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Is it time we scrapped that cap?

Prepare for the debate by reading the details about the Maximum Revenue Entitlement

If you’ve been following the transportation debates, you’ve heard about the maximum revenue entitlement, or revenue cap. And that means you’ve probably heard a lot of contradictory, confusing, and outright false information about how the revenue cap works and how it affects rail service.

While it’s a complex issue, there are facts to be found. Grainews searched them out so that the next time the MRE comes up, you can separate myth from reality.

What is the Maximum Revenue Entitlement (MRE)?

The MRE was created in 2000 to replace maximum freight rates for hauling grain. Railways now set rates for shipping grain. But the MRE limits the average revenue per tonne they can earn, while taking into account inflation of the railways’ costs.

The Canadian Transportation Agency crunches the numbers every year to figure out the MRE. They use a complex formula that includes:

A. Company revenue for grain movement in base year.
B. Tonnes moved in base year
C. Average length of haul in current crop year.
D. Average length of haul in base year.
E. Tonnes moved in current crop year.
F. VRCPI — an inflation index that includes forecasted price changes for railway, fuel, labour, material, capital purchases and inputs. It’s usually around two per cent.

The formula looks like this: [A/B+((C-D) x $0.22)]xExF

The Canadian Transportation Agency publishes the VRCPI for the upcoming crop year by April 30. They also publish the MRE determination for the past crop year by December 31.

If CN or CP top the MRE, they need to pay that excess, plus a penalty, to the Western Grains Research Foundation within 30 days.

What does the MRE cover?

Quorum Corp has an online factsheet that outlines this succinctly. The MRE covers regulated grains originating in Western Canada and funnelling through west coast ports. Any regulated grains moving through Armstrong, Ont. or Thunder Bay are also included, whether they’re for export or domestic use.

Shipments through the west coast, but destined for consumption in the U.S. are excluded. Grain flowing through Churchill isn’t covered because the last leg is the Hudson Bay Railway, which is a non-prescribed carrier.

The MRE regulates 58 grains and oilseeds crops, according to a report submitted by the Crop Logistics Working Group III MRE subcommittee. The Crop Logistics Working Group was struck in February 2015 to review supply chain and logistics issues in the grain industry. The working group has since filed their final report.

Does the MRE limit railways’ revenue from grain shipments?

“The simple truth is that this is a false assertion,” Quorum’s fact sheet states.

The MRE keeps raising freight rates in lines with underlying costs, the Quorum factsheet notes. It doesn’t keep a railway from pricing differentially, based on season, commodity, equipment, or other factors, Quorum says.

The MRE subcommittee’s report backs Quorum on this. The MRE takes into account inflation, haul length, and total grain hauled, says the report. The more grain hauled, the more revenue earned.

Besides, hauling grain isn’t biting into the railways’ bottom lines. In fact, the opposite seems to be true, according to the MRE subcommittee report.

In 2014, both CN and CP’s grain revenues grew significantly more than their overall revenues. And, the report notes, total railway revenue per revenue tonne mile has grown 2.26 per cent over the last 13 years. Grain under the MRE has increased by 2.24 per cent in that same time period.

Should we scrap the revenue cap?

Both CN and CP have blamed the revenue cap for lagging investment in their grain operations. In its submission to the Canada Transport Act Review, CP said removing the MRE would allow it to invest in new, larger hopper cars, as reported by the Globe and Mail last February.

And the railways aren’t the only ones calling for the MRE’s demise.

“If the railways were allowed to maximize the revenue they receive from hauling grain, it might be surprising how quickly they’d find a few spare grain cars sitting around — and how immediately those grain elevators would be emptied,” wrote Todd Hirsch in a March 2014 piece for the Globe and Mail. Hirsch, based in Calgary, is the chief economist of ATB Financial.

But would scrapping the revenue cap improve service? The MRE subcommittee’s report suggests not.

For one thing, shippers of crops such as soybeans, which don’t fall under the MRE, don’t get better service, the report notes. Neither do shippers of crops on non-regulated routes. And other commodities that pay more don’t necessarily get better service, according to the MRE subcommittee.

“Paying a higher freight rate means only that the commodity is likely making a larger contribution to the railway’s fixed, or constant, costs and ultimately serving to enhance the railway’s profitability,” the subcommittee’s report states.

The subcommittee was also sceptical that chopping the cap would boost investment by the railways. The MRE takes into account railway investments into hopper cars or grain facilities, the subcommittee notes. And railways have benefited from changes to the grain handling and transportation system, the report adds.

But the only way to know for sure would be to make public the railways’ grain transportation costs, according to the MRE subcommittee. The Canadian Transportation Agency and the railways are the only ones with those numbers.

The subcommittee did make an interesting observation about hopper car investments. The Agency uses one figure for each railway every year when rewarding them for hopper car investments. This means that if one railway pours cash into its hopper car fleet, and the other doesn’t, both railways would benefit.

Should we review the costs built into the MRE?

Many farm groups have asked for the MRE to stay put, but to review the costs built into the formula. The VRCPI is adjusted each year, but the Canadian Transportation Agency doesn’t review the railways’ actual costs for moving grain.

Elements of the MRE are based on the railways’ 1992 costs. Since then, the grain handling and transportation system has transformed into a much leaner machine. Some in the grain industry would like to review costs to see how much the railways are benefiting from those changes, and possibly share some of those gains with the grain sector.

But the MRE is working as intended, the MRE subcommittee states. Shippers are protected from escalating shipping prices, railways earn a profit, and railways have some flexibility in setting prices, the report states.

Ultimately, service issues are separate from the MRE, the subcommittee report states. Every sector has service issues, regardless of freight rates, the report points out. The subcommittee recommends addressing those issues before doing a full costing review or starting a public policy debate around the MRE. It did recommend full public disclosure of railway costs around shipping grain.

Have a sudden urge to read more about the MRE? Both the MRE subcommittee report and the Quorum factsheet are online at quorumcorp.net.

About the author

Field Editor

Lisa Guenther is field editor for Grainews based at Livelong, Sask. You can follow her on Twitter @LtoG.

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