Rail transportation interswitching rates (“rates”) are a competitive measure that applies when a shipper wishes to tender freight to a federally regulated railway to which it does not have direct access due to the location of its facilities or sidings, and where the only means of access is via another federally regulated railway.

On November 30, 2020, the Canadian Transportation Agency (“Agency”) set out the railway interswitching rates for 2021 via Determination No. R-2020-194^. We published an article on this subject at the time.

On October 26, 2021, the Agency issued Determination No. R-2021-161 following this announcement and updated the previous determination. Concurrently, the Agency is required under section 127.1 of the Canada Transportation Act (the “CTA”) to determine interswitching rates by December 2 of each year. Thus, on December 1, 2021, the Agency published in the Canada Gazette Determination No. R-2021-176 which set the rates for 2022.

The article that follows will provide significant detail regarding regulated interswitching rates in Canada.

1. Background - What are Interswitching Rates?

Regulation on interswitching rates facilitates a shipper’s access to the railway of choice by requiring the intermediate railway to “transfer cars with a shipper’s traffic to an interchange of a different railway company with which the shipper has transportation arrangements”.[1] The rate of such transportation is then regulated by the Agency.

Since 2018, the rates have been modified by determinations from the Agency, which in turn are premised on a set of criteria. This is in contrast to previous changes that were made by way of regulation. We previously published an article discussing Bill C-49, which introduced these changes, among others, to the CTA.

1.1. Reminder - Federal Legislation for Federal Rail Carriers

It is important to remember that rates can only be enforced if the CTA is applicable. This means that these rates apply to federal rail carriers rather than to provincial rail carriers, with some exceptions. As such, provincial rail carriers should refer to their respective provincial legislation. Readers should keep in mind that the CTA provides a specific regime for long-distance interswitching.

1.2. Overview - Pricing Mechanism Under the CTA

The CTA requires the Agency to consider a number of factors in determining the rates for a given year. For example, the Agency is required under section 112 CTA to ensure that the rates remain commercially fair and reasonable, and under paragraph 127.1(2)(b) CTA, to take into account the need to encourage long-term investment in the railway system.

Rates are also set according to the distance left to be covered before being able to reach the shipper’s desired railway, based on a rate zone system. We also note that the rate zones, established by the Agency under the CTA in the Railway Interswitching Regulations, are set primarily on the basis of the distances (including sidings) between the point of origin and the point of interchange, with each zone being mutually exclusive to the others, and being equivalent to certain specific rates.[2]

Beyond the framework set by the CTA, the Agency has some discretion in developing the calculation to determine the rates. Hence, the determination of rates may depend on the Agency’s interpretation of the CTA. This can lead to results that are not always consistent or that are contested.

2. Features of the 2021–2022 Process

This year, the Agency reported that it calculated 2022 rates based on “available data and well-established costing methodologies, some elements of which are used in other Agency determinations,”[3] while reflecting past determinations, which involves some changes to past methods.[4]

The Agency explains that its decision this year is based “on actual service units in each zone,” with cost variation “based on a range of factors, including train length, characteristics of the customer’s siding, and marshalling yard activity; factors that can vary significantly from one situation to another.”^[5]

This approach contrasts with the Agency’s position for 2021 which did not provide any changes to the calculation methodology.

2.1 Impact of the Federal Court of Appeal decision inCanadian Pacific Railway Company v. Canada (Transportation Agency), 2021 FCA 69

Rates for the upcoming year reflect an adjustment required by an April 9, 2021 decision of the Federal Court of Appeal, Canadian Pacific Railway Company v. Canada(Transportation Agency), 2021 FCA 69 (the “2021 Decision”). Previously, rates were calculated using a cost of capital rate. Yet, this specific rate was implicitly invalidated by the 2021 Decision, compelling the Agency to increase it accordingly. Readers should note, however, that this decision did not directly address the issue of rates.

Specifically, the adjustment to the methodology for calculating the rates for 2022, which became necessary as a result of the 2021 Decision, was determined by “calculating the difference between the rates set in the original 2021 Determination on Interswitching Rates and the rates following the reconsideration, and multiplying that difference by a factor representing the number of days to which the reconsidered rates were not applied.”^[6]

2.2 Determination for 2021 Rates

In Determination No. R-021-161, the Agency concluded that it was necessary to revise its rates for 2021, and to modify its pricing schedule. However, this modification is prospective and only applies as of October 26, 2021.

Under this determination, Canadian Pacific’s cost of capital rate of 6.64% replaces the previous rate of 4.60%, which was approved in the original 2021 rate determination. Therefore, this changes the 2021 rates as follows:

INTERSWITCHING DISTANCE ZONE	RATE PER CAR FOR INTERSWITCHING TRAFFIC TO OR FROM A SIDING (SINGLE CAR)	RATE PER CAR FOR INTERSWITCHING A CAR BLOCK (60 CARS OR MORE)
Zone 1 (6.4 km)	$305	$80
Zone 2 (10 km)	$425	$125
Zone 3 (20 km)	$315	$70
Zone 4A (30 km to 40 km)[7]	$270	$100
Zone 4B (30 km)[8]	$270 + $8.50/ per additional km	$100 + $1.05/ per additional km

2.3 Interswitching Rates for 2022

Once again, the Agency consulted this past year with shippers and rail carriers prior to making its rate determination. Readers interested in the calculations’ details and methodology may refer to the Appendices of Determination No. R-220-194. The final results of Determination No. R-2021-176, which established the interswitching rates for 2022, are summarized as follows:

INTERSWITCHING DISTANCE ZONE	RATE PER CAR FOR INTERSWITCHING TRAFFIC TO OR FROM A SIDING (SINGLE CAR)	RATE PER CAR FOR INTERSWITCHING A CAR BLOCK (60 CARS OR MORE)
Zone (16.4 km)	$335	$90
Zone (210 km)	$460	$140
Zone (320 km)	$415	$75
Zone 4A (30 km to 40 km)	$475	$95
Zone 4B (30 km)	$478 +$10.75/ per additional km	$95 + $0.98 /per additional km

It is interesting to note that within the space of a few months separating the Agency’s two 2021 decisions on rates, the Agency increased rates on a per car basis, but decreased the rates for trips of 60 cars or more.

Interswitching rates, and the Agency’s annual determination thereof, represent the type of regulatory complexity that may discourage even the most interested law student or young lawyer from familiarising themselves with the laws governing railways in Canada. Despite the forbidding patina of mathematics-imbued regulatory granularity, regulated interswitching is nevertheless considered daily by railways and their counsel, both in respect of negotiations with shippers and other railways and in respect of level of service (common carrier) obligations.

McCarthy Tétrault’sTransportation and Logistics Group is involved in all levels of the rail industry, from transactions involving the sale, lease or financing of rail equipment, to siding agreements, to service agreements, to constitutional litigation. Our firm regularly represents shippers, Class I railroads and short line railroads under federal and provincial jurisdiction. For more information, please contact David F. Blair or Brian Lipson.

***

[1] Determination No. R-2021-176, para. 4.

[2] SOR/88-41 (the “Regulation”).

[3] Determination No. R-2021-176, par 9.

[4] See Determination No. R-2020-194 – Determination by the Canadian Transportation Agency (Agency) of the 2021 regulated interswitching rates pursuant to Part III, Division IV of the Canada Transportation Act, SC 1996, c 10 (CTA), of November 30, 2020; Determination No. R-2019-229 – Review of the methodology used by the Canadian Transportation Agency (Agency) to determine the cost rate of common equity for federally-regulated railway companies, of November 29, 2019; Determination No. R-2019-230 – Determination by the Canadian Transportation Agency (Agency) of the 2020 regulated interswitching rates pursuant to Part III, Division IV of the Canada Transportation Act, S.C., 1996, c. 10, as amended (CTA), of November 29, 2019; Determination No. R-2017-198 – Determination by the Canadian Transportation Agency (Agency) of the methodology to be used by federally-regulated railway companies to determine the working capital amounts and capital structure for regulatory purposes, of December 5, 2017; Order No. 2015-R-91 – Determination by the Canadian Transportation Agency of the variable portions of railway company cost accounts for the Canadian National Railway Company and the Canadian Pacific Railway Company, of June 8, 2015; Decision No. 425-R-2011 – Review of the methodology used by the Canadian Transportation Agency to determine the cost of capital for federally-regulated railway companies., of December 9, 2011.

[5] Determination No. R-2021-176, par. 11

[6] Determination No. R-2021-176, par. 29.

[7] Under section 7(2)(d) of the Regulation, interswitching distance zone 4A “includes sidings located: (i) wholly or partly within a radius of 30 km of an interchange; (i.1) wholly or partly within 40 km or less of an interchange, and (ii) wholly outside interswitching distance zones 1, 2 and 3.”

[8] Under section 7(2)(e) of the Regulation, interswitching distance zone 4B “includes sidings located both: (i) wholly or partly within a radius of 30 km of an interchange, and; (ii) wholly outside interswitching distance zones 1, 2, 3 and 4A.”