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Railways (2). Canadian National Railway Company v. Canadian Transportation Agency et al.
In Canadian National Railway Company v. Canadian Transportation Agency et al. (Fed CA, 2025) the Federal Court of Appeal dismissed two appeals, these brought against "two decisions of the Canadian Transportation Agency (Agency) dismissing the company’s requests under section 32 of the Canada Transportation Act, S.C. 1996, c. 10 (CTA) to vary its Volume-Related Composite Price Index (VRCPI) and Maximum Revenue Entitlement (MRE) for the 2021/2022 and 2022/2023 crop years (relevant crop years)".
Here the court considered "the pricing for rail transportation of grain from points in western Canada for export (western grain)", and illustration it's determination in this case:[3] For more than 25 years, Parliament has regulated the pricing for rail transportation of grain from points in western Canada for export (western grain) by capping the total revenue that a prescribed railway company (railway company or companies) may earn for the movement thereof in each crop year. Crop years for western grain in Canada run the twelve-month period from August 1 to July 31 of the following year; CN Rail is one of two prescribed railway companies in Canada.
[4] Under the MRE regime prescribed under the CTA, railway companies have relative freedom to set freight rates charged to shippers and grain producers for the movement of western grain based on market conditions, so long as the railway company’s total revenue during a crop year for the movement of western grain does not exceed its MRE for that crop year. If it does, pursuant to subsection 150(2) of the CTA and corresponding regulations, the railway company must pay all excess revenue and any penalty that may be specified in the regulations to the Western Grains Research Foundation (Foundation).
[5] The formula used by the Agency in the determination of a railway company’s MRE, prescribed in subsection 151(1) of the CTA (MRE determination formula), includes a number of factors, one of which is the VRCPI, a numerical multiplier which acts as an inflation index determined by the Agency using forecasted price variations based on forecasting models, expert data, detailed railway company submissions of historical costing information specific to them, forecasting indices and economic analyses and projections that look at macro trends in the economy more globally.
[6] Although the data used by the Agency in the determination of a railway company’s VRCPI includes, amongst other information, actual pricing data from the railway companies, the VRCPI is not a cost-based determination. Rather it uses a predictive methodology to capture forecasted price variations in the cost of railway inputs, i.e., expected variations due to inflation in the cost of labour, fuel, services, materials and other capital items to be used by the railway company for the purpose of transporting western grain during the upcoming crop year. The record suggests the methodology used to determine a railway company’s VRCPI is less a matter of a statutory direction or formulae, but rather of how the Agency determined to implement the CTA. Although Parliament defined the MRE regime, it left it largely to the Agency to set out the mechanics of implementation. The purpose of the VRCPI is to ensure that the transportation of western grain remains economically viable and that railway companies are not absorbing inflationary costs without compensation due to an artificially low MRE revenue cap. As recognized by this Court in Canadian Pacific Railway Company v. Canada (Transportation Agency), 2021 FCA 69 at para. 6, "“[w]hile the VRCPI is not the only factor affecting a railway’s MRE, it is a significant factor.”"
[7] Pursuant to subsection 151(5) of the CTA, the Agency is tasked with determining a railway company's VRCPI for each crop year on or before April 30 of the previous crop year, i.e., at least three months prior to the start of the crop year to which the VRCPI relates, enabling western grain stakeholders—including railway companies, shippers and producers—to plan their operations and account for freight rate increases or decreases in advance of the upcoming crop year based upon the anticipated MRE for each railway company. According to the Agency, this brings a level of certainty and predictability across the western grain market. Subsection 151(5) also provides that a railway company’s MRE for each crop year is to be determined by the Agency on or before December 31 of the following crop year, i.e., up to five months after the end of the crop year to which the MRE relates so as to account for the amount of western grain actually transported as well as the average distance travelled during that period, both being factors, along with the VRCPI, of the MRE determination formula in relation to a given crop year.
[8] As such, the statutory scheme of the MRE regime provides that a railway company will only receive confirmation of its allowable MRE, or MRE space, up to twenty months after the determination of the VRCPI for the relevant crop year; a lot may happen within twenty months in relation to the impact inflation has on the cost of railway inputs during the crop year. Accordingly, the Agency’s methodology for the determination of a railway company’s VRCPI for a given crop year has two components: the first is a percentage increase or decrease reflecting the prospective year over year forecasted inflationary changes in the cost of railway inputs for the upcoming crop year (forecast projection) and the second being a retrospective adjustment to the previous year’s forecast—either up or down—meant to capture any over or under forecasting by the Agency of the previous year’s VRCPI, incorporating updated forecasts for the upcoming crop year based upon updated data of the railway companies’ actual cost of railway inputs for the previous crop year (forecasting variance). The result of combining the prospective inflationary expectations of the forecast projection with the retrospective adjustment of the forecasting variance is applied by the Agency, as a percentage, to the VRCPI of the previous year to arrive at the numerical multiplier or inflation adjustment for the VRCPI for the upcoming crop year.
[9] The Agency’s determinations with respect to the company’s VRCPI and MRE with respect to the relevant crop years may be summarized as follows:April 2021 – the Agency determined CN Rail’s 2021/2022 VRCPI for the crop year set to begin on August 1, 2021 to be 1.4505, an increase of 0.50% over the previous year. This increase was the combination of an increase of 1.06% in the forecast projection component for the 2021/2022 crop year coupled with a decrease of 0.56% in the forecasting variance component to previous year’s forecast (2021/2022 VRCPI Determination).
The 2021/2022 crop year begins August 1, 2021, and runs to July 31, 2022.
March 15, 2022 – the Agency adjusts the 2021/2022 VRCPI to 1.4572 to account for the increase in the costs incurred by CN Rail to obtain and maintain hopper cars, pursuant to subsection 151(6) of the CTA.
April 2022 – the Agency determined CN Rail’s 2022/2023 VRCPI for the crop year set to begin on August 1, 2022, to be 1.6319, an increase of 11.99 % over the previous year. This increase was the combination of an increase of 4.55% in the forecast projection component for the 2022/2023 crop year coupled with an increase of 7.44% in the forecasting variance component to the previous year’s forecast (2022/2023 VRCPI Determination).
The 2022/2023 crop year begins August 1, 2022, and runs to July 31, 2023.
December 2022 – the Agency determined CN Rail’s 2021/2022 MRE (for the 2021/2022 crop year) to be $589,140,501 (2021/2022 MRE Determination). The 2021/2022 MRE Determination was made using a VRCPI of 1.4572, i.e., it did not take into consideration the forecasting variance of 7.44% made in April 2022. As CN Rail’s actual western grain revenue for the 2021/2022 crop year was $592,208,589, the Agency also ordered CN Rail to pay $3,221,492 in excess revenue and penalties to the Foundation.
April 2023 – the Agency determined CN Rail’s 2023/2024 VRCPI for the crop year set to begin on August 1, 2023, to be 1.8295, an increase of 12.11% over the previous year. This increase was the combination of a decrease of 0.08% in the forecast projection component for the 2023/2024 crop year coupled with an increase of 12.19% in the forecasting variance component to the previous year’s forecast (2023/2024 VRCPI Determination).
December 2023 – the Agency determined CN Rail’s 2022/2023 MRE (for the 2022/2023 crop year) to be $1,076,064,100 (2022/2023 MRE Determination). The 2022/2023 MRE Determination was made using a VRCPI of 1.6319, i.e., it did not take into consideration the forecasting variance of 12.19% made in April 2023. As CN Rail’s actual western grain revenue for the 2022/2023 crop year was $1,079,522,039, the Agency also ordered CN Rail to pay $3,630,836 in excess revenue and penalties to the Foundation. [10] As noted, a significant increase in CN Rail’s cost of railway inputs took place during the relevant crop years as a result of a considerable spike in inflation, in particular, according to CN Rail, for steel, fabricated metals and petroleum-related products as a result of what the company refers to as the "“unpredictable, once-in-a-century events”" of the COVID-19 pandemic and the conflict in Ukraine. To put matters into perspective, the record shows that between the 2010/2011 and 2021/2022 crop years, the retrospective adjustment made by way of the forecasting variance component to CN Rail’s annual VRCPI ranged between a decrease of 4.10% and an increase of 3.60%. However, for the relevant crop years, that component represented an increase of 7.44% and 12.19% respectively. According to CN Rail, the degree of what the company called the Agency’s "“forecasting errors in the economic sense”" with respect to the relevant crop years was unprecedented—as evidenced by the magnitude of the forecasting variance components—and led to seriously undervalued MRE determinations for those years corresponding to lost MRE space for the company of about $175 million over that period. CN Rail asserts that the company was left to unfairly absorb significant losses during the relevant crop years on account of the remarkable and unexpected rise in its cost of railway inputs coupled with an artificially low MRE which limited the freight rates the company was able to charge its shippers for the carriage of western grain during that period.
[11] As noted, the forecasting variance component of the VRCPI determined for any crop year is not given retroactive effect. Rather, there is a one-year lag in the adjustment to the previous year’s VRCPI; the adjustment to the VRCPI is made prospectively, with the forecasting variance component taken into account in the determination of the VRCPI for the following crop year, thus allowing, in the Agency’s view, for any necessary adjustment at that time.
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