• Policy Committees
• Intergenerational Transfer
• Producer Payment Security
• Grain Freight Transportation
• Full Costing Review
• Rail Freight Service Review
• Producer Cars
• Cost of Capital Methodology Review
• Industry Development Fund (IDF) Review
• Discontinuance Payment Indexing
• Livestock Sector Crisis
• Crop Insurance

Industry Development Fund (IDF) Review

Current Costing Reviews

While a full costing review has been refused, the CTA has been directed to conduct two current reviews that have direct cost implications for grain shippers:  1) the Cost of Capital Methodology Review; and 2) the Industry Development Fund Review. 

The bottom line is that there is money on the table and these reviews are one-sided:  a) all components of the reviews will increase railway revenues if their recommended changes are adopted; and b) the reviews are not looking at changes that would reduce the revenue cap. 

Increases to railway revenues from these reviews would be achieved prior to a full costing review being done and become part of the status quo.

Through ongoing reforms in the regulatory framework the railways gained a stronger commercial position and price flexibility in exchange for a revenue cap.  Now, they are seeking relief from the constraints of the cap by creating as many opportunities as possible for generating more revenue under the cap.

An initial analysis of the Cost of Capital Methodology Review is available [HERE]

Industry Development Fund Review

When railways make financial contributions to facilities owned by others, the IDF allows railways to pass part of the cost to producers through the revenue cap:

For the purposes of this section, if the Agency determines that it was reasonable for a prescribed railway company [currently CN and CP] to make a contribution for the development of grain-related facilities to a grain handling undertaking that is not owned by the railway company, the company’s revenues for the movement of grain in a crop year shall be reduced by any amount that the Agency determines constitutes the amortized amount of the contribution by the company in the crop year.

The railways contend that they have the right to retain ownership of the IDF contribution deducted from the revenue cap.  APAS signed on in October, 2009 to KAP’s submission to the CTA’s review of the IDF.  They argue convincingly that the CTA should not accept the railways’ contention.  Here is their central argument:

"It is the submission of Keystone Agricultural Producers that the Agency does not have the legislated authority to reduce the capped revenue of a railway company by the added cost of capital calculated on the value of remaining amortized IDF contributions.

Section 150(5) of the Canada Transportation Act (the Act) allows railways to pass on a portion of the costs associated with investments in grain handling infrastructure to grain shippers through an increase in allowable freight rates.   There is no indication that the intention of the legislation is to allow railways to pass on the total cost of these investments as has been previously claimed.  The issue with deducting the cost of capital in addition to the amortized value of IDF contributions is that it does just that. 

The development of the grain handling infrastructure funded through IDF contributions result in additional profits for the contributing railway through efficiencies associated with larger car block shipments.  These profits are not restricted by the revenue cap and the legislation already makes exceptions that allow for the railways to pass on the cost of the incentives used to encourage these efficiencies.  The contributing railway company should then expect to pay for at least a portion of this investment.

The legislation clearly states that the reduction of the railway’s capped revenues is to be the “amount that the Agency determines constitutes the amortized amount of the contribution by the company.”  The addition of the cost of capital being calculated on the remaining initial investment would accurately reflect a cost of ownership or the general costs incurred by the railway.  In Section 157 of the Act, the Agency is provided the authority to develop methodologies to determine railway costs, including cost of capital, which the legislation then call on the Agency to apply to regulatory calculations including the VRCPI .  In the case of Section 150(5) of the act, the Agency is neither directly nor implicitly instructed to apply this calculation to the value of an IDF contribution. 

We understand the challenge the Agency has in balancing the interests of the various actors involved in Canada’s grain handling and transportation system while still trying to promote growth and efficiency.  The foundation of our position that the Agency may not include the cost of capital in the reduction of a railway’s capped revenues related to an IDF contribution is that the railway companies must share the financial cost of investments that will earn them additional profits through increased efficiencies.  The Maximum Grain Revenue Entitlement exists first and foremost to protect captive grain shippers from a limited competition market.  Other considerations are secondary to this goal."