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Questions and answers on the Railway Revenue Cap

QUESTION 1:

Can you explain the maximum grain revenue entitlement (or "revenue cap") formula in subsection 151(1) of the Canada Transportation Act (CTA) and illustrate how it works?

ANSWER:

The revenue cap formula is given below. At this point in time, it applies to CN and CP since they are currently the only "prescribed railway companies". In order to determine the CN and CP revenue caps for a given crop year, railway-specific statistics are put into the formula. The only exception relates to input F, the volume-related composite price index, which is common to both CN and CP. A general explanation of the formula is given below. Further, examples with specific figures will be provided in answering subsequent questions.

Revenue Cap = [A ÷ B + ((C - D) × $0.022)] × E × F

The revenue cap formula has four components. The first component, A/B, takes the company's base year revenues for the movement of grain (A) and divides it by the number of tonnes of grain (B) moved by the company in the base year. The result is the company's average base year revenue per tonne. Values for A and B are provided in subsections 151 (2) and (3) of the CTA.

The second component, (C-D) x $0.022, adjusts the above figure (A/B) in order to take into account the difference in the average length of haul (in miles) for a given crop year compared to the base year average length of haul. C is the average length of haul for the given crop year and is determined by the Agency after the crop year has ended. D is the average length of haul for the base year and is given in subsections 151 (2) and (3) of the CTA. If the two average lengths of haul are the same, the adjustment is nil. However, if the average lengths of haul differ by10 miles, for example, then the average revenues for the given crop year would be adjusted by $0.22 per tonne (10 x $0.022).

The third component, E, multiplies the adjusted revenue per tonne figure for the given crop year by the number of tonnes moved by the company in the given crop year. The result is a revenue cap figure, before an allowance for inflation. When this figure is multiplied by the fourth component, F, the volume-related composite price index, the final revenue cap figure is derived for the given crop year.

Note that paragraph 151(4)(a) of the CTA has set the value for F to be unity (1.0) for crop year 2000-2001. While this suggests that there is no allowance for inflation for crop year 2000-2001, this is not the case since the Agency's estimated 4.5% inflationary increase for crop year 2000-2001 was captured during the development of the base year revenue statistics.

QUESTION 2:

When must the Agency provide its revenue cap determinations for a given crop year?

ANSWER:

The Agency must provide its determinations for a given crop year as follows:

a) The forecasted volume-related composite price index (reflecting railway inflation) must be established by April 30^th preceding the given crop year.

b) The railway companies' revenues and the maximum grain revenue entitlements must be determined by December 31^st after the given crop year.

QUESTION 3:

Can you illustrate how the revenue cap formula works for CN, for crop year 2000-2001?

ANSWER:

Two examples follow:

Example #1: Assuming actual crop year tonnages and length of haul are the same as the base year CN figures (i.e. 12,437,000 tonnes, and 1,045 miles).

The formula is: Revenue Cap = [A ÷ B + ((C - D) × $0.022)] × E × F

Pursuant to subsection 151(2) and paragraph 151(4)(a) of the CTA:

A = $348,000,000
B = 12,437,000 tonnes
D = 1,045 miles
F = 1.0

As set above for the example,

C = 1,045 miles
E = 12,437,000 tonnes

Inserting these values into the formula we get:

In this example, the revenue cap is unchanged from the base year figure. This occurs since there was no adjustment attributable to the average length of haul, nor to volume, since these figures were assumed to be the same as for CN's base year.

Example #2: Assuming actual crop year tonnages and length of haul differ from the base year CN figures: eg. 12,810,100 tonnes and 1,060 miles.

The formula is: Revenue Cap = [A ÷ B + ((C - D) × $0.022)] × E × F

Pursuant to subsection 151(2) and paragraph 151(4)(a) of the CTA:

A = $348,000,000
B = 12,437,000 tonnes
D = 1,045 miles
F = 1.0

As set above for the example,

C = 1,060 miles
E = 12,810,100 tonnes

Inserting these values into the formula we get:

In this example, the revenue cap is about 4.2% higher than the base year figure of $348,000,000. This occurs since the average length of haul adjustment adds $0.33, or 1.2 %, to the average revenue per tonne while the volume of grain shipped in the crop year was 3.0% higher than the base year figure.

QUESTION 4:

Can you illustrate how the revenue cap formula works for CP, for crop year 2000-2001?

ANSWER:

Two examples follow:

Example #1: Assuming actual crop year tonnages and length of haul are the same as the base year CP figures (i.e. 13,894,000 tonnes, and 897 miles).

The formula is: Revenue Cap = [A ÷ B + ((C - D) × $0.022)] × E × F

Pursuant to subsection 151(3) and paragraph 151(4)(a) of the CTA:

A = $362,900,000
B = 13,894,000 tonnes
D = 897 miles
F = 1.0

As set above for the example,

C = 897 miles
E = 13,894,000 tonnes

Inserting these values into the formula we get:

In this example, the revenue cap is unchanged from the base year figure. This occurs since there was no adjustment attributable to the average length of haul, nor to volume, since these figures were assumed to be the same as for CP's base year.

Example #2: Assuming actual crop year tonnages and length of haul differ from the base year CP figures: eg. 14,090,000 tonnes and 880 miles.

The formula is: Revenue Cap = [A ÷ B + ((C - D) × $0.022)] × E × F

Pursuant to subsection 151(3) and paragraph 151(4)(a) of the CTA:

A = $362,900,000
B = 13,894,000 tonnes
D = 897 miles
F = 1.0

As set above for the example,

C = 880 miles
E = 14,090,000 tonnes

Inserting these values into the formula we get:

In this example, the revenue cap amount is almost the same as the base year figure. This occurs since the average length of haul adjustment subtracts $0.37, or 1.4%, from the average revenue per tonne while the volume of grain shipped in the crop year was 1.4% higher than the base year figure. The two adjustments virtually offset each other.

For more information please contact:

Manager, Grain Division
Rail and Marine Branch
Canadian Transportation Agency
15 Eddy Street
Gatineau, Quebec K1A 0N9

Phone: (819) 997-6542
Toll-Free: 1-888-222-2592
TTY: 1-800-669-5575 or (819) 953-9705
Fax: (819) 953-5564
E-mail: revenue.cap@cta-otc.gc.ca

These questions and answers have been prepared for information purposes only. In all cases, the language of the legislation and the regulations is the final authority.