Bigger freight bill on the tracks

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Get ready to dig a little deeper to ship this year’s harvest to export ports.

The Canadian Transportation Agency has approved a hefty 9.5 per cent raise in the revenue cap, which is the maximum railways can earn from shipping grain, a boost that could cost farmers an extra $87 million or about $3 per tonne.

The move is prompting farm groups to ask Ottawa for a review of the revenue cap formula.

“We’ve seen with this increase how creative railway accounting can work to the railway’s advantage,” said Keystone Agricultural Producers president Doug Chorney May 2. He was alluding to changes in how the Canadian Transportation Agency (CTA) now calculates some railway costs.

But calls for a full review of railway costs are muted, with some fearing it could make farmers worse off. Keystone Agricultural Producers’ (KAP) standing policy favours a review, but Chorney is wary.

A year ago, then minister of state for transport Rob Merrifield warned a costing review could see farmers pay even more.

“It’s (revenue cap) only gone up 6.2 per cent — less than the cost of living in a decade so it’s not something that’s getting out of hand on us,” he said.

Chorney said he doesn’t believe such a big jump is justified given the healthy profits the railways are earning.

The previous record increase was eight per cent in 2008-09 due mainly to projected higher fuel costs.

The CTA announced April 30 a 9.5 per cent increase in the Volume-Related Composite Price Index (VRCPI) used to determine how much the Canadian National Railway Company (CN) and the Canadian Pacific Railway Company (CP) can earn annually from transporting western grain.

The VRCPI adjusts railway costs such as labour, fuel and materials, for inflation. However, the index doesn’t take into account increased railway efficiency, which farmers argue they have contributed to by having to haul grain farther, to bigger elevators, which they ultimately paid for through elevation charges. As a result, some farm groups believe railway profits from grain have never been higher.

Variable costs

A study commissioned by the wheat board several years ago estimates the railways were earning close to 60 per cent of their variable costs, compared to 20 per cent in the late 1980s. The report concludes farmers were collectively overpaying the railways $6 a tonne or a total of $200 million a year.

Most of this year’s 9.5 per cent increase is due to changes in how the CTA calculates the contribution the railways make to their pension plans (4.6 per cent) and the cost of capital (3.3 per cent). Inflation accounts for 1.6 per cent of the increase.

Under the CTA’s old calculations the cap would have increased by 1.6 per cent, the CTA said. That would’ve been just under the 1.9 per cent annual rate of inflation.

The CTA said under its old calculation the cost of railway capital would’ve fallen 14.6 per cent due to lower equity and tax rates.

“This represents a significant jump in freight rates,” Western Canadian Wheat Growers Association president Kevin Bender said in a news release. “The government needs to review the components of the revenue cap and come up with a better approach to ensure farmers are not hit with unwarranted freight increases.”

Instead of adjusting the revenue cap to simply reflect higher rail costs, the Wheat Growers say the cap should be adjusted to reflect costs in a competitive market.

For example, the allowance for wages should reflect averages for similar type of work where there’s competition, such as the trucking industry. The railways would then work to keep labour costs, including pensions, in check.

National Farmers Union president Terry Boehm agrees the railways are powerful and they could undermine a costing review, but says government oversight could counter it. A review is necessary to prevent farmers from being overcharged, he said. Under the Western Grain Transportation Act, rail costs were reviewed every four years and rates adjusted to reflect increased rail efficiency.

The Wheat Growers want the cap inflation formula reviewed and even tweaked, but oppose a full costing review, partly because the government has rejected it, said association executive director Blair Rutter.

“It’s just not on,” he said. “It would take so much manpower.”

Market discipline

The association would prefer market forces discipline rail rates, but acknowledges it’s not possible with railways operating as duopolies. However, the Wheat Growers hope the end of the Canadian Wheat Board’s single desk will stimulate enough domestic processing to force the railways to compete to attract grain.

The revenue cap has increased an average of 2.1 per cent a year since 2000, matching the rise in the Consumer Price Index. However, last year the cap rose 3.5 per cent adding about a buck a tonne to the average cost of shipping grain. It went up 7.4 per cent or more than $2 a tonne in 2010-11.

Even though the cap, which is also adjusted for the volume of grain moved, is going up dramatically, the railways don’t have to charge more. The federal government introduced the cap in 2000 so the railways could set their own freight rates, while protecting farmers from being gouged. The railways said competition would keep revenues well under the cap, but most years they’re close to it or exceed it. Farmers say that’s proof competition doesn’t exist between the railways.

When the railways exceed the cap, the overage, plus a five per cent penalty, must be paid to the Western Grains Research Foundation.

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