Railways exceeded their regulatory revenue cap moving record volumes

The Canadian Transportation Agency says the railways were allowed to earn $1.46 billion shipping grain in 2014-15, but exceeded their maximum revenue entitlement by $9 million or about 22 cents a tonne

The nation’s two main railways moved a record volume of western Canadian grain in the 2014-15 crop year but they collected more from grain shippers than regulations allow.

Canadian National Railway Company (CN) and Canadian Pacific Railway Company (CP) together shipped 41.3 million tonnes of western grain to export position and were supposed to do it for $1.46 billion or less under the Canada Transportation Act’s maximum revenue entitlement (MRE) regulation. The law was implemented in 2000 to give railways freight rate flexibility to encourage efficient grain movement, while protecting farmers, who are seen as captive shippers, from being gouged.

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CN and CP exceeded the MRE, also referred to as the “revenue cap,” by almost $6.9 million and $2.1 million, respectively — totalling $9.02 million, the Canadian Transportation Agency (CTA) said in a release Dec. 29, 2015. The railways have 30 days to forward the surplus revenue to the Western Grains Research Foundation, plus a five per cent penalty of $450,188 ($343,330 and $106,858 for CN and CP, respectively). The foundation, which is governed by farmers, uses the money for crop research to benefit western farmers.

More grain moved

CN moved six per cent more grain in 2015 and CP moved eight per cent more than the previous crop year. Total movement was up 7.4 per cent from 2013-14’s 38.4 million tonnes, which was the previous record.

Back-to-back record grain shipping followed in the wake of 2013’s record 78-million-tonne western Canadian crop harvest.

In 2013-14 there was a record 81.9 million tonnes of grain to move when production and carry-over were combined. In 2014-15 total supply dropped to 77.01 million tonnes — the second largest ever.

While the railways struggled in 2013-14 with shipping backlogs, the “sun and stars aligned” in 2014-15 allowing the railways to break the previous year’s record, one industry observer said. Improved winter weather helped and “the railways were more focused.”

In an effort to reduce a backlog of grain following the record harvest and the coldest winter in a century, on March 5, 2014 the federal government ordered the railways to ship a weekly minimum volume of grain or face fines. The order ended March 28, 2015. Although the order had unintended consequences, including less grain going to domestic and U.S. markets because of slower turnaround times, the government’s unprecedented action got the railways’ attention, according to farmers and shippers.

The railways maintained they would have moved the same or more grain without the order.

While exceeding the MRE by $9 million might seem a lot, it’s just 0.6 per cent of the total revenue allowed.

Rail freight rates can vary throughout the year and with the distance hauled. That said, the weighted average the railways were allowed to collect in 2014-15 was $35.35 a tonne — up five per cent from 2013-14.

The amount they collected on average was $35.57, or 22 cents a tonne too much.

In 2013-14 the railways (CN was over and CP was under the MRE) collectively exceeded the MRE by nine cents a tonne.

Maximizing revenues

For years, the railways have been just under or just over the MRE. Farmers and shippers say this proves the railways are maximizing revenues, rather than competing. When CP proposed the MRE as an alternative to running rights to create rail competition, the railways said the MRE would be irrelevant because competition would keep earnings well below the maximum.

The railways and some economists say the MRE is blunting market forces and discouraging railway investment, which will result in poorer service, lost markets and ultimately less returns to farmers.

The future of the MRE and grain transportation will presumably soon be clearer. The Canadian Transportation Act was reviewed in 2015. The findings landed on Transport Minister Marc Garneau’s desk Dec. 21. He must table the report no later than 30 days following the first sitting of the House of Commons.

The MRE is based on a formula the CTA uses before April 30 each year. It’s adjusted to cover the railways’ inflationary costs, the expected volume of grain to be hauled and the distance hauled. The more grain the railways move, the more revenue they are entitled to collect.

In April 2014, the volume-related composite price index was raised 4.2 per cent, but it was cut 5.6 per cent in April 2015.

However, railway costs in the formula haven’t been updated since 1992. In 2000 the formula was designed to give the railways a 20 per cent return on variable costs. But a study by Travacon, prepared recently for a number of Saskatchewan farm groups, estimates grain pays a 61 per cent return due to increased rail efficiency. And farmers say most of those efficiencies have cost them money due to longer trucking distances to elevators.

“Grain is paying its fair share and then some,” Harvey Brooks, general manager of the Saskatchewan Wheat Development Commission, said during the Fields on Wheels conference in Winnipeg Dec. 2.

About the author

Reporter

Allan Dawson

Allan Dawson is a reporter with the Manitoba Co-operator based near Miami, Man. Covering agriculture since 1980, Dawson has spent most of his career with the Co-operator except for several years with Farmers’ Independent Weekly and before that a Morden-Winkler area radio station.

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