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Decision No. 670-R-2002

Amended by Decision No. 667-R-2003

IN THE MATTER OF the determination by the Canadian Transportation Agency of the Western Grain Revenue Caps for the movement of western grain by prescribed railway companies for crop year 2001-2002, and

IN THE MATTER OF the determination by the Canadian Transportation Agency of a prescribed railway company's revenue for the movement of western grain for crop year 2001-2002 and whether a prescribed railway company's western grain revenue exceeds its corresponding revenue cap, pursuant to sections 150 and 151 of Division VI, Part III of the Canada Transportation Act, S.C., 1996, c. 10.

File No. T6650-2

This Decision provides the Canadian Transportation Agency's (hereinafter the Agency) determinations of the western grain revenue caps, and revenues, for the movement of western grain by prescribed railway companies for crop year 2001-2002. These determinations, which must be completed by December 31, 2002, are necessary to ensure that a prescribed railway company's western grain revenue does not exceed its maximum revenue entitlement, which is referred to as its revenue cap. If a prescribed railway company's revenue exceeds its revenue cap, the company must pay out the excess amount and penalties, as specified in the Railway Company Pay Out of Excess Revenue for the Movement of Grain Regulations. There were two prescribed railway companies during the 2001-2002 crop year; the Canadian National Railway Company (hereinafter CN) and the Canadian Pacific Railway Company (hereinafter CP), about which the Agency made its revenue cap determinations.

The Agency's determination of CN's and CP's revenue caps must utilize the formula, the base year statistics, and the volume-related composite price index as defined in section 151 of the Canada Transportation Act (hereinafter the CTA). It also requires CN's and CP's specific tonnage and length of haul statistics for crop year 2001-2002.

The Agency's determination of CN's and CP's western grain revenue complies with the matters contained in subsections 150(3),(4), (5) and (6) of the CTA. It is also consistent with two Agency Decisions concerning the interpretation of a number of matters that are to be considered when the Agency determines a prescribed railway company's grain revenue for revenue cap purposes: Decision No. 114-R-2001 (In the matter of the Western Grain Revenue Cap established pursuant to Division VI, Part III of the CTA dated March 16, 2001) and Decision No. 664-R-2001 dated December 21, 2001 (In the matter of CP's revised grain port demurrage rules which took effect on July 1, 2001). CP's appeal of the latter decision to the Federal Court of Appeal is pending.

A western grain movement for a given crop year is defined in section 147 of the CTA. Key terms are 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, or

(b) Churchill, Manitoba, or a port in British Columbia for export,

but does not include the carriage of grain to a port in British Columbia for export to the United States for consumption in that country;

"grain" means 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; [Note: there are over 50 types of grain defined in Schedule II as eligible grains under the revenue cap. These include the six major grains - wheat, barley, canola, oats, rye and flax.]

"crop year" means the period beginning on August 1 in any year and ending on July 31 in the next year;

"prescribed railway company" means the Canadian National Railway Company, the Canadian Pacific Railway Company and any railway company that may be specified in the regulations.

The Agency's determination of CN's and CP's volume and length of haul statistics for western grain movements for crop year 2001-2002 is shown in Table 1 below. This determination was based on detailed traffic submissions by CN and CP. The submissions were audited to ensure that the traffic qualified as western grain movements and that the related revenue, tonnage and mileage statistics were accurate. Compliance testing, on a sample basis, and editing of the railway company's data was performed by Agency staff. A number of minor anomalies were found and corrected.

* Reflects movement by CP to Edmonton, with CN haulage from Edmonton to Prince Rupert.

As shown in the above table, 22,077,118 tonnes of western grain were moved in the 2001-2002 crop year. This figure is about 25 percent lower than the western grain volume for the previous crop year. The 2001-2002 crop year average length of haul of 896 miles is 30 miles lower than for the previous crop year. This shorter length of haul is primarily the result of a lower proportion of CN movements terminating at Prince Rupert and a lower proportion of CP movements to Vancouver. While Churchill is an eligible western grain destination, the Churchill-bound movements which took place did not qualify as western grain. The reason is that the CTA requires the carriage of western grain to be by a "prescribed railway company" and the Hudson Bay Railway Company is not a prescribed railway company.

Subsection 151(1) of the CTA states that the following formula is to be used by the Agency in its determination of a prescribed railway company's revenue cap:

[A/B + ( (C-D) x $0.022)] x E x F

where

A is the company's revenue 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 as determined by the Agency.

For CN, in respect of crop year 2001-2002, the values for A, B, C, D, E and F are as follows:

A = $348,000,000
B = 12,437,000
C = 930
D = 1,045
E = 11,147,422
F = 1.0352

The source of CN's values for A, B and D is prescribed by subsection 151(2) of the CTA. As shown earlier in section 1.0 of this Decision, the 2001-2002 crop year values for C and E were 930 miles and 11,147,422 tonnes respectively. The value of 1.0352 for the volume-related composite price index for crop year 2001-2002 was determined by the Agency pursuant to subsection 151(5) of the CTA in Decision No. 202-R-2001, dated April 26, 2001.

Substitution of these CN values into the revenue cap formula results in a CN revenue cap for crop year 2001-2002 of $293,700,017. In other words, after accounting for the actual tonnage and actual length of haul in crop year 2001-2002, CN's revenue cap is $293,700,017.

For CP, in respect of crop year 2001-2002, the values for A, B, C, D, E and F are as follows:

A = $362,900,000
B = 13,894,000
C = 861
D = 897
E = 10,929,696
F = 1.0352

As above, CP's values for A, B and D are derived from subsection 151(3) of the CTA and as shown in section 1.0 of this Decision, the 2001-2002 crop year values for C and E were 861 miles and 10,929,696 tonnes respectively. The value of 1.0352 for the volume-related composite price index for crop year 2001-2002 was provided in Agency Decision No. 202-R-2001, dated April 26, 2001.

Substitution of these CP values into the revenue cap formula results in a CP revenue cap for crop year 2001-2002 of $286,562,477. In other words, after accounting for the actual tonnage and actual length of haul in crop year 2001-2002, CP's revenue cap is $286,562,477.

The determination of a prescribed railway company's grain revenue requires many assessments as to what is, or is not, to be included as revenue; and what is, or is not, an allowable reduction to revenue. A partial listing of such matters appears in subsections 150(3), (4), and (5) of the CTA. A more comprehensive listing was established, following consultation with the grain industry, in Decision No. 114-R-2001. Decision No. 664-R-2001 provided further clarification concerning the treatment of revisions to CP's demurrage rules.

As a brief summary, a prescribed railway company's statutory western grain revenue stems mostly from billings generated by 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 interswitching or exchange switching; amounts received for additional switching requested by the shipper; a portion of grain port demurrage charges. A railway company's statutory grain revenue does not include (as non-revenue matters): any amounts paid or allowed for incentives, rebates or any other similar reductions; amounts that are earned which the Agency characterizes as a performance penalty or as being in respect of demurrage or for the storage of railway 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; and compensation for running rights.

Allowable reductions to a railway company's statutory grain revenue include; the amortized amounts of contributions for the development of grain-related facilities to a grain handling undertaking that is not owned by the company (Industrial Development Fund contributions); and amounts paid or allowed for interswitching or exchange switching. The following matters do not reduce a railway company's statutory grain revenue: amounts paid or allowed as dispatch; amounts paid by railway companies resulting from the discontinuance of grain dependent branch lines; or amounts paid by the railway companies to municipal or district governments as performance penalties.

Taking all of the above into account, the Agency has determined CN's and CP's western grain revenue for crop year 2001-2002 to be: CN = $280,202,777; CP = $277,873,748.

Railway company records relating to western grain revenue were audited by Agency staff. Initial freight revenue, including payments to other railway companies involved with the carriage of grain, were submitted by CN and CP on a per movement basis. Both were verified, on a test basis, against company accounting records and source documents. Numerous onsite visits were also made to CN and CP offices to ensure that all western grain revenue was captured and that revenue exclusions or reductions were appropriate and accurate.

The Agency has determined western grain revenue caps and revenue for CN and CP for the crop year 2001-2002 as summarized below. The grain revenue for both railway companies was below their respective revenue cap.

Subsection 150(2) of the CTA provides that if a prescribed railway company's revenues, as determined by the Agency, for the movement of grain in a given crop year exceed the company's revenue cap for that year, the company shall pay out the excess amount, and any penalty that may be specified in the regulations. Pursuant to this provision, Privy Council Order No. P.C. 2001-1051 dated June 7, 2001 established the Railway Company Pay Out of Excess Revenue for the Movement of Grain Regulations. According to these Regulations:

- if the Agency concludes that a prescribed railway company's revenues for the movement of grain in a crop year exceed the company's maximum revenue entitlement for that year, the Agency must make a decision or order requiring the company to pay out the excess amount and the applicable penalty;

- the penalty is:

5 percent of the excess amount, if that excess amount is one per cent or less of the company's maximum revenue entitlement; or

15 percent of the excess amount, if that excess amount is more than one per cent of the company's maximum revenue entitlement.

the excess amount and the penalty is to be paid to the Western Grains Research Foundation, within 30 days after the date on which it receives the Agency's decision or order.

As CN's and CP's statutory grain revenues fell below their respective revenue caps for the crop year 2001-2002, no penalties or payouts apply.