Farmers are subsidizing railways and large grain companies because of a flaw in the grain revenue cap, says a study by a well-known transportation research firm.
Under the current rules, any “incentives, rebates or other reductions” paid by the railways are not counted as revenue in calculating the cap.
By offering inflated multi car loading incentives, the railways can reduce their cap revenue, leaving them room to raise freight rates accordingly, says the study by Travacon Research Ltd. of Seattle.
The Producer Car Shippers of Canada, which hired Travacon, said the revenue cap formula must be amended because it has enabled the railways to overcharge producers by an estimated $100 million each year.
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“The fact the multicar incentives are a deductible expense, that’s what causing the problem,” PCSC spokesperson Bill Woods said.
“The railways are offering triple the incentives to their actual savings. They could offer five times because it’s not coming out of their pockets.”
The Travacon study found that the railways’ actual savings from those incentives are far less than the incentives paid to the grain firms.
For example, the incentives paid by the railways for moving grain in 50 to 99 car blocks are $4 a tonne for Canadian National Railway, while the actual savings to the railway are $1.84 a tonne.
For Canadian Pacific Railway, the incentive is $5 a tonne while the actual saving is $1.88 a tonne.
For blocks of more than 99 cars, the railways both pay an incentive of $8 a tonne, while the actual savings are $2.95 for CN and $3.07 for CPR.
CN spokesperson Kelli Svendsen said CN’s incentive rate programs are based on longstanding business practices designed to encourage competitive efficiencies and share the resulting benefits.
“We will not engage in a politically motivated discussion of our business practices,” she said.
Breanne Feigel of CPR said the railway does not deduct multiple car block incentives from its mandated revenue, claimed by the PCSC and Travacon.
She said all revenue earned is under the maximum rate entitlement and designed to improve system efficiency and reliability.
PCSC says the incentives enable large grain companies to offer sizable trucking premiums, which are used to draw business away from small grain shippers, short-line rail companies and producer shipping groups.
Because the car incentives are an expense under the cap, the railways can deduct more money from their cap revenue than they are actually saving.
That allows them to raise freight rates while remaining under the cap, clawing back from farmers the incentives they paid to the grain companies.
“This multi car incentive loophole enables the railways to use the farmers’ own money to price discriminate against small shippers and the farmers themselves,” said PCSC.
“If this flawed formula is not corrected, it will enable the railways to use farmers’ money to price all small shippers out of business.”
