Dear Charlie et al.
We have had some interesting discussions with
neighbours about lack of transport services.
WCWGA is flying a 'test ballon' that gives good detail
on the present system... and a proposal to pay
incentive rates in times of high demand for transport
services.
I note that significant grain is moving to the lower
mainland BC area by truck... now... which if railways
were able to extract huge premiums... this would be
being done now as we speak.
Here is the Background on how our system works now;
thanks WCWGA for 'testing the waters' in a tough
political climate with 'brave' ideas!
Enjoy!
Tom4cwb
Background on the present system, WCWGA
Under the Canada Transportation Act, the two main
Canadian railways (CN and CP) are subject to a
maximum revenue entitlement on shipments of grain
and grain products from western Canada. This
entitlement is commonly referred to as a revenue cap,
although that is somewhat of a misnomer, as the
revenue is not “capped”, but rather is adjusted to
reflect the actual volume of grain shipped. The
maximum revenue entitlement for each railway is also
adjusted to reflect the average length of haul for grain
shipped during the crop year, and inflation (or
deflation) in railway input costs.
Grain shipments subject to the revenue cap are those
that are destined to west coast ports (Vancouver and
Prince Rupert) and those destined to Thunder Bay and
Armstrong (a station on the CN line directly north of
Thunder Bay, enroute to central and eastern Canada).
Rail grain shipments to the United States, to Churchill,
beyond Thunder Bay / Armstrong, and to interior
points within western Canada (e.g. the Fraser Valley)
are not subject to the revenue cap and instead move
under commercial freight rates.
The base year for the revenue cap was established in
the 2000-01 crop year, following a costing analysis
undertaken as part of the Kroeger review. This analysis
essentially updated the cost figures calculated under
the 1992 costing review, as mandated under the now-
repealed Western Grain Transportation Act.
Formula for determining the revenue cap
The formula for determining the maximum revenue
entitlement for each railway company is set out in
section 151 of the Canada Transportation Act. The
formula is as follows:
[A/B ((C - D) × $0.022)] × E × F
where,
A is the company’s revenues 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.
The first term in the formula (i.e. A/B) effectively
represents the average revenue per tonne (or average
“freight rate”) that each railway was deemed to earn in
the base year. For CN, this was $27.98 per tonne. For
CP it was $26.12 per tonne. The higher CN rate reflects
the fact that the average length of haul for CN was
greater in the base year than the average length of
haul for CP. CN’s average length of haul in the base
year (term D in the above formula) was 1,045 miles.
CP’s average length of haul was 897 miles.
If the actual average length of haul (term C) for either
railway in any given crop year happens to be equal to
the length of haul in the base year, then the second
term in the formula becomes zero (i.e. C – D = 0) and
therefore no adjustment is made for the length of haul.
If the average length of haul is either above or below
the length of haul in the base year, then the revenue
per tonne entitlement is adjusted by $0.022 for every
mile the average is above or below the base year. For
example, if the average length of haul for CN in any
given crop year was 1,055 (i.e. 10 miles above the
average in the base year) then the revenue per tonne
entitlement (i.e. base freight rate) would be adjusted
upward by 22 cents per tonne (i.e. 10 times $0.022).
Similarly, if the average length of haul for CN was
1,035, then the revenue per tonne entitlement would
be adjusted downward by 22 cents per tonne.
According to the Canadian Transportation Agency, the
average length of haul for shipments by CN under the
revenue cap has ranged from 930 to 1,040 miles over
the past 13 years. The average length of haul for CP
has ranged from 820 to 916 miles.
The next term in the formula, variable E is the actual
grain volume shipped by a railway company in a given
crop year. In effect, the maximum revenue entitlement
formula takes the average revenue per tonne
entitlement (as adjusted for average length of haul)
and multiplies it by the actual tonnes shipped. Thus,
there is no “cap” on absolute revenue. The amount of
revenue that each railway is entitled to receive is
directly correlated to the volume of grain shipped.
Agency statistics over the past 13 years record that the
grain volume shipped by CN under the revenue cap has
ranged from a low of 7.3 million tonnes in 2002-03 to
a high of 17.1 million tonnes in 2011-12. The grain
volume shipped by CP has ranged from 9.1 million
tonnes in 2002-03 to 16.4 million tonnes in 2012-13.
The next term in the formula, variable F is the volume-
related composite price index (VRCPI). This index is a
measure of price inflation (or deflation) of certain
railway input costs including labour, fuel, materials
and capital. The index was set at 1.0 for the 2000-01
crop year and is adjusted annually in a determination
made by the Canadian Transportation Agency. For the
2013-14 crop year, the VRCPI is set at 1.2691. In other
words, railway input costs have climbed by 26.91%
since 2000-01.
This means that the average maximum revenue per
tonne that CN is allowed to charge in the 2013-14
crop year on statutory grain shipments is $35.51 per
tonne (i.e. $27.98 in the base year
1 Canadian Transportation Agency. Western grain
revenue cap statistics, 2000-01 to 2012-13.
http://www.otc-cta.gc.ca/eng/publication/western-
grain-revenue-cap-statistics times 1.2691), assuming
the average length of haul is the same as it was (i.e.
1,045 miles) in the base year. For CP, the average
maximum revenue per tonne allowed in 2013-14 is
$33.15 per tonne (i.e. $26.12 times 1.2691).
In summary then, the revenue cap calculation for each
railway is based on the maximum revenue per tonne
entitlement (as adjusted by average length of haul and
inflation) multiplied by the actual tonnage shipped by
each railway.
Wheat Grower proposal (to add incentives)
The Wheat Growers propose an incentive be built into
the maximum revenue entitlement to encourage the
railways to add extra grain shipping capacity during
the peak post-harvest shipping period (i.e. September
to January). We propose the revenue entitlement for
each railway be adjusted upward if the number of
grain cars shipped by the railway during this period
exceed a predetermined threshold by a certain
percentage. The incentive entitlement could also be
designed such that the incentive increases as the
amount above threshold increases – in effect, the
greater the shipments, the greater the incentive.
For illustration purposes, let’s suppose the baseline car
shipments is established for a railway company at
5,000 cars per week or 100,000 cars over the 20
weeks in the post-harvest shipping period. If actual
shipments were say, 5% above 100,000 cars, then the
revenue cap for that railway company would be
adjusted upward, by say 1%. If actual shipments were
10% above the baseline threshold, then the revenue
cap would be adjusted upward by 2% or perhaps by a
higher amount if the decision was made to
progressively increase the incentive entitlement.
In effect, we are proposing to amend the maximum
revenue entitlement formula as follows:
[A/B ((C - D) × $0.022)] × E × F × G
where,
G is an incentive-based entitlement if grain shipments
during the peak post-harvest shipping period are a
certain percentage above a pre-established baseline.
The baseline threshold, the level at which the incentive
is to be triggered, and the amount of the incentive are
all to be determined. These parameters would be
established and set out by regulation after the federal
government consults with railways, shippers and
farmers.
Some considerations in establishing an incentive-
based revenue cap
In determining the appropriate incentive entitlement to
incorporate into the formula, some issues need to be
addressed. These include:
1) Setting an appropriate threshold base. In our view,
the baseline threshold should be set at a level that is
considered to be the “normal” level of shipments (in
terms of volume of grain or number of cars shipped) in
the peak post-harvest shipping period. Perhaps this
could be set on the basis of a five or ten year historical
average, adjusted upward by trendline increases in
grain production or rail shipments. A determination
would also have to be made as to the appropriate start
and end date of the “peak post-harvest shipping
period” so as to establish a suitable baseline threshold
for each railway during that period.
2) Determining which shipments should be included in
the threshold base. In our view, the threshold base
should include grain and grain product shipments to
all destinations, whether they are governed by the
revenue cap or not. If the incentive entitlement were to
be restricted to railcars shipped under the revenue cap,
then that would act as a disincentive for railways to
ship cars to other destinations, such as the U.S.,
eastern Canada or within western Canada. In our view,
including all shipments as the basis for calculating the
incentive entitlement will minimize any market
distortions. We recognize that shipments with a quick
turnaround time will be favoured under our proposal
however, if the primary objective is to move as much
grain as quickly as possible during the peak post-
harvest period, this is not seen as a negative.
Moreover, shipments with long turnaround times (e.g.
shipments to the southern U.S. or Mexico) move at
commercial rates and so presumably these rates will
reflect the longer turnaround times.
3) Determining the amount of the incentive.
Depending on where the baseline threshold is set, a
determination would have to be made as to when the
incentive is triggered, and the level of that incentive
entitlement. For example, the incentive may be set at
0% if shipments are less than 5% above normal. This
would be considered normal variation. At 5% above
threshold, the incentive may be 1%; at 10% it may be
2%, etc. The incentive scale could be linear or increase
progressively as the amount of shipments exceeds the
base threshold, subject to some overall maximum
limit. A decision would also have to be made on the
increment levels. In our view, the incentive entitlement
should be graduated on fairly fine increments, so there
is not a huge difference in entitlement between just
hitting or just missing a certain threshold level.
4) Whether a railway company exceeds its threshold,
and by how much, depends on whether there are
sufficient car orders from grain companies and other
shippers. In those years where there is a shortfall in
crop production, or slow customer orders, there would
be no need to add rail capacity and no incentive would
be paid. In effect, variable G would equal 1.0 and there
would be no impact on the revenue cap.
5) Consideration was given as to whether the formula
should be adjusted downward if rail shipments fall
below a certain threshold. While we see the merit in
imposing a penalty for poor performance, it is our view
that addressing such performance issues are better
dealt with through service level agreements that the
railways negotiate with shippers. In years where there
was a short crop or weak demand, it would not be
appropriate to penalize the railways due to a lack of
car orders.
Moreover, if the objective is to add railway capacity
when it is needed most, then our view is that a “carrot”
approach is preferable to a “stick”.
6) It is recognized that the maximum grain revenue
entitlement is determined “after the fact”. That is, the
maximum revenue cap that each railway is entitled to
receive is determined in the months following the crop
year. This is necessary because the actual volume of
grain shipped under the revenue cap, and the average
length of haul cannot be determined until the crop
year is concluded. Similarly, the “incentive entitlement”
(variable G) contemplated here will be determined after
the crop year is concluded. However, as is the case
now, the railways will know precisely how much grain
they are shipping on a weekly basis and will have the
ability to adjust their freight rates throughout the crop
year to take into account any incentive entitlement
they may earn. That said, given the ability for the
railways to continually assess volumes (and estimate
future volumes), the freight rate charged to shippers
will likely be reasonably consistent throughout the
crop year (or at least not more variable than it is
today), even though the revenue per tonne earned by
the railways will be at its highest during the peak
shipping period in those years when the extra shipping
capacity is needed.
7) In determining the baseline threshold, and in
deciding upon the incentive trigger and the incentive
rate, the goal is to set these at such a level that the
railways will devote greater resources (cars, crews and
power) to shipping grain during the peak post-harvest
shipping period, and that the benefits to farmers
outweigh the added cost. As noted above, the purpose
of this incentive-based model is to add shipping
capacity if and when it is needed. It is not designed to
address specific performance-based issues, which in
our view, are better dealt with through penalties,
bonuses or other measures negotiated as part of the
service level agreements between shippers and
railways.
Overall railway compensation under the revenue cap
It should be noted that this proposal is not about
increasing the overall compensation to the railways for
shipping grain. It may result in increased
compensation to the railways if farmers and shippers
determine, through their individual decisions, that they
want to ship a larger than normal amount of grain
during the peak post-harvest shipping period. If there
is a short crop, or if customer demand is not present,
or if farmers would prefer to hold on to their grain (for
example, if they expect prices to rise) then the
incentive-based component of the revenue cap
(variable G) would not be triggered.
Admittedly, in years where there is a large crop and/or
large customer demand, farmers will end up paying
higher overall freight rates than they would under the
existing revenue cap. However, the wide basis levels
we are experiencing this crop year, the lack of delivery
opportunity and the missed sales opportunities are
undoubtedly costing farmers a great deal more than
would be the case if there was a reasonable incentive
for the railways to add capacity when it is needed the
most.
A related, but separate issue is whether the
compensation now provided to the railways provides
an adequate and suitable return to the railways for
their investment, and whether compensation
on an ongoing basis will be sufficient to encourage the
railways to add capacity to meet future demand. As
such, the Wheat Growers recommend that a review of
the overall adequacy of compensation under the
revenue cap be undertaken.
We note that the last review of railway costs and
returns in shipping grain was conducted in 1998 as
part of the Kroeger review process. It was this review
(and the earlier recommendations of Justice Estey) that
led to the establishment of the revenue cap in the
2000-01 crop year. In light of the problems
experienced this year, we consider it timely to conduct
a further review with a view to updating the base
numbers if necessary.
The review should take into account the productivity
gains the railways have achieved since 2000-01 and a
determination as to how much of these gains should
be shared with farmers through a reduction in the
revenue cap. Further, the Wheat Growers recommend
an independent assessment be undertaken comparing
railway returns on grain shipments to returns on the
shipment of other commodities. Such an assessment
would assist in determining whether the revenue the
railways earn from shipping grain is at an appropriate
level or not.
Summary
In proposing an incentive-based revenue cap, the
Wheat Growers are seeking to encourage the railways
to add more shipping capacity when it is needed. In
many respects, it is an attempt to incorporate some
“market signals” into the revenue cap. Long-term, it is
our hope that railway competition increases (including
expanded linkages with U.S. based railway companies),
and that the livestock and processing sector in western
Canada expand to such an extent that there is no
longer a need for a revenue cap or any other form of
railway rate regulation. We recognize such an ideal
scenario is likely years if not decades away. In the
meantime, the Wheat Growers see an incentive-based
revenue cap as the best means to encourage greater
investment in railway surge capacity, while ensuring
farmers and shippers are charged rates that
approximate those that would occur in a competitive
rail market.
We recognize that several parameters of this incentive-
based revenue cap model need to be negotiated
among government, railways, shippers and farmers. At
this stage, the Wheat Growers are seeking support for
the concept and welcome any suggestions for
improvement.
It must be emphasized that this proposal is not about
increasing overall railway revenue. It’s about
encouraging the railways to dedicate extra resources to
shipping grain when the marketplace demands it. The
question of whether overall compensation to the
railways for shipping grain is adequate to meet future
demand is a separate, albeit related, matter. An
updated review of costs and returns under the revenue
cap is needed to make this assessment.
The Wheat Growers recognize this model is but one of
several measures that must be taken to address the
shortfall in rail shipping capacity for grain. We contend
however that an incentive- based revenue cap will be
an important step toward a rail transportation system
that better serves the future needs of farmers, shippers
and our customers.
Western Canadian Wheat Growers Association
I think it is very good the WCWGA put this information
forward in a very timely manner.
If you have suggestions about how to make the present
system work better... not just whining.. that would be
great!
Cheers!
Tom4cwb
We have had some interesting discussions with
neighbours about lack of transport services.
WCWGA is flying a 'test ballon' that gives good detail
on the present system... and a proposal to pay
incentive rates in times of high demand for transport
services.
I note that significant grain is moving to the lower
mainland BC area by truck... now... which if railways
were able to extract huge premiums... this would be
being done now as we speak.
Here is the Background on how our system works now;
thanks WCWGA for 'testing the waters' in a tough
political climate with 'brave' ideas!
Enjoy!
Tom4cwb
Background on the present system, WCWGA
Under the Canada Transportation Act, the two main
Canadian railways (CN and CP) are subject to a
maximum revenue entitlement on shipments of grain
and grain products from western Canada. This
entitlement is commonly referred to as a revenue cap,
although that is somewhat of a misnomer, as the
revenue is not “capped”, but rather is adjusted to
reflect the actual volume of grain shipped. The
maximum revenue entitlement for each railway is also
adjusted to reflect the average length of haul for grain
shipped during the crop year, and inflation (or
deflation) in railway input costs.
Grain shipments subject to the revenue cap are those
that are destined to west coast ports (Vancouver and
Prince Rupert) and those destined to Thunder Bay and
Armstrong (a station on the CN line directly north of
Thunder Bay, enroute to central and eastern Canada).
Rail grain shipments to the United States, to Churchill,
beyond Thunder Bay / Armstrong, and to interior
points within western Canada (e.g. the Fraser Valley)
are not subject to the revenue cap and instead move
under commercial freight rates.
The base year for the revenue cap was established in
the 2000-01 crop year, following a costing analysis
undertaken as part of the Kroeger review. This analysis
essentially updated the cost figures calculated under
the 1992 costing review, as mandated under the now-
repealed Western Grain Transportation Act.
Formula for determining the revenue cap
The formula for determining the maximum revenue
entitlement for each railway company is set out in
section 151 of the Canada Transportation Act. The
formula is as follows:
[A/B ((C - D) × $0.022)] × E × F
where,
A is the company’s revenues 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.
The first term in the formula (i.e. A/B) effectively
represents the average revenue per tonne (or average
“freight rate”) that each railway was deemed to earn in
the base year. For CN, this was $27.98 per tonne. For
CP it was $26.12 per tonne. The higher CN rate reflects
the fact that the average length of haul for CN was
greater in the base year than the average length of
haul for CP. CN’s average length of haul in the base
year (term D in the above formula) was 1,045 miles.
CP’s average length of haul was 897 miles.
If the actual average length of haul (term C) for either
railway in any given crop year happens to be equal to
the length of haul in the base year, then the second
term in the formula becomes zero (i.e. C – D = 0) and
therefore no adjustment is made for the length of haul.
If the average length of haul is either above or below
the length of haul in the base year, then the revenue
per tonne entitlement is adjusted by $0.022 for every
mile the average is above or below the base year. For
example, if the average length of haul for CN in any
given crop year was 1,055 (i.e. 10 miles above the
average in the base year) then the revenue per tonne
entitlement (i.e. base freight rate) would be adjusted
upward by 22 cents per tonne (i.e. 10 times $0.022).
Similarly, if the average length of haul for CN was
1,035, then the revenue per tonne entitlement would
be adjusted downward by 22 cents per tonne.
According to the Canadian Transportation Agency, the
average length of haul for shipments by CN under the
revenue cap has ranged from 930 to 1,040 miles over
the past 13 years. The average length of haul for CP
has ranged from 820 to 916 miles.
The next term in the formula, variable E is the actual
grain volume shipped by a railway company in a given
crop year. In effect, the maximum revenue entitlement
formula takes the average revenue per tonne
entitlement (as adjusted for average length of haul)
and multiplies it by the actual tonnes shipped. Thus,
there is no “cap” on absolute revenue. The amount of
revenue that each railway is entitled to receive is
directly correlated to the volume of grain shipped.
Agency statistics over the past 13 years record that the
grain volume shipped by CN under the revenue cap has
ranged from a low of 7.3 million tonnes in 2002-03 to
a high of 17.1 million tonnes in 2011-12. The grain
volume shipped by CP has ranged from 9.1 million
tonnes in 2002-03 to 16.4 million tonnes in 2012-13.
The next term in the formula, variable F is the volume-
related composite price index (VRCPI). This index is a
measure of price inflation (or deflation) of certain
railway input costs including labour, fuel, materials
and capital. The index was set at 1.0 for the 2000-01
crop year and is adjusted annually in a determination
made by the Canadian Transportation Agency. For the
2013-14 crop year, the VRCPI is set at 1.2691. In other
words, railway input costs have climbed by 26.91%
since 2000-01.
This means that the average maximum revenue per
tonne that CN is allowed to charge in the 2013-14
crop year on statutory grain shipments is $35.51 per
tonne (i.e. $27.98 in the base year
1 Canadian Transportation Agency. Western grain
revenue cap statistics, 2000-01 to 2012-13.
http://www.otc-cta.gc.ca/eng/publication/western-
grain-revenue-cap-statistics times 1.2691), assuming
the average length of haul is the same as it was (i.e.
1,045 miles) in the base year. For CP, the average
maximum revenue per tonne allowed in 2013-14 is
$33.15 per tonne (i.e. $26.12 times 1.2691).
In summary then, the revenue cap calculation for each
railway is based on the maximum revenue per tonne
entitlement (as adjusted by average length of haul and
inflation) multiplied by the actual tonnage shipped by
each railway.
Wheat Grower proposal (to add incentives)
The Wheat Growers propose an incentive be built into
the maximum revenue entitlement to encourage the
railways to add extra grain shipping capacity during
the peak post-harvest shipping period (i.e. September
to January). We propose the revenue entitlement for
each railway be adjusted upward if the number of
grain cars shipped by the railway during this period
exceed a predetermined threshold by a certain
percentage. The incentive entitlement could also be
designed such that the incentive increases as the
amount above threshold increases – in effect, the
greater the shipments, the greater the incentive.
For illustration purposes, let’s suppose the baseline car
shipments is established for a railway company at
5,000 cars per week or 100,000 cars over the 20
weeks in the post-harvest shipping period. If actual
shipments were say, 5% above 100,000 cars, then the
revenue cap for that railway company would be
adjusted upward, by say 1%. If actual shipments were
10% above the baseline threshold, then the revenue
cap would be adjusted upward by 2% or perhaps by a
higher amount if the decision was made to
progressively increase the incentive entitlement.
In effect, we are proposing to amend the maximum
revenue entitlement formula as follows:
[A/B ((C - D) × $0.022)] × E × F × G
where,
G is an incentive-based entitlement if grain shipments
during the peak post-harvest shipping period are a
certain percentage above a pre-established baseline.
The baseline threshold, the level at which the incentive
is to be triggered, and the amount of the incentive are
all to be determined. These parameters would be
established and set out by regulation after the federal
government consults with railways, shippers and
farmers.
Some considerations in establishing an incentive-
based revenue cap
In determining the appropriate incentive entitlement to
incorporate into the formula, some issues need to be
addressed. These include:
1) Setting an appropriate threshold base. In our view,
the baseline threshold should be set at a level that is
considered to be the “normal” level of shipments (in
terms of volume of grain or number of cars shipped) in
the peak post-harvest shipping period. Perhaps this
could be set on the basis of a five or ten year historical
average, adjusted upward by trendline increases in
grain production or rail shipments. A determination
would also have to be made as to the appropriate start
and end date of the “peak post-harvest shipping
period” so as to establish a suitable baseline threshold
for each railway during that period.
2) Determining which shipments should be included in
the threshold base. In our view, the threshold base
should include grain and grain product shipments to
all destinations, whether they are governed by the
revenue cap or not. If the incentive entitlement were to
be restricted to railcars shipped under the revenue cap,
then that would act as a disincentive for railways to
ship cars to other destinations, such as the U.S.,
eastern Canada or within western Canada. In our view,
including all shipments as the basis for calculating the
incentive entitlement will minimize any market
distortions. We recognize that shipments with a quick
turnaround time will be favoured under our proposal
however, if the primary objective is to move as much
grain as quickly as possible during the peak post-
harvest period, this is not seen as a negative.
Moreover, shipments with long turnaround times (e.g.
shipments to the southern U.S. or Mexico) move at
commercial rates and so presumably these rates will
reflect the longer turnaround times.
3) Determining the amount of the incentive.
Depending on where the baseline threshold is set, a
determination would have to be made as to when the
incentive is triggered, and the level of that incentive
entitlement. For example, the incentive may be set at
0% if shipments are less than 5% above normal. This
would be considered normal variation. At 5% above
threshold, the incentive may be 1%; at 10% it may be
2%, etc. The incentive scale could be linear or increase
progressively as the amount of shipments exceeds the
base threshold, subject to some overall maximum
limit. A decision would also have to be made on the
increment levels. In our view, the incentive entitlement
should be graduated on fairly fine increments, so there
is not a huge difference in entitlement between just
hitting or just missing a certain threshold level.
4) Whether a railway company exceeds its threshold,
and by how much, depends on whether there are
sufficient car orders from grain companies and other
shippers. In those years where there is a shortfall in
crop production, or slow customer orders, there would
be no need to add rail capacity and no incentive would
be paid. In effect, variable G would equal 1.0 and there
would be no impact on the revenue cap.
5) Consideration was given as to whether the formula
should be adjusted downward if rail shipments fall
below a certain threshold. While we see the merit in
imposing a penalty for poor performance, it is our view
that addressing such performance issues are better
dealt with through service level agreements that the
railways negotiate with shippers. In years where there
was a short crop or weak demand, it would not be
appropriate to penalize the railways due to a lack of
car orders.
Moreover, if the objective is to add railway capacity
when it is needed most, then our view is that a “carrot”
approach is preferable to a “stick”.
6) It is recognized that the maximum grain revenue
entitlement is determined “after the fact”. That is, the
maximum revenue cap that each railway is entitled to
receive is determined in the months following the crop
year. This is necessary because the actual volume of
grain shipped under the revenue cap, and the average
length of haul cannot be determined until the crop
year is concluded. Similarly, the “incentive entitlement”
(variable G) contemplated here will be determined after
the crop year is concluded. However, as is the case
now, the railways will know precisely how much grain
they are shipping on a weekly basis and will have the
ability to adjust their freight rates throughout the crop
year to take into account any incentive entitlement
they may earn. That said, given the ability for the
railways to continually assess volumes (and estimate
future volumes), the freight rate charged to shippers
will likely be reasonably consistent throughout the
crop year (or at least not more variable than it is
today), even though the revenue per tonne earned by
the railways will be at its highest during the peak
shipping period in those years when the extra shipping
capacity is needed.
7) In determining the baseline threshold, and in
deciding upon the incentive trigger and the incentive
rate, the goal is to set these at such a level that the
railways will devote greater resources (cars, crews and
power) to shipping grain during the peak post-harvest
shipping period, and that the benefits to farmers
outweigh the added cost. As noted above, the purpose
of this incentive-based model is to add shipping
capacity if and when it is needed. It is not designed to
address specific performance-based issues, which in
our view, are better dealt with through penalties,
bonuses or other measures negotiated as part of the
service level agreements between shippers and
railways.
Overall railway compensation under the revenue cap
It should be noted that this proposal is not about
increasing the overall compensation to the railways for
shipping grain. It may result in increased
compensation to the railways if farmers and shippers
determine, through their individual decisions, that they
want to ship a larger than normal amount of grain
during the peak post-harvest shipping period. If there
is a short crop, or if customer demand is not present,
or if farmers would prefer to hold on to their grain (for
example, if they expect prices to rise) then the
incentive-based component of the revenue cap
(variable G) would not be triggered.
Admittedly, in years where there is a large crop and/or
large customer demand, farmers will end up paying
higher overall freight rates than they would under the
existing revenue cap. However, the wide basis levels
we are experiencing this crop year, the lack of delivery
opportunity and the missed sales opportunities are
undoubtedly costing farmers a great deal more than
would be the case if there was a reasonable incentive
for the railways to add capacity when it is needed the
most.
A related, but separate issue is whether the
compensation now provided to the railways provides
an adequate and suitable return to the railways for
their investment, and whether compensation
on an ongoing basis will be sufficient to encourage the
railways to add capacity to meet future demand. As
such, the Wheat Growers recommend that a review of
the overall adequacy of compensation under the
revenue cap be undertaken.
We note that the last review of railway costs and
returns in shipping grain was conducted in 1998 as
part of the Kroeger review process. It was this review
(and the earlier recommendations of Justice Estey) that
led to the establishment of the revenue cap in the
2000-01 crop year. In light of the problems
experienced this year, we consider it timely to conduct
a further review with a view to updating the base
numbers if necessary.
The review should take into account the productivity
gains the railways have achieved since 2000-01 and a
determination as to how much of these gains should
be shared with farmers through a reduction in the
revenue cap. Further, the Wheat Growers recommend
an independent assessment be undertaken comparing
railway returns on grain shipments to returns on the
shipment of other commodities. Such an assessment
would assist in determining whether the revenue the
railways earn from shipping grain is at an appropriate
level or not.
Summary
In proposing an incentive-based revenue cap, the
Wheat Growers are seeking to encourage the railways
to add more shipping capacity when it is needed. In
many respects, it is an attempt to incorporate some
“market signals” into the revenue cap. Long-term, it is
our hope that railway competition increases (including
expanded linkages with U.S. based railway companies),
and that the livestock and processing sector in western
Canada expand to such an extent that there is no
longer a need for a revenue cap or any other form of
railway rate regulation. We recognize such an ideal
scenario is likely years if not decades away. In the
meantime, the Wheat Growers see an incentive-based
revenue cap as the best means to encourage greater
investment in railway surge capacity, while ensuring
farmers and shippers are charged rates that
approximate those that would occur in a competitive
rail market.
We recognize that several parameters of this incentive-
based revenue cap model need to be negotiated
among government, railways, shippers and farmers. At
this stage, the Wheat Growers are seeking support for
the concept and welcome any suggestions for
improvement.
It must be emphasized that this proposal is not about
increasing overall railway revenue. It’s about
encouraging the railways to dedicate extra resources to
shipping grain when the marketplace demands it. The
question of whether overall compensation to the
railways for shipping grain is adequate to meet future
demand is a separate, albeit related, matter. An
updated review of costs and returns under the revenue
cap is needed to make this assessment.
The Wheat Growers recognize this model is but one of
several measures that must be taken to address the
shortfall in rail shipping capacity for grain. We contend
however that an incentive- based revenue cap will be
an important step toward a rail transportation system
that better serves the future needs of farmers, shippers
and our customers.
Western Canadian Wheat Growers Association
I think it is very good the WCWGA put this information
forward in a very timely manner.
If you have suggestions about how to make the present
system work better... not just whining.. that would be
great!
Cheers!
Tom4cwb