Decision No. 134-R-1998

March 30, 1998

March 30, 1998

APPLICATION by CSX Transportation, Inc. to be permitted to either index the 1995 unit costs using the Association of American Railroads Cost Recovery Index for 1996, or to use the 1995 unit costs "as is", in the development of its 1996 subsidy claim.

File No. 6350-2-2


BACKGROUND

On April 1, 1997, CSX Transportation, Inc. (hereinafter CSXT) requested that the Canadian Transportation Agency (hereinafter the Agency) permit CSXT to either index the 1995 unit costs using the Association of American Railroads Cost Recovery Index for 1996, or to use its 1995 unit costs "as is", in the development of its 1996 branch line subsidy claim. The enactment of the Canada Transportation Act, S.C., 1996, c. 10, eliminated branch line subsidy payments for which CSXT could apply under the National Transportation Act, 1987, R.S.C., 1985, c. 28 (3rd Supp.) (hereinafter the NTA, 1987). The procedure for admissible subsidy claims under the NTA, 1987 requires an actual determination of CSXT's 1996 unit costs whenever CSXT files a subsidy claim.

POSITION OF CSXT

CSXT suggests that the requirement for a unit cost determination and an Agency audit in respect of 1996 is questionable given the current circumstances. CSXT expects that the branch line subsidy payment in respect of the calendar year 1996 will amount to only about $83,428 US for the January 15 to June 30 period for which CSXT may apply for subsidy under the NTA, 1987.

CSXT is of the opinion that in order to develop all the required supporting data and documentation to respond to an Agency audit, a significant level of resources would be required which CSXT is reluctant to commit given the expected level of subsidy.

CSXT further states that the 1996 payments based on the 1995 unit costs would not substantially differ from a payment based on a full-scale unit cost determination.

LEGAL CONSIDERATIONS

Branch line subsidy claims for a service are governed by section 178 of the NTA, 1987 which contemplates that a claim may be filed with the Agency for payment of the amount of the "actual loss" attributable to the operation of that service. "Actual loss" is defined in subsection 157(2) as:

For the purposes of this Division, the actual loss of a railway company in a financial year of the company attributable to a branch line is the excess of

(a) the costs reasonably incurred by the company in the financial year in the efficient operation of the branch line and in the efficient movement of traffic originating or terminating on the branch line

over

(b) the revenues of the company for the financial year from the operation of the branch line and from the movement of traffic originating or terminating on the branch line.

In addition to the NTA, 1987, the calculation of actual loss and variable costs is governed by the Railway Costing Regulations, SOR/80-310, as amended. These Regulations provide that costs in relation to a branch line service and variable costs shall be based on Uniform Classification of Accounts (hereinafter UCA) expense accounts or items or factors of costs as the Agency may order (subsection 5(1) and paragraph 7(a) of the Regulations).

However, the provisions of section 40 of the Western Grain Transportation Act, R.S.C., 1985, c. W-8 (hereinafter the WGTA), allowed the use of price indices to adjust base year costs to arrive at estimated variable costs. This legislation was specific in that variable costs determined in this manner were "estimates", while the NTA, 1987 uses terms such as "actual loss" (costs based on UCA accounts); "costs incurred"; "costs reasonably incurred", contrasting with the terminology of the WGTA.

In light of the above, it could be said that, due to the contrasting terminology between the two above-noted pieces of legislation, Parliament meant that actual loss and variable cost determinations could not be made on the basis of the use of price indices and may have actually intended the opposite; that is, that these determinations were meant to be made on actual cost data.

It is important to note that the Agency has taken measures in the past to ensure that the costs included in actual loss determinations are not necessarily just those costs which are recorded in the railway company's books, but are rather all of the costs of providing a railway service. For example, railway companies are entitled to claim their cost of invested capital which includes not only the cost of debt of the railway company but also the deemed cost of shareholders equity. As well, the Agency normalizes cost data through the application of indices in order to smooth out fluctuations in cost data from year to year which could otherwise overstate or understate the costs of the railway company in any given year. Other measures relied on by the Agency include the use of regression analysis to relate costs incurred by the railway company to the work performed in order to determine what costs are reasonably incurred. The Agency's overriding concern is in ensuring that the costs included in the actual loss determination are reasonable.

OTHER CONSIDERATIONS

While it may be argued that the use of indexation or prior years actual unit costs is not what was intended by the legislation, it may also be argued that the expected level of subsidy does not warrant significant levels of resource expenditures by CSXT and the Agency in arriving at the subsidy determination. The Agency is aware of the adverse consequences that unnecessary and overly bureaucratic procedures have on the railway industry.

The Agency notes that the possibility of an error in payment through the use of indexation of 1995 unit costs will be minimized provided that the price indices used to inflate the 1995 unit costs to 1996 levels are adjusted for any productivity gain experienced by CSXT between 1995 and 1996. The same can be said of the use of 1995 unit costs "as is", in that CSXT is foregoing any possible benefit of indexing the 1995 unit costs to 1996 levels. In this context, it should also be noted that given the level of the expected claim, a payment through the use of indexation or 1995 unit costs with even as much as 5 percent different from the application of actual 1996 costs would only result in a difference of $4,171 US. This has to be balanced against the efforts required by CSXT to develop "actual" 1996 unit costs and the related verification by the Agency which will require the expenditure of amounts well in excess of this potential difference.

CSXT also proposes, as another alternative, to use the Association of American Railroads Cost Recovery Index to adjust 1995 unit costs to 1996 levels. However, the Agency notes that this index reflects only price increases for railway companies operating in the United States.

AGENCY FINDINGS AND CONCLUSION

For the reasons set out above, the Agency determines that in light of the amounts involved, it would not be efficient nor appropriate to require CSXT to undertake a detailed development of its 1996 unit costs given the cost the railway company and the Agency would be required to incur to do so. The Agency does not accept CSXT's proposal to use the Association of American Railroads Cost Recovery Index to adjust the 1995 unit costs to 1996 levels. As the branch line whose operations CSXT requested to abandon is entirely in Canada, the Agency concludes that the use of an American price index would be inappropriate. Consequently, in order to minimize risk of an error in payment and since CSXT is willing to forego any benefits of indexation, the Agency hereby authorizes CSXT to use the 1995 unit costs "as is" to develop its 1996 subsidy claim.

The Agency is of the opinion that this Decision permitting the use of 1995 unit costs in this case is an efficient approach and consistent with good management practices. This Decision effectively responds to an issue that is affected by shrinking resources within government and private industry and by the minimal amount of subsidy payment expected versus the costs of preparing and verifying submissions.

This Decision is based on the specific circumstances of this case.

Date modified: