The Canadian Transportation Agency is reviewing how it calculates the railways’ cost of capital, which could affect how much farmers pay to ship grain.
Cost of capital, similar to return on investment, is a crucial factor in the annual calculation of the grain revenue cap for the two national railways.
If the agency adopts a methodology that results in a higher cost of capital allowance, then the revenue cap, and freight rates, would go up.
Conversely, a methodology that results in a lower cost of capital would mean a lower revenue cap and lower freight rates.
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The CTA is in the process of hiring a consultant to work on the review, which will include consultations with stakeholders and is scheduled to be completed in November.
However, shipper and producer groups have already expressed fear that the review will result in higher freight rates.
“Any changes to the current methodology used in determining the cost of capital will result in higher costs for our members,” the Western Canadian Shippers’ Coalition (WCSC) said in a submission to the agency last fall.
The Coalition of Rail Shippers, whose membership includes the WCSC, expressed a similar view.
“This review clearly raises the potential of a windfall for the railways,” it said in its brief, adding the railways have consistently achieved record profits in recent years under the existing system.
“We are of the view that the railways’ desire for changes that would enhance their bottom lines is not reason enough to undertake a review.”
Wild Rose Agricultural Producers said in its brief to the agency last fall that the review puts producers at risk.
“We feel that a change in methodology … would ultimately result in higher payments being made by producers,” said WRAP president Humphrey Banack.
CTA spokesperson Marc Comeau said those groups are jumping the gun and there is no way to predict how the review will turn out.
“We don’t know if it will result in a change in the methodology, and if it does change we don’t know what impact that will have on cost of capital rate, or ultimately on rates charged to shippers,” he said. “Rates could go up, stay the same or go down.”
Rick Steinke, director of logistics for the Canadian Wheat Board, said an increase in cost of capital wouldn’t be good for farmers, but the magnitude of the changes would not be as significant as other cost factors.
He said the review won’t necessarily result in changes to the methodology, adding he’s not going to pre-judge the outcome.
“With a review, you open up the risk of an increase, but I have faith in the CTA process,” he said.
In their initial submissions to the CTA, the two national railways said they welcomed the review.
Canadian Pacific Railway said it’s critically important to the railway industry.
“It impacts the railway’s ability to attract and retain capital necessary to maintain infrastructure and expand capacity,” the railway said.
“Nowhere is this more significant than in the Canadian grain network.”
CPR said there must be an adequate and competitive cost of capital to generate investment in infrastructure.
Canadian National Railway had little to say in its initial submission, other than to present the CTA with a list of proposed changes to the terms of reference.
The agency responded to those initial submissions last fall by issuing in January a revised terms of reference and making changes to the review process and the timetable.
The first phase of the review will be a study by the yet-to-be-hired consultant. That report will be due at the end of July. It will be followed by consultations with stakeholders, with final comments in mid-October and the study phase concluded by Nov. 1.
The CTA will then review the consultant’s final report, have further discussions with stakeholders and then decide on the appropriate methodology to be used for the next five years.
