

At year $(t 0)$ for which the last costing information is available:

$V C^{t 0} (s, i, z, r) = \sum_{j} \frac{C_{j}^{t 0} (r)}{y_{j} (r)} v_{j} (r) y_{j}^{*} (s, i, z, r)$

where:

s : is a shipper;

i : is an interchange;

z : is a zone ;

r : is a railway company;

$C_{j t 0} (r)$ is the cost for a specific expense category j for a railway r at time t0;

$y_{j} (r)$ is a system service unit that drives expenses of category j;

$v_{j} (r)$ 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 $(1 + p_{j})$ are applied to each cost categories j as follows:

${V C}^{t} (s, i, z, r) = \sum_{j} \frac{C_{j}^{t 0} (r) \times (1 + p_{j})}{y_{j} (r)} v_{j} y_{j}^{*} (s, i, z, r)$

Inflation factors $(1 + p_{j})$ 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.

$V C (z) = \sum_{r \in z} [\sum_{i \in z} (\sum_{s \in i} {V C}^{t} (s, i, z, r) ω_{s}) ω_{i}] ω_{r}$

Weights:

$χ_{s}$ is the volume of cars (measured with carloads) related to a specific shipper (s);

$ω_{s} = \frac{x_{s}}{\sum_{s \in i} x_{s}}$ is the weight of each shipper (s) in a specific interchange (i);

$ω_{i} = \frac{\sum_{s \in i} x_{s}}{\sum_{i \in z} \sum_{s \in i} x_{s}}$ is the weight of each interchange (i) in a specific zone (z);

$ω_{r} = \frac{\sum_{i \in z} \sum_{s \in i} x_{s}}{\sum_{r \in z} \sum_{i \in z} \sum_{s \in i} x_{s}}$ is the weight of each railway (r) in a specific zone (z).

Section 4.0 (Volume of interswitched cars) in 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 ( $C o n t r$ ) and a productivity factor ( $1 + g$ ) to each variable cost per zone $V C (z)$

$R (z) = \frac{V C (z) C o n t r}{1 + g}$

Where the contribution to fixed costs ( $C o n t r$ ) is estimated using the following equation:

$C o n t r i b u t i o n t o F i x e d C o s t (F) = \frac{T o t a l s y s t e m c o s t}{S y s t e m v a r i a b l e c o s t}$

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:

$P r o d u c t i v i t y I n d e x (g) = \frac{F i s h e r O u t p u t I n d e x}{F i s h e r I n p u t I n d e x} X 100 = \frac{F_{t_{0} {, t}_{1}}^{O u t p u t}}{F_{t_{0} {, t}_{1}}^{I n p u t}} X 100$

$F i s h e r O u t p u t I n d e x = F_{t_{0} {, t}_{1}}^{O u t p u t} = \sqrt{L_{t_{0} {, t}_{1}}^{O u t p u t} \times P_{t_{0} {, t}_{1}}^{O u t p u t}}$

$L a s p e y r e s O u t p u t I n d e x = L_{t_{0} {, t}_{1}}^{O u t p u t} = \frac{\sum_{i = 1}^{N} p_{i {, t}_{0}} {\times y}_{i, t_{1}}}{\sum_{i = 1}^{N} p_{i {, t}_{0}} \times y_{i, t_{0}}} = \sum_{i = 1}^{N} \frac{y_{i, t_{1}}}{y_{i, t_{0}}} \times w_{i, t_{0}}$

$P a a s c h e O u t p u t I n d e x = P_{t_{0} {, t}_{1}}^{O u t p u t} = \frac{\sum_{i = 1}^{N} p_{i {, t}_{1}} {\times y}_{i, t_{1}}}{\sum_{i = 1}^{N} p_{i {, t}_{1}} \times y_{i, t_{0}}} = \sum_{i = 1}^{N} \frac{y_{i, t_{1}}}{y_{i, t_{0}}} \times w_{i, t_{1}}$

$F i s h e r I n p u t I n d e x = F_{t_{0} {, t}_{1}}^{I n p u t} = \sqrt{L_{t_{0} {, t}_{1}}^{I n p u t} \times P_{t_{0} {, t}_{1}}^{I n p u t}}$

$L a s p e y r e s I n p u t I n d e x = L_{t_{0} {, t}_{1}}^{I n p u t} = \frac{\sum_{j = 1}^{M} w_{j {, t}_{0}} {\times x}_{j, t_{1}}}{\sum_{j = 1}^{M} w_{j {, t}_{0}} \times x_{j, t_{0}}} = \sum_{j = 1}^{M} \frac{x_{j, t_{1}}}{x_{j, t_{0}}} \times z_{j, t_{0}}$

$P a a s c h e I n p u t I n d e x = P_{t_{0} {, t}_{1}}^{I n p u t} = \frac{\sum_{j = 1}^{M} w_{j {, t}_{1}} {\times x}_{j, t_{1}}}{\sum_{j = 1}^{M} w_{j {, t}_{1}} \times x_{j, t_{0}}} = \sum_{j = 1}^{M} \frac{x_{j, t_{1}}}{x_{j, t_{0}}} \times z_{j, t_{1}}$

where:

$t_{0}$ is the base period;

$t_{1}$ 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;

$y$ is the output commodity quantity;

$w$ is the input commodity price;

$x$ is the input commodity quantity;

$w_{i, t_{0}}$ is the share of $i^{t h}$ output commodity in the base period value and $w_{i, t_{0}} = \frac{p_{i {, t}_{0}} {\times y}_{i, t_{0}}}{\sum_{i = 1}^{N} p_{i {, t}_{0}} \times y_{i, t_{0}}};$

$w_{i, t_{1}}$ is the share of $i^{t h}$ output commodity in the current period value and $w_{i, t_{1}} = \frac{p_{i {, t}_{1}} {\times y}_{i, t_{1}}}{\sum_{i = 1}^{N} p_{i {, t}_{1}} \times y_{i, t_{1}}}$

$z_{j, t_{0}}$ is the share of $j^{t h}$ input commodity in the base period value and $z_{j, t_{0}} = \frac{w_{j {, t}_{0}} \times x_{j, t_{0}}}{\sum_{j = 1}^{M} w_{j {, t}_{0}} \times x_{j, t_{0}}};$

$z_{j, t_{1}}$ is the share of $j^{t h}$ input commodity in the current period value and $z_{j, t_{1}} = \frac{w_{j {, t}_{1}} \times x_{j, t_{1}}}{\sum_{j = 1}^{M} w_{j {, t}_{1}} \times x_{j, t_{1}}}$

Appendix C to Determination R-2023-178

Accounts from the Uniform Classification of Accounts and Related Railway Records (2014) [UCA] that factor into the 2023 interswitching rates for Zone 5
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
635	635	Crew Accommodation
637	637	Crew Transportation
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)

Mark MacKeigan

Heather Smith

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Date modified:: 2023-09-18

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Determination No. R-2023-178

Summary

Background

The law

Stakeholder engagement and feedback

Hypothetical Workloads

Controlling for Distance Variance

Contribution to Fixed Costs

Methodology for the 2023 regulated interswitching rates applicable to Zone 5

2023 Regulated interswitching rates applicable to Zone 5

Appendix A to Determination R-2023-178

The Canadian Transportation Agency’s (Agency) methodology for calculating regulated interswitching rates for Zone 5

1.0 Interswitching service units

1.1 Single-car service units

1.2 Block-train service units

2.0 Unit cost for each service unit, including overheads

Output price and quantity data

Input price and quantity data

Note 1:

3.0 Cost of capital

4.0 Averaging of costs for the development of the 2023 interswitching rates for Zone 5

5.0 Contribution to fixed costs

6.0 2023 Interswitching rates for Zone 5

Appendix B to Determination R-2023-178

Detailed interswitching rates calculation

Variable costs per shipper:

Variable costs per zone:

Weights:

Final rates per zone:

Appendix C to Determination R-2023-178

Member(s)