Adjust rail revenue cap to encourage investment

Most farmers and farm groups want the maximum revenue entitlement maintained on grain movement by the major railways.

The feds are promising to address the future of the MRE in upcoming legislation but haven’t tipped their hand on exactly what they’re planning to do.

Without the protection of the MRE, which is also known as the railway revenue cap, there’s little doubt that producers would be paying more and perhaps a lot more for grain transportation.

However, changes are warranted in the MRE formula to give the railways more incentive to invest in the system, particularly with regard to the fleet of railway hopper cars, and this can be accomplished without fundamentally altering MRE protection.

GATX Rail Canada has come up with some thoughtful suggestions in this regard.

As a major player in the leasing of railway cars, GATX has an obvious vested interest, but its ideas appear to have merit. We need a path forward to replace the government purchased railway hopper cars that are nearing the end of their useful life.

GATX says the replacement of more than 17,000 soon-to-be expiring railway hopper cars could reach a total cost of $1.7 billion ($100,000 per car). There’s little appetite for federal and provincial governments to again invest in cars, so it make sense to provide the proper incentives for the railways to invest.

The way the MRE currently works, adjustments are made each year based on changes in input costs. However, if one railway acquires new cars and the other does not, the benefit from the upward adjustment in the MRE is split between the two railways. Each railway should obviously have its own factor for qualified investments.

As well, GATX says the Canada Transportation Agency has permitted the railways to include lease or purchase expenses only if the new cars can be correlated to destroyed or otherwise eliminated government cars. Rather than being reimbursed for newer, larger-capacity cars, the agency is limiting the railways to the capacity of the smaller government cars.

Another complication is CTA’s methodology that discounts the cost of the lease that the railways can include in the MRE.

GATX argues that given the sophistication of information technology, it’s now possible to provide a highly accurate accounting of the lease cost actually incurred in MRE-eligible grain traffic on a car-by-car basis. This would ensure the railways of a full recovery on their actual cost for supplying rail cars for the export of grain.

The theoretical 50-year lifespan has most of the cars retired between 2025 and 2030. GATX says in its experience, the lifespan of this brand of hopper cars is closer to 40 years, making the next five years important for figuring out fleet replacement.

New cars will last a long time, but the initial investment will be daunting if the proper incentives aren’t in place. Ultimately, farmers will end up paying for any new rail cars, but if MRE protection remains, at least the railways won’t be able to charge whatever the market will bear.

Kevin Hursh is an agricultural journalist, consultant and farmer. He can be reached by e-mail at kevin@hursh.ca.

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