Decision No. 266-R-1991

May 22, 1991

IN THE MATTER OF a complaint made by Atlantic Container Express Inc. pursuant to subsection 35(1) of the National Transportation Act, 1987, R.S.C., 1985, c. 28 (3rd Supp.), dated July 6, 1989, that Canadian National Railway Company is charging rates to Newfoundland destinations not consistent with the Terms of Union.

File No. D2985-89/2

HEARD in St. John's, Newfoundland on August 14 and 15, 1990 and

in Corner Brook, Newfoundland on August 20 and 21, 1990.

BEFORE:

Mr. Edward Weinberg Chairman of the Hearing, National Transportation Agency

Mr. Keith Penner Member, National Transportation Agency

Mr. Kenneth Ritter Member, National Transportation Agency

APPEARANCES

Mr. Marshall Rothstein, Q.C. Counsel, Atlantic Container Express Inc.

Mr. L. Michel Huart Counsel, Canadian National Railway Company

Ms. Anne Marie Rose Counsel, Government of Newfoundland and Labrador

Ms. B. Gale Welsh

Mr. Brian K. Wentzell Counsel, Atlantic Provinces Transportation Commission

Mr. Geoffrey E. J. Brown Counsel, Town of Channel-Port aux Basques

Mr. Steve Neary on behalf of Roger Simmins, M.P.

Mr. Peter D. Locke public interest

Mr. Ian MacKay Counsel, National Transportation Agency

Mr. Ronald Ashley

INTRODUCTION

On July 6, 1989, Atlantic Container Express Inc. (hereinafter ACE) filed with the Secretary of the National Transportation Agency (hereinafter the Agency) a complaint made pursuant to sections 35 and 113 of the National Transportation Act, 1987 (hereinafter the NTA, 1987). The ACE complaint was that certain freight rates offered by the Canadian National Railway Company (hereinafter CN) were not compensatory, and that rates offered for the transportation of goods to Newfoundland destinations were at less than the level required by the Terms of Union. In its complaint, ACE stated:

... that CN is charging rates to Newfoundland destinations not consistent with the requirements of the Terms of Union. We point out specifically rates on pool car traffic from Toronto and Montreal, rates on insulation from Ottawa, and rates on flour from Montreal....

ACE also claimed that CN was offering rates to the Maritimes at less than compensatory levels, and cited section 113 of the NTA, 1987. In its complaint, ACE stated:

... that the Maritime rates upon which the pool car, insulation and flour rates to Newfoundland are constructed are themselves noncompensatory....

Subsections 35(1), 113(1) and (5) of the NTA, 1987 state:

35.(1) The Agency may inquire into, hear and determine a complaint concerning any act, matter or thing prohibited, sanctioned or required to be done under any Act of Parliament that is administered in whole or in part by the Agency.

113.(1) Where the Agency receives a complaint made by any person that a rate is not compensatory, the Agency shall conduct such investigation of the rate as, in its opinion, is warranted.

(5) On completion of an investigation conducted pursuant to subsection (1) and within ninety days after the complaint is received,the Agency shall determine whether the rate in respect of which the complaint was made is compensatory; and where the Agency determines that the rate is not compensatory, unless the company establishes to the satisfaction of the Agency that the rate does not have the effect or tendency of substantially lessening competition or significantly harming a competitor and was not designed to have that effect, the Agency shall make an order disallowing that rate and requiring the company to substitute for that rate a rate that is compensatory.

By Decision No. 509-R-1989 dated October 3, 1989, the Agency determined that the Maritime rates used by CN to formulate the Newfoundland rates complained of were compensatory. The Decision stated:

After consideration of the facts and submissions presented by the parties to this application, the Agency determines that pursuant to section 113 of the NTA, 1987 the CN rates to the Maritimes (Truro, Sydney, Moncton and Halifax) in relation to the transportation of insulation from Ottawa, flour from Montreal, and pool car traffic from Montreal and Toronto are compensatory.

This then left for consideration the allegation by ACE that CN was charging rates to Newfoundland destinations "... not consistent with the Terms of Union ...". The Agency decided that it would hold a public hearing to determine how Term 32(2) of the Terms of Union should be applied in establishing rates for the transportation of goods to Newfoundland, within the new regulatory regime created by the NTA, 1987. The Decision further stated:

The Agency has decided, pursuant to section 35 of the NTA, 1987, to hold a public hearing to give all interested parties an opportunity to make submissions on how Term 32(2) of the Terms of Union is to be applied.

On October 26, 1989, the Government of Newfoundland and Labrador (hereinafter the Government of Newfoundland) filed a Notice of Motion for Leave to Appeal the Agency Decision to hold a public hearing. The application by the Government of Newfoundland for leave to appeal was denied by the Federal Court of Appeal on January 12, 1990.

Although the application by the Government of Newfoundland was subsequently dismissed by the Court, ACE filed a second complaint dated November 29, 1989, with the Agency in respect of Review Committee Decision No. 1987-02 dated August 28, 1987 (hereinafter the Review Committee Decision) and the Terms of Union \so as to avoid an appeal on a technical procedural issue\. All parties at the public hearing were asked to give their views as to how the Agency should deal with this second complaint. ACE, CN and the Government of Newfoundland argued that there is no need for the Agency to address this second complaint as a separate matter. Therefore, the Agency finds that the November 29, 1989 complaint is subsumed by the original complaint and is to be considered as part of the first complaint. The Decision which follows, therefore will pertain to both complaints.

On August 14, 1990, public hearings commenced in St. John's, Newfoundland, to consider the complaint filed by ACE.

The ACE complaint centres on one fundamental issue, the interpretation and application of Term 32(2) of Terms of Union of Newfoundland with Canada (schedule to the Newfoundland Act, (1949) (U.K.)) (hereinafter the Terms of Union). The Terms of Union are part of the Constitution of Canada and, under subsection 52(1) of the Constitution Act, 1982 (Canada Act 1982 (U.K.), 1982, c. 11, Sch. B), the Constitution of Canada is the supreme law of Canada. Any law of Canada which is inconsistent with it is of no force or effect.

Term 32 states:

(1) Canada will maintain in accordance with the traffic offering a freight and passenger steamship service between North Sydney and Port Aux Basques, which, on completion of a motor highway between Corner Brook and Port aux Basques, will include suitable provision for the carriage of motor vehicles.

(2) For the purpose of railway rate regulation the Island of Newfoundland will be included in the Maritime region of Canada, and through-traffic moving between North Sydney and Port aux Basques will be treated as all-rail traffic.

(3) All legislation of the Parliament of Canada providing for special rates on traffic moving within, into, or out of, the Maritime region will, as far as appropriate, be made applicable to the Island of Newfoundland.

In the past, ACE has filed complaints in respect of CN rates to Newfoundland. On July 29, 1982, ACE made a formal complaint to the Minister of Transport alleging that certain CN rates for movement of goods between mainland Canada and Newfoundland were noncompensatory. The Minister of Transport requested the Canadian Transport Commission (hereinafter the CTC) to investigate these allegations. The Railway Transport Committee (hereinafter RTC) Decision of February 12, 1986 held that CN rates must be in accordance with section 276 of the Railway Act, R.S.C. 1970, c. R-2, that is, they were required to be compensatory. On appeal, the Review Committee Decision held that the Railway Act required CN to set maximum rates for Newfoundland based on the Terms of Union and that rates, so based, need not be compensatory.

Again, on June 20, 1988, ACE filed a complaint with the Agency in respect of the rates to Newfoundland and the development of those rates. On April 4, 1989, the Agency directed specific CN rates to be adjusted.

Among other things, the Agency found in its Decision of October 3, 1989 that since the findings of the Review Committee, there have been significant changes in the circumstances which existed in 1987. Furthermore, the Agency found that the basis for the Review Committee Decision is now in doubt.

Since the Review Committee Decision, important changes have occurred. These include:

The Newfoundland Railway is no longer in existence. Pursuant to the Memorandum of Understanding (hereinafter the MOU) between the Government of Canada and the Government of Newfoundland dated June 20, 1988, Canada disentrusted CN from the operation of the Newfoundland Railway. The railway has been largely dismantled, track and ties have been lifted, and the right-of-way returned to its original state.
Since January 1, 1988, there has been a significant and substantial change in the regulation of railway freight rates in Canada. An important aspect of that change was the inception of confidential contracting between carriers and shippers. According to evidence at the hearing, 65 percent of the revenue traffic moving to Newfoundland, and 70 percent of the revenue traffic across Canada, move under confidential contract. This has had a significant impact on what the Review Committee referred to as an identifiable Maritime Freight Rate Structure. This structure continues to exist, albeit to a lesser extent than it did at the time of the Review Committee Decision.
Changes have occurred in traffic patterns to Newfoundland. Term 32(2) seems to contemplate a routing for Newfoundland Railway traffic moving between North Sydney and Port aux Basques. Marine Atlantic Inc. container carryings over this gateway show a precipitous and continual decline. Currently 75 percent of CN Newfoundland traffic moves between Halifax and St. John's over a substantially greater marine haulage distance and hence is a more significant component of delivered costs to Newfoundland.
Rates set by CN to Newfoundland, for weights greater than 60,000 lbs, are based on Maritime equipment rates (eg. box cars). Since 1988, 100 percent of CN traffic to Newfoundland has been moving in containers, with substantially lower content weights.
The competitive structure of the linkages between mainland Canada and the Island of Newfoundland has changed dramatically. At the time of the Review Committee Decision, three competing carriers served Newfoundland; i.e. , a) Marine Atlantic Inc., North Sydney to Port aux Basques b) Atlantic Searoute Limited (hereinafter ASL), Halifax to St. John's and Corner Brook, and c) Atlantic Container Express, Montreal to St. John's and Corner Brook. Since the hearing, it has been learned that ACE and ASL are to be amalgamated.
The ADI Limited report, entered at the hearing by the Atlantic Provinces Transportation Commission (hereinafter APTC) as Exhibit No. APTC -1, provides the statistics which indicated changes to traffic shares into Newfoundland with respect to rail, ship and road. Exhibit 4.5, included in Exhibit No. APTC -1, depicts that since 1984 CN rail traffic has steadily decreased while the shares of both shipping and trucking modes have increased, suggesting that CN may no longer be the price leader.

JURISDICTION

During argument at the public hearing, CN questioned the capacity of ACE to complain under subsection 35(1) of the NTA, 1987. CN stated that the complaint by ACE was deficient in that ACE had not indicated how it was suffering, whether it had a proper interest in the matter and what kind of relief it was seeking. On those grounds alone, CN said that the Agency would be justified in dismissing the complaint by ACE. While the Agency agrees that it has some discretion under subsection 35(1) of the NTA, 1987 to decide to what extent it will deal with any particular complaint, it does not believe that any of the alleged deficiencies, even if true, would preclude the Agency from considering this complaint. In any event, the Agency is satisfied that the complaint filed by ACE is not deficient and that the interest by ACE in freight rates charged for traffic to Newfoundland is readily apparent. Clearly, ACE is a modal competitor of CN for the transport of goods to Newfoundland.

CN also said that the Agency could not deal with the issue of whether the rates complained of were noncompensatory because more than ninety days had elapsed since the complaint was filed. Section 113 of the NTA, 1987 requires the Agency to complete its investigation and determine that a rate is noncompensatory within ninety days after the complaint is received. CN cited the fact that conditions in respect of the rates complained of had probably changed since the filing of the application. The Agency considers that it would have been inconceivable that in making the provision for a decision to be rendered within ninety days, that Parliament would have intended that the Agency do so before it had completed its analysis of a matter. It is common ground among the parties to this case that to the extent that there exists a Terms of Union rate, such a rate need not be compensatory. In this Decision, the Agency has reviewed and outlined what it considers to be proper development of a Terms of Union rate. The Agency could not have ruled that certain rates to Newfoundland were compensatory or noncompensatory before it was known whether such rates were in accordance with the Terms of Union. Furthermore, not only was the development of rates an issue of concern, but also the appropriate methodology for costing Newfoundland movements was in question. Would CN have the Agency cost a movement to Newfoundland before the appropriate methodology was known? Notwithstanding its objection, CN has participated fully in the hearing of this matter and has not sought any prerogative remedy. Although the Agency is sensitive to the view that the rates complained of may now be part of history, the Agency considers that it retains the jurisdiction to deal with this complaint in toto.

CN had also suggested, by way of a preliminary motion at the hearing, that the Agency was acting on its own motion under the complaint made pursuant to subsection 35(1) of the NTA, 1987 as the Agency went beyond the scope of that complaint. CN also said that the parties did not have sufficient notice if the Agency was going beyond the scope of the complaint or acting under any other jurisdiction. The Agency ruled, however, that the matters with which the Agency was dealing with were required to be dealt with as part of the original complaint and that all parties had been given sufficient notice of the issues.

BACKGROUND

In 1949, the time Newfoundland entered into Confederation with Canada, rail traffic to Newfoundland was handled via North Sydney, Nova Scotia then transshipped by water carrier to Port aux Basques. Mainland railway equipment, which was built to operate over standard gauge track in mainland Canada, was not compatible with the Newfoundland narrow gauge track and therefore not transported across the Gulf. Traffic was unloaded into a shed at North Sydney, loaded into the hold of vessels and shipped to Port aux Basques. It was then unloaded into a shed, loaded into Newfoundland narrow gauge railway equipment for distribution to Island destinations by the Newfoundland Railway. No railway cars actually moved across the Gulf to Newfoundland in 1951 (the year in which the Board of Transport Commissioners (hereinafter the Board) ordered CN to cancel existing class rates and substitute rates based on the rate structure in the Maritime provinces).

This system of unloading and reloading continued until the 1960's when it was changed to a system of "truck-to-truck" (truck meaning the undercarriage and wheels of railway equipment) transfer at North Sydney and Port aux Basques. This meant that a vessel was equipped to carry mainland railway cars across the Gulf to Port aux Basques, where the standard conventional "trucks" were replaced with narrow gauge "trucks", in order to continue the rail movement across Newfoundland. This "truck-to-truck" transfer continued until 1988, the year in which CN ceased to be entrusted with the operation of the Newfoundland Railway.

The advent of the containerization program brought about dramatic changes not only to CN methods of handling traffic but also to its pattern of movement. Prior to 1982, 100 percent of CN traffic moved entirely by conventional railway equipment. By 1987 this had changed significantly to a situation where 80 percent of CN traffic was moved by containers and only 20 percent by conventional equipment. Since 1988, 100 percent of Newfoundland traffic has been moved by container.

During this transitional period (1982 to 1988), 98 percent of CN traffic moved between North Sydney and Port aux Basques. A small portion of piggy-back trailer traffic moved between Halifax and St. John's, via ASL. Containerized traffic was ferried from North Sydney to Port aux Basques, via Marine Atlantic Inc., loaded onto Newfoundland flat cars and transported to container terminals at Corner Brook, Grand Falls and St. John's, and then delivered to its destination by highway. This method and movement of CN traffic was continued until the closure of the Newfoundland Railway in 1988.

In June 1988, the governments of Canada and Newfoundland signed the MOU. As a result of the MOU, CN was no longer entrusted with the operation of the Newfoundland Railway and this resulted in the dismantlement of the railway infrastructure on the Island of Newfoundland. There is no longer a continuous railway linkage between Port aux Basques and St. John's. The trade-off for the loss of the railway was a major long-term commitment to the transportation system in Newfoundland, specifically in regard to the development of highways, ports and harbours. However, CN was required to continue to serve Newfoundland with intermodal services.

The MOU made no change to the constitutional commitment already in place other than to agree that there would be no future claim on the part of Newfoundland for the reestablishment of a rail network on the Island. The MOU assures that Canada would maintain its constitutional obligations in a post-rail era. However, this federal-provincial agreement is not entrenched in the Constitution nor does it call for amendments to either the Terms of Union or legislation of the Parliament of Canada including the Railway Act, the NTA, 1987 and the Maritime Freight Rates Act, R.S.C., 1985, c. M-1.

CN now routes its container traffic destined to points east of Lewisporte through Halifax, then by sea to St. John's where it is moved by highway to final destination. Traffic destined to points west of Lewisporte moves via Halifax, then by sea to Corner Brook. Due to shipper preference, some residual traffic continues to be moved through the North Sydney gateway to Port aux Basques and then by highway to destination. By 1989, the total volume of CN traffic to Newfoundland destinations, rerouted through Halifax, increased to 75 percent; the remainder moved through the North Sydney gateway. From Halifax, ASL ships CN traffic twice a week to the Island of Newfoundland employing two container vessels. The vessels operate a triangular route between Halifax, St. John's and Corner Brook.

In summary, CN currently serves Newfoundland either by containers (85 percent) or trailers (15 percent). Of the total traffic, 75 percent moves between Halifax and St. John's and Corner Brook, and the remaining 25 percent moves between North Sydney and Port aux Basques. CN has a contractual arrangement with ASL regarding the price per container, water haul, and loading and unloading. CN does not, however, have contractual arrangements with Marine Atlantic Inc., and therefore CN containers and/or trailers are handled out of North Sydney by Marine Atlantic Inc. on the same terms as other commercial traffic.

EVIDENCE AND ARGUMENT

The Agency has reviewed all evidence and argument presented by the interested parties in their written submissions and at the public hearing. The pleadings form part of the public files and may be consulted in the offices of the Agency by anyone who so desires. In addition, copies will be provided by the Secretary of the Agency on request.

The Agency has considered all of the material filed in the matter of the complaint made by ACE and provides the following analysis and determination.

AGENCY ANALYSIS

Terms of Union

Term 32(2) of the Terms of Union has been the subject of much analysis by the predecessors of the Agency, the CTC and the Board. Term 32(2) states:

For the purpose of railway rate regulation the Island of Newfoundland will be included in the Maritime region of Canada, and through-traffic moving between North Sydney and Port aux Basques will be treated as all-rail traffic.

When the latest ACE complaint was received, the Agency was concerned about the impact the various changes described in the background section may have had on the application of the Terms of Union.

Essentially the Agency perceives two questions: firstly, is the Term 32(2) still applicable in 1991?; and secondly, if Term 32(2) continues to apply, how should it be applied? Concerning the first question, the parties at the public hearing seem to be in agreement that Term 32(2) of the Terms of Union must continue to apply in 1990 because it is a constitutional provision. No party argued that Term 32(2) is spent or that the circumstances have changed to such a degree that Term 32(2) cannot be given meaning; although Mr. Peter Locke, the only public interest witness to appear at the hearing, stated:

... Evidently, the evolution in Newfoundland's freight transportation environment has helped to render subsection 32(2) redundant and more an historical anecdote than anything....

Counsel for the Government of Newfoundland, however, submitted:

... that the changes which have occurred in the operations of CN since the 1987 Review Committee Decision do not affect the operation and application of Term 32 of the Terms of Union of Newfoundland with Canada....

In support of her position, counsel argued:

... a railway rate is a rate offered by a railway company for the transportation of goods using its rail and rail-related operations. More particularly, a railway rate is not limited to the transport of goods solely by rail, but includes the intermodal transport of freight by a railway company....

In respect of container traffic moving to Newfoundland, counsel stated:

... CN maintains control of and responsibility for freight from door to door....

... It is my submission that the rate charged by CN while it retains control of the freight, normally door to door, constitutes a railway rate ...

... The use of trucks occurred both prior to and after closure of the railway. The choice to use truck rather than rail is made by CN. The shipper has no input. It is a matter of carrier convenience. The rate charged to the shipper remains a railway rate....

And finally, counsel for the Government of Newfoundland said:

... In summary, I submit that shippers and consignees in Newfoundland pay railway rates for the shipment of freight by CN and that they are, therefore, entitled to be treated as if they were in the Maritime region. In other words, the benefits of the first part of Term 32(2) clearly apply.... (Emphasis added.)

The Agency is in agreement with counsel for the Government of Newfoundland and is of the opinion that Term 32(2) continues to apply. Although there is no longer a railway on the Island of Newfoundland and little traffic goes by way of the North Sydney - Port aux Basques route, as mentioned in Term 32(2), there continue to be "railway rates" to the Island of Newfoundland.

Where the parties differ is on the meaning of Term 32(2) and how it is to be applied. ACE says that the original rationale for Term 32(2) was the shift in trading patterns, and the expense of the Newfoundland Railway. At present, only a small volume of traffic moves by way of Port aux Basques now that the Newfoundland Railway is gone. For these reasons, and in keeping with the living tree doctrine of constitutional interpretation, ACE argues that Newfoundland is entitled to three things under Term 32(2): through railway rates; the benefits of Term 32(2) when invoking the competitive access provisions of the NTA, 1987 (it was not explained how this might be done); and the continued application of the Maritime Freight Rates Act and the Atlantic Freight Assistance Act, R.S.S., 1985, c. A-15 to Newfoundland rail traffic. If Term 32(2) is not spent and is to be given meaning, the argument presented by ACE gives Newfoundland no more than that which it would be entitled to under existing legislation or other constitutional provisions. As long as there are railway rates to and from Newfoundland, shippers will be entitled to rely on all aspects of the NTA, 1987 and the Railway Act which may be of assistance to them. Furthermore, Term 32(3) of the Terms of Union specifically extends the benefit of such legislation as the Maritime Freight Rates Act to Newfoundland.

On the other hand, the three parties, the Government of Newfoundland, the APTC, and CN argued throughout the proceedings that the Review Committee Decision dealt with the issue of the interpretation of Term 32(2), and, therefore, there is no need to review that ground again. This argument ignores the reality that CN traffic does not, for the most part, move on the route that it travelled when the Review Committee made its Decision, nor on the route which was likely contemplated by the framers of the Terms of Union. There have also been significant changes resulting from the NTA, 1987 and the most significant, for the purposes of this proceeding, is the provision for the railway companies to have confidential contracts with shippers. The Town of Channel-Port aux Basques adds that Term 32(2) provides that the traffic must be shipped via North Sydney - Port aux Basques in order to be entitled to whatever special preference the Terms of Union afford.

There is no doubt that constitutional provisions such as those found in Term 32(2) must be given a liberal and large interpretation. As stated by the Supreme Court of Canada in The Attorney General of British Columbia v. The Canada Trust Company [1980] 2 S.C.R. 466 by Dickson, J. as he then was at page 478:

It has been stated repeatedly on high authority that a constitutional document must remain flexible and elastic, in the words of Lord Sankey in Edwards v. Attorney General of Canada, at p. 136, `a living tree capable of growth and expansion within its natural limits'. There is nothing static or frozen, narrow or technical, about the Constitution of Canada.

The Agency is of the view that the living tree doctrine of constitutional interpretation requires it to give meaning to Term 32(2) in 1991.

In the opinion of the Agency, it was the Board in Attorney-General of Newfoundland v. C.N.R. (1951) 67 C.R.T.C. 353 who came closest to the true meaning of Term 32(2). Commissioner Wardrope then said at page 357:

... This then leaves the opening words in s-s. (2) of s. 32 for separate and distinct consideration. They are not essential to bring Newfoundland under the same form of rate regulation as the other Maritime Provinces. The benefits of the Maritime Freight Rates Act have been fully provided for. The Railway entrusted with the management and operation of the Newfoundland Railway, would be subject to the same regulation without the use of these words as they are in other Maritime Provinces. In my opinion they must then mean that notwithstanding certain dissimilar, disadvantageous circumstances and conditions pertaining to Newfoundland, this Province is to be included rate-wise in the Maritime region on a general level of rates similar to the other Maritime Provinces.... (Emphasis added.)

The Board ordered the revision of class rates to Newfoundland, but left the matter of town and commodity rates to continue to be determined by negotiations between the railway companies and the interested parties. The Board reserved the right to give consideration to an application pertaining to any specific dispute relating thereto.

The Agency believes that the interpretation given by the Board of Term 32(2) is sound, notwithstanding the fact that the reasons and circumstances for the creation of Term 32(2) may have either disappeared or reduced in importance. The Agency maintains that Term 32(2) is a constitutionally entrenched guarantee that railway rates charged for traffic to and from Newfoundland will be established at a level that is charged for comparable traffic in the Maritimes.

Furthermore, there is nothing in the words of Term 32(2) which suggest its benefits are to accrue only to traffic moving between North Sydney and Port aux Basques. The words "For the purpose of railway rate regulation the Island of Newfoundland will be included in the Maritime region of Canada, ..." are, in the view of the Agency separate from those words which pertain to North Sydney and Port aux Basques.

In the course of final argument, counsel for the Government of Newfoundland restated its position on the legislative intent, interpretation and purpose of Term 32(2):

... It can be expected that over the years adjustments to accommodate for dissimilar shipping conditions will be required. These adjustments should be made so as to achieve the legislative intention underlying Term 32(2) -- that is, to put Newfoundland shippers and consignees on as equal a footing as possible with those in the Maritime provinces.... (Emphasis added).

and in discussing the MOU:

... It shows that it was acknowledged by both parties that the Terms of Union had been interpreted so as to ensure that Newfoundland shippers and receivers would be put in the same position as their Maritime counterparts.... (Emphasis added)

and in summarizing the position of the Government of Newfoundland:

... I would submit that adjustments should be made, as necessary, in order to achieve the purpose of Term 32(2). That purpose is to place Newfoundland shippers and consignees on as equal a footing as possible with their counterparts in the Maritime provinces.... (Emphasis added)

In reaching its conclusion on the purpose of Term 32(2), the Agency has considered the comparability of Newfoundland shippers to their counterparts in the Maritime provinces:

Railway freight rate regulation in both Newfoundland and the remainder of Maritime Canada is under the jurisdiction of the NTA, 1987.
Shippers in Maritime Canada enjoy certain benefits under the jurisdiction of both the Maritime Freight Rates Act and the Atlantic Region Freight Assistance Act. Term 32(3) of the Terms of Union extends these same benefits to Newfoundland shippers.
Railway shippers in Maritime Canada ship goods under published tariffs and confidential contracts. Newfoundland shippers similarly transport and/or receive goods under both published tariffs and confidential contracts.
Newfoundland shippers enjoy maximum rate protection by virtue of the Terms of Union; Maritime shippers do not (nor do any other Canadian shippers).
Terms of Union rates to Newfoundland destinations can be at less than compensatory levels. All rates in Maritime Canada must be compensatory.

As far as comparability, the Agency concludes that Newfoundland shippers enjoy legislative provisions under the NTA, 1987 and Terms 32(2) and 32(3) of the Terms of Union which, at the very least, equal, and likely surpass, those enjoyed by shippers in the remainder of Atlantic Canada. The expressed concern of the Government of Newfoundland that it may not be on "as equal a footing as possible" or the "same position" as shippers in Maritime Canada, has not been demonstrated.

Identifiable Maritime Rate Structure

The Review Committee expressed the view that Newfoundland is entitled to rates based upon an identifiable Maritime structure to the extent that there is one.

In the past, when the Board in 1951 directed CN to base tariffs on a Maritime rate structure, this structure consisted of class rates, commodity rates, competitive rates, agreed charges and statutory rates. Of these, class and commodity rates made up the majority. Similarly, in 1987 when the Review Committee Decision was issued directing CN to base rates on an identifiable Maritime rate structure, the structure consisted of class rates, commodity rates, competitive rates, agreed charges and statutory rates. Currently, in addition to the rates mentioned above which are found in public tariffs, there also exist confidential contract rates.

During the public hearings, the Agency heard considerable argument from the parties concerning what an identifiable Maritime rate structure is and whether it exists today. ACE believes that although there appears to be a basis for a structure, the structure itself has largely disappeared; CN argues that a visible structure exists today; and the Government of Newfoundland, APTC and Port aux Basques believe that rates can be identifiable without being visible to the public, such as rates in confidential contracts.

The Agency heard evidence by CN that 60 to 70 percent of its Maritime freight is now shipped under confidential contract and that 64 percent of its Newfoundland revenue is derived from confidential contract. It is the opinion of the Agency that while these percentages indicate that an increasing volume of freight is shipped under confidential contract, this is not indicative of declining published tariffs. It does not necessarily follow that, because 60 to 70 percent of Maritime freight traffic moves under confidential contracts that 60 to 70 percent of Maritime published tariffs have disappeared. A few large tonnage shippers in Maritime Canada could account for a significant proportion of the tonnage moving under Maritime confidential contracts. Also, section 115 of the NTA, 1987 obliges a railway company, on the request of a shipper, to issue a tariff in respect of the transportation of traffic.

In the opinion of the Agency, it is not necessary to determine whether visible rates are disappearing or whether a neatly defined structure of rates exists in order to accord Newfoundland the benefit of Term 32(2). Such a determination in the past was deemed necessary by the Review Committee in order to make Newfoundland a part of the Maritime region for the purposes of railway rate regulation. However, the real question now is whether or not Newfoundland, in order to be given the benefit of Term 32(2) of the Terms of Union, is entitled to a Terms of Union rate based in part on confidential contracts in the Maritimes.

Confidential Contracts

During the hearing, much importance was given to the matter of confidential contracts in the Maritimes and whether they should form the basis for rates to Newfoundland. ACE and Mr. Peter Locke believe that to include confidential contracts in the Maritime rate structure would risk compromising the confidentiality with respect to subsection 120(5) of the NTA, 1987. Therefore, these rates should not be included in the calculation of a Terms of Union rate. Alternatively, the other parties believe that confidential contracts should be included in the Terms of Union rate calculation. Port aux Basques, APTC and the Government of Newfoundland believe that the terms and conditions of a contract can be valued and included in the calculation, while CN believes that the terms and conditions of the contract must be similar in order to be included.

In her concluding argument, counsel for the Government of Newfoundland, maintains that the purpose of Term 32(2) "... is to place Newfoundland shippers and consignees on as equal a footing as possible with their counterparts in the Maritime provinces....". She said "We submit that, by virtue of 111 and the Term itself, CN is required to do all that is necessary to carry out the intention of Term 32(2). In that regard, its decision to conduct business by way of confidential contracts cannot override its absolute constitutional obligation to set rates to and from Newfoundland based on Term 32(2)....".

Furthermore, counsel for the Government of Newfoundland argued "You have heard in evidence that confidential contracts were not included in such a rate base and that their inclusion would bring the Maritime rate down. I would suggest that it is necessarily extended that there must be an Order to direct CN to offer new rates. Without the inclusion of confidential rates, CN's method of calculation clearly provides Terms of Union rates which are higher than a rate derived from the blending of Maritime confidential net rates and published rates".... (Emphasis added)

Counsel for ACE stated that to blend confidential contracts and published tariffs would not be appropriate, as this could give Newfoundland something which nobody else has in the Maritimes. He said "... The point is that Newfoundland can get what the Maritimes can get, but the [sic] can't get more than what the Maritimes can get. With the greatest of respect to my friend, I think the burden of their argument is that they are asking for more...."

The Agency is of the opinion that to include rates found in confidential contracts in the calculation of the Terms of Union rate could give Newfoundland shippers rates lower than the published rates which Maritime shippers can receive. For example, if a confidential contract rate were included in the Terms of Union rate, small volume Newfoundland shippers would benefit from a lower rate offered by a carrier to another Maritime shipper, because of significantly larger volume commitment. Shippers in Newfoundland, as do shippers in the Maritimes, have opportunities to negotiate confidential contracts and, therefore, should not be privileged to a rate that includes confidential contract rates designed for a specific shipper in the Maritimes.

Not all Maritime shippers have the benefit of confidential contracts, only those who have entered specific agreements with the carriers. The balance use published tariffs. If the Agency were to factor net confidential contract rates into the determination of Terms of Union rates, all Newfoundland shippers and receivers of the same commodity could have the benefit of confidential contracts. This will be by virtue of where they are located rather than what they have negotiated.

Also, confidential contract rates may include a reduced rate, which is subject to specific terms and conditions. If we factor confidential rates into Terms of Union rates, Newfoundland shippers will have the benefit of lower confidential rates but will not be subject to the same terms and conditions as Maritime shippers.

Furthermore, as indicated during the hearing by Mr. Edsforth, witness for ACE, confidential contracts can include many terms and conditions such as: multi-year rates with escalation provisions; ancillary charges dealing with delays by the shipper or the railway; volume commitments with penalties for volume shortfalls and rebates for meeting the commitment; performance penalties; switching at origin and/or destinations; loading and unloading of cars and specifications of train service. The Agency is not in possession of the detailed information concerning the operations of the carriers and shippers and maintains that it would be extremely difficult, if not impossible, to isolate and value the portion of each specific term and condition attributable to the Maritime region, so that the "net" confidential contracts can be included in the Terms of Union rate.

Notwithstanding these reservations, the Agency has concluded that Term 32(2) requires that the Island of Newfoundland be included in the Maritime region of Canada for the purpose of railway rate regulation. The Agency does not, except upon complaint, regulate rates, and is committed to a comprehensive policy to allow all carriers the ability to compete. Furthermore, the Agency is required to review any complaints which may affect the well-being and growth of Canada and its regions. The Agency believes CN should only include rates from confidential contracts with similar terms and conditions into the calculation of Terms of Union rates.

The Agency does not agree that the development of Newfoundland rates based on such confidential contracts in the Maritimes would compromise the confidentiality provisions found in subsection 120(5) of the NTA, 1987. That section prohibits the Agency or any Member, officer or employee from disclosing any information in a confidential contract. There is no reason whatsoever to believe that this section would be breached if CN were to develop rates based on confidential contracts as herein described.

The Agency does not agree with the submission of the Government of Newfoundland that disclosure of the contents of confidential contracts is necessary in order to comply with Term 32(2) or section 111 of the NTA, 1987. Section 111 allows CN to set its rates as it sees fit subject only to various legal requirements including the Terms of Union. In the competitive environment established by the NTA, 1987, it is the responsibility of CN to establish rates and it is not within the mandate of the Agency, except on a properly found complaint within its jurisdiction, to interfere with that responsibility. The Agency, therefore, has no ongoing monitoring function to ensure that the Terms of Union rates are properly established. As such, there can be no circumstance where a breach of subsection 120(5) of the NTA, 1987 could occur as a result of the use by CN of confidential contracts in the Maritimes to establish Terms of Union rates.

Terms of Union Rate Development

If Newfoundland shippers are to be in a comparable position to their Maritime counterparts, Terms of Union rates should be developed on published Maritime freight rates and/or confidential contracts having similar terms and conditions. These Maritime rates, upon which Terms of Union rates are based, must be compensatory in the Maritimes as determined by the costing methodology and criteria outlined in this Decision, that is, the movement is to be costed in the manner that the traffic actually moves to Newfoundland. Maritime rates from which Terms of Union rates are developed shall be no lower than prevailing published intermodal rates in the Maritimes, so as to maintain Newfoundland and Maritime comparability.

Rate Ceiling

The Agency is of the opinion that Term 32(2) is a rate ceiling. Term 32(2) provides maximum rate protection to Newfoundland shippers. It is the opinion of the Agency that Term 32(2), does not necessarily provide Newfoundland shippers with lower railway freight rates than Maritime levels. Any rates below the rate ceiling must comply with the requirement that the rate be compensatory. CN has given evidence that some 70 percent of its traffic to Newfoundland moves at less than the Terms of Union rates. These rates are required to be compensatory. If a complaint were made to the Agency, and if the railway could not establish that a particular rate does not have the effect or tendency of substantially lessening competition or significantly harming a competitor and was not designed to have that effect, the Agency could disallow that rate. The Agency agrees with the Review Committee Decision which states:

It may be that in some instances the resultant rates will be noncompensatory. However, CN will not be in violation of Section 276 because the Terms of Union, as a constitutional enactment, will override the requirements of Section 276 when such an inconsistency arises. The rates calculated in this manner will represent the maximum rates CN can charge for freight moving to, from and within Newfoundland.

This is not to say, however, that CN has complete downward pricing freedom. Once the maximum level has been established, CN is free to set rates at any lower level providing the compensatory requirements of Section 276 are met.

Section 276 of the Railway Act is now revoked and in its place are sections 112 and 113 of the NTA, 1987. Although, sections 112 and 113 differ somewhat from section 276, Term 32(2) takes precedence over the NTA, 1987.

Routing

With respect to the significance of the Terms of Union routings to Newfoundland destinations, the "Background" section of this Decision outlines in considerable detail the changes in railway traffic patterns and routings to Newfoundland since the Review Committee Decision and the closure of the Newfoundland Railway in 1988.

The Agency agrees that Terms of Union rates, based on Maritime rates as discussed above should be developed using rail mileages through North Sydney to Port aux Basques and onto St. John's, as if the Newfoundland Railway was still in place. This traffic routing is not relevant to the costing of rail, intermodal, and multi-modal movements to Newfoundland, which was, in part, the subject of the July 6, 1989 complaint by ACE regarding section 113 of the NTA, 1987.

Paper Rates

Furthermore, Terms of Union rates must not be developed on a "paper rate", which as described by Mr. Shapcott, a witness for CN, "... would be a rate that would be in the tariff which would not be moving any traffic.". In certain cases, a Terms of Union rate for a specific item might be based on Maritime rates which is not presently being transported, has not been transported in the immediate past, and will not be transported in the future within or into the Maritimes. In this respect, rates to Newfoundland must stand the compensatory test.

Cost Development

The Review Committee had previously considered the question of how movements to Newfoundland are costed. It ruled that such movements should be costed using conventional railway costing techniques for the rail portion of the haul on the mainland and on Newfoundland and that the water portion between North Sydney and Port aux Basques should be treated as if it were an all rail through haul (no allowance would be made therefore for marine charges and port handling).

Only 25 percent of CN traffic continues to use the Port aux Basques gateway. Therefore, the Agency had asked parties at the public hearing how they would cost a CN movement to Newfoundland should it be necessary to determine if a rate were compensatory. All parties were in general agreement that movements should be costed as they are actually moved. The Agency has considered this matter and is of the opinion that rail movements in respect of rates to Newfoundland that are noncompensatory should be costed in the following manner: Rail cost, plus water costs, plus pick-up and delivery (hereinafter P&D) costs, and costed via the actual route taken using the equipment employed and based on the commodity and weight shipped.

Further, the costs will be the actual specific costs (e.g. actual contract price for shipping or actual P&D price) where available and if not, the average costs (service units and unit costs) will be used. For example, if the traffic moves from Montreal to Halifax to Grand Falls, in order to develop the costs, the following components are to be included: the cost of pick-up from the customer; the cost of moving the container by rail from Montreal to Halifax; the cost of loading the container on the ship; the cost of transporting the container to St. John's by ship; the cost of unloading; and the cost of delivering the container to the customer in Grand Falls.

The costing of traffic moving between North Sydney and Port aux Basques using actual costs is different from the method adopted by the Review Committee which concluded that the water portion of the route should be costed as if it were an extension of the Maritime rail route. Now, of course traffic does not move on the Island of Newfoundland by rail and the imaginary rail connection between the Island and the mainland is no longer required. Imaginary costs related to this imaginary connection should not be used as a basis for costing. Therefore, shipping costs for both Halifax-St. John's-Corner Brook and North Sydney to Port aux Basques should reflect the actual rates paid by CN to either ASL or Marine Atlantic Inc. If a minimum is paid, this should also be reflected in the cost.

In addition, the Maritime rates upon which Terms of Union rates are based, must be costed as the traffic actually moves to Newfoundland. For example, if the traffic is being transported to Newfoundland by container, then a container cost to the Maritimes must be used to determine if the Maritime rate is compensatory.

Further, empty return ratios (the ratio used in costing to reflect the cost of returning empty equipment to its origin) would be developed as described by ACE witness, Mr. Edsforth: the Agency would conduct an analysis of the actual containers which flow to and from Newfoundland, get estimates of the different ratios for the two gateways of North Sydney and Halifax and establish the volume of empty slots on the railway cars to acquire the empty return on the equipment. In summary it would establish the costs of the movements for the following three components: 1) loaded containers, 2) empty containers, and 3) empty slots on container cars.

CONCLUSION

The Agency is of the opinion that rate setting is a function of the railway companies and that they should have the freedom to set rates without interference. The mandate of the Agency is to administer the NTA, 1987 which requires that rates are compensatory pursuant to section 112 of the NTA, 1987. In regard to rates into Newfoundland, however, CN must also be conscious of section 111 of the NTA, 1987 which requires CN to calculate rates to Newfoundland in accordance with Term 32(2) of the Terms of Union.

The Agency cannot agree with the proposal for blending all net confidential contract rates with published tariffs for the purposes of developing Terms of Union rates. The Agency maintains that to include an average of all confidential contract and published tariff rates in a Terms of Union rate would give Newfoundland shippers something that is not available to the Maritime shippers. This would, therefore, leave Newfoundland shippers on more than an "equal footing" as is intended by the Terms of Union. Therefore, only rates from Maritime contracts with similar terms and conditions and published tariff rates are to be used to determine Terms of Union rates. Traffic moving under published Maritime rates upon which Terms of Union rates are presently based is diminishing, and CN may henceforth include rates set out in confidential contracts with similar terms and conditions in the development of Terms of Union rates.

The Agency is of the view that Terms of Union rates must be based on published Maritime freight rates and/or confidential contracts which have similar terms and conditions. These Maritime rates upon which Terms of Union rates are based must be compensatory in the manner that the traffic actually moves to Newfoundland and shall be no lower than prevailing published intermodal rates in the Maritimes.

Furthermore, CN will develop Terms of Union rates on the traditional railway mileage and routing from North Sydney to St. John's, Newfoundland. CN may, however, move freight to Newfoundland by any manner and any route.

In determining if a rate is compensatory when below the Terms of Union rate, CN must meet the compensatory test as per sections 112 and 113 of the NTA, 1987. In determining the costs associated with a specific rate, the actual cost related to the actual movement of the commodity will be used as described in the costing section of this Decision.

Prior to Decision No. 509-R-1989 dated October 3, 1989, the Agency had requested CN to provide information which would reveal either that the rates complained of by ACE were at a Terms of Union level or were at compensatory levels. Based on a review of this information, the Agency determined that the box car rates to the Maritimes upon which Terms of Union rates are based are compensatory based on box car costing. The Agency further discovered that rates to Newfoundland on pool car traffic from Toronto and Montreal and rates to Newfoundland on insulation from Ottawa, were developed using confidential contracts, and the published tariffs were cancelled. With respect to rates to Newfoundland on flour from Montreal, no traffic was moving under the published tariff, and therefore it was also cancelled.

The Agency requires CN to review those confidential contracts containing rates on pool car traffic from Toronto and Montreal to Newfoundland, and insulation from Ottawa to Newfoundland as referred to in the Agency letters of September 19, 1989, and September 8, 1989. If traffic continues to move under these confidential contracts, CN is required to establish to the Agency that those rates are at Terms of Union level by applying the principles of this Decision; or if below Terms of Union level, to provide calculations in accordance with the principles set out in this Decision, which would reveal that the rate is compensatory or noncompensatory. If traffic no longer moves under the contracts referred to above, CN is required to advise the Agency, under which confidential contracts, if any, pool car and insulation traffic from the origins Toronto, Montreal and Ottawa now moves. CN is to also advise under which confidential contracts the traffic previously moved.

Further, CN is required to review flour rates from Montreal and ensure that no traffic is moving to Newfoundland today, under either confidential contracts or published tariffs and advise the Agency of its findings.

With respect to all other rates, CN may charge rates as it sees fit subject only to section 111 of the NTA, 1987, which makes CN subject to the requirements of Term 32(2) and of sections 112 and 113 of the NTA, 1987, and any other law which may be invoked on appropriate complaint.

Dissenting Opinion of Mr. Kenneth Ritter to Decision No. 266-R-1991

I have read the majority decision in this matter. Except for the sub-heading on Jurisdiction, I concur with both the content and wording of the Introduction, Background, Evidence and Argument (beginning at page 1 and continuing to Agency Analysis on page 7). My views regarding jurisdiction, while similar in result, are set out below in a separate section.

ANALYSIS AND DECISION

Jurisdiction

The Canadian National Railway Company (hereinafter CN) made a preliminary motion to the Tribunal, asserting that the National Transportation Agency (hereinafter the Agency) lost jurisdiction because a decision on this complaint by Atlantic Container Express Inc. (hereinafter ACE) concerning rates, was not made within 90 days as set out in subsection 113(5) of the National Transportation Act, 1987, R.S.C., 1985, c. 28 (3rd Supp.) (hereinafter referred to as the NTA, 1987).

CN did not apply for any Prerogative Remedy and has participated fully in this hearing.

In my opinion, no loss of jurisdiction has occurred although CN may have had a remedy in Mandamus.

Term 32(2)

For ease of reference Term 32 reads as follows:

Canada will maintain in accordance with the traffic offering a freight and passenger steamship service between North Sydney and Port Aux Basques, which, on completion of a motor highway between Corner Brook and Port aux Basques, will include suitable provision for the carriage of motor vehicles.
For the purpose of railway rate regulation the Island of Newfoundland will be included in the Maritime region of Canada, and through-traffic moving between North Sydney and Port aux Basques will be treated as all-rail traffic.
All legislation of the Parliament of Canada providing for special rates on traffic moving within, into, or out of, the Maritime region will, as far as appropriate, be made applicable to the Island of Newfoundland.

PART I

All parties at the hearing fully agreed that a decision in this case must involve the interpretation and application of Term 32(2) of the Terms of Union between Canada and Newfoundland (hereinafter referred to as Term 32(2).

Three possible options for interpretation were put forward at the hearing:

Term 32(2) is to all intent and purpose "spent".
Term 32(2) grants Newfoundland rights similar to those of the other Maritime provinces.
The original intent and effect of Term 32(2) has continued, and presently embraces, contemporary circumstances and conditions such as the enactment of the NTA, 1987 and the demise of the Newfoundland Railway.

Historical Background

At the time of confederation in 1949, Newfoundland was economically weak and fragile.

It had in 1933, due to its inability to support itself, requested the United Kingdom to suspend its constitution (legislature and responsible government) and to appoint a Commission of Government responsible to the Parliament of the United Kingdom. This form of government persisted until confederation.

The Terms of Union contemplated a change in traffic patterns to and from Newfoundland. Prior to confederation Newfoundland's trade was with the United Kingdom, the United States and Canada. As a province, its trade was integrated and bonded with Canada's.

Enhanced inter-Canadian trade was an important background factor to the enactment of Term 32 as a constitutional provision. Since all freight of consequence would now move to Newfoundland by rail on the North Sydney and Port aux Basques routing, and through Newfoundland on the Newfoundland Railway, Term 32(2) only had to refer to rate regulation. There was no need to include other modes or routing of freight, as this was the only one that was of any significance.

Term 32(2), the subsection applicable to this complaint, did two things.

It established the constitutional fiction that Newfoundland was, for the purpose of railway rate making, a contiguous part of the Maritimes.
It granted Newfoundland, railway rate-making equality with the other Maritime provinces, at a time when rate-making was both regulated and regional.

However, in order to adequately assess Term 32(2), a review of a number of important factors is critical.

Role of the Constitution in Canadian Law

The Constitution Act, 1982 states:

Subsection 52(1)

The Constitution of Canada is the Supreme Law of Canada and any law that is inconsistent with the provisions of the Constitution is, to the extent of the inconsistency, of no force or effect.

In light of this complaint I have absolutely no doubt that in the event of a conflict between Term 32(2) and the NTA, 1987, Term 32(2) will prevail.

Analysis and Interpretation of Constitutional Provisions

Can a constitutional provision be eroded or spent with the passage of time or changing circumstances? I am of the view, that changing circumstances do not erode the effect of a constitutional provision. Rather, the Constitution can adapt, chameleon like, to contemporary realities, so long as the effect of the adaptation does not negate the original intent and effect of the Constitutional provision.

The Supreme Court of Canada in The Attorney General of British Columbia v. The Canada Trust Company [1980] 2 S.C.R. 466 per Dickson, J. as he then was at page 478, said:

This principle was restated by Louis B.Z. Davis, Canadian Constitutional Law Handbook, (Aurora, Ontario: Canada Law Book Inc., 1985) at page 491.

The task of expounding a constitution is crucially different from that of construing a statute. A statute defines present rights and obligations. It is easily enacted and as easily repealed. A constitution, by contrast, is drafted with an eye to the future. Its function is to provide a continuing framework for the legitimate exercise of government power and, when joined by a Bill or a Charter of rights, for the unremitting protection of individual rights and liberties. Once enacted, its provisions cannot easily be repealed or amended. It must, therefore, be capable of growth and development over time to meet new social, political and historical realities often unimagined by its framers.

I believe that Term 32(2) has the potential to adapt and embrace changing circumstances and conditions, such as the demise of the Newfoundland Railway, the passing of the NTA, 1987, and the re-routing of traffic to and from Newfoundland.

There is a reasonable and traceable connection between present conditions and the words and intent of Term 32(2).

This issue was also discussed by Erwin N. Griswold and reported in the Ottawa Law Review, Volume 20:2 page 403 at page 412:

The judge must take into account anything and everything that is relevant, giving each factor the weight to which he concludes it is entitled. He must consider the actual language of the constitutional provision. He must consider the original intent if sure and reliable evidence of such can be found. He must also consider original intent in its broadest aspect, that is, the underlying intent - what did the persons who framed and approved this constitutional provision contemplate would be accomplished by what they were doing?

I believe a broad and liberal interpretation must be given to Term 32(2) that allows its historical background and original intent to be transferred to contemporary circumstances.

Previous Decisions

It is also important to review previous decisions, which were closer to the enactment of Term 32(2), in order to determine if a pattern of meaning can be traced, which might prove useful in defining Term 32(2)'s present meaning and effect.

My predecessors ably discussed this issue when Assistant Chief Commissioner Wardrope of the Board of Transport Commissioners in Attorney General of Newfoundland v. C.N.R. [1951] 67 C.R.T.C. 353 at page 357 stated (hereinafter referred to as the 1951 Board of Transport Commissioners Decision):

This then leaves the opening words in s-s. (2) of s. 32 for separate and distinct consideration. They are not essential to bring Newfoundland under the same form of rate regulation as the other Maritime provinces. The benefits of the Maritime Freight Rates Act have been fully provided for. The Railway entrusted with the management and operation of the Newfoundland railway, would be subject to the same regulation without the use of these words as they are in other Maritime provinces. In my opinion they must then mean that notwithstanding certain dissimilar, disadvantageous circumstances and conditions pertaining to Newfoundland, this Province is to be included rate-wise in the Maritime region on a general level of rates similar to the other Maritime Provinces. (Emphasis added.)

The Board of Transport Commissioners (hereinafter the Board) then directed tariff amendments, including surcharge removals to Newfoundland, and the adjustment of class rates to Newfoundland by the addition of arbitraries from North Sydney.

Adjustments to commodity rates and town tariffs were not ordered, as these rates were generally determined by negotiations between the railway and the affected parties. However, implicit in the Board's decision was the fact that Town tariffs and commodity rates were to comply with Term 32(2). That is, they were to be similar to the other Maritime provinces. Therefore, all rates were subject to Terms of Union.

An analysis of Term 32(2) and discussion of its effect was considered in Attorney General of Newfoundland v. Atlantic Container Express Incorporated (1987), Canadian Transport Commission, Decision No. 1987-02 (hereinafter referred to as ACE (1987)).

In its discussion of the meaning and effect of Term 32(2), the Review Committee made a number of important observations.

It adopted and extended the 1951 Board of Transport Commissioner's Decision to the changes made to the Railway Act in 1967.
It determined that the intention of the drafters of the Terms of Union was to place Newfoundland shippers and consumers on the same commercial footing as the other Maritime provinces.

I note in ACE (1987) at page 37:

Despite the higher costs associated with rail hauls to, from and within Newfoundland, the Island was to have the benefits of the Maritime structure to allow it to compete on an equal basis with its mainland neighbours in the markets of central Canada.

(c) It determined that Term 32(2) provided for an all-rail through rate to Newfoundland.

(d) It found that the words in Term 32(2) "For the purpose of railway rate regulation the Island of Newfoundland will be included in the Maritime region of Canada,...(Emphasis added)" were capable of embracing the changed provision in the Railway Act (1967). Where previously the Canadian Transport Commission had set rates, the railways were now free to do so, so long as the rates were compensatory and met constitutional commitments (Term 32(2)).

(e) The Review Committee determined that rates to Newfoundland were to be based on an identifiable Maritime structure at a time when rates were required to be published.

(f) It determined that all rates to the Maritimes were to be included in the development of the Terms of Union rate.

ACE (1987) at page 24:

Rather, Term 32 guaranteed to Newfoundland the Maritime freight rate structure in toto.

These two major decisions stated Term 32(2) guarantees Newfoundland the right to receive rates equal to those of other Maritime provinces.

National Transportation Act, 1987

The NTA, 1987 established a number of new statutory provisions, which further deregulated the railroad industry.

Previously under the Railway Act, railways had the right to set domestic rates, but these rates were common carrier rates and had to be filed with the Canadian Transport Commission and published. Subsequent to the enactment of the NTA, 1987, railways and their customers were given the right to negotiate their own contracts, on a confidential basis. However, these confidential contracts must be filed with the Agency although they are not published. Precise visible information is no longer available to other shippers. As a result rate transparency and so-called structures have rapidly disappeared. How does this affect Term 32(2)?

In order to determine the interaction of Term 32(2) with the NTA, 1987, it is important to review the applicable sections of the latter.

The policy of the NTA, 1987, is stated in section 3.

Specifically it promotes a safe efficient, competitive and adequate transportation network in order to maintain the growth of Canada and its regions.

...having due regard to national policy and to legal and constitutional requirements, ...

Part III, Division I of the NTA, 1987 is the principle area from which the Agency receives its specific jurisdiction to deal with this complaint.

This Division covers the railway's ability to set rates, the requirement that those rates be compensatory, tariffs, confidential contracts, competitive line rates, agreed charges.

The important thing to note is that section 111, being the interpretative section to this Division states:

The powers given by this Division to a railway company with respect to tariffs, confidential contracts and agreed charges are not limited or in any manner affected by any Act of Parliament, other than this Act, or by any agreement made or entered into pursuant to any Act of Parliament other than this Act, whether general in application or special and relating only to any specific railway, except the Atlantic Region Freight Assistance Act, the Maritime Freight Rates Act, the Western Grain Transportation Act, Term 32 of the Terms of Union of Newfoundland with Canada set out in the schedule to the Newfoundland Act and section 281 of the Railway Act. (Emphasis added)

CN's right to set rates, by whatever means, under Part III, Division I of the NTA, 1987, has been made subject to Term 32(2).

Conclusion

After reviewing the history of Term 32(2), the role of the constitution, previous decisions and the NTA, 1987, I have concluded that the original intention behind the enactment of Term 32(2) was to grant Newfoundland a constitutional guarantee of equality with the other Maritime provinces. This guarantee is one of actual rate equality and not just equality before the law.

The (1951) Board of Transport Commissioners Decision, and ACE (1987) recognized this and declared that Term 32(2) gave Newfoundland something more than legal equality. Even though Newfoundland was an island, with obvious transportation disadvantages, Term 32(2) allowed Newfoundland's industries, processors and consumers to participate fully and equally in the Canadian economy. The only factors to distinguish Newfoundland's actual transportation rates from other Maritime shippers was their distance from the market place and service enhancements (where applicable). This is a continuing guarantee which adapts to changing circumstances. Even though the visible rates and structures, which formed the basis of the ACE (1987) decision, have eroded or disappeared, the substantive guarantee in Term 32(2) remains.

The enactment of the NTA, 1987 and the demise of the Newfoundland Railway do not change this guarantee. Under the Constitution, rail rates are required to be offered to Newfoundland and are being offered by CN.

The only way to change the guarantee to Newfoundland, granted by Term 32(2) is by constitutional amendment. Parliament cannot erode the substance of Term 32(2), a constitutional provision, by the passage of ordinary legislation such as the NTA, 1987. I believe this was recognized by the Government of Canada when Parliament enacted the rate-making section of Part III, Division I of the NTA, 1987 and made them expressly subject to Term 32(2) of the Terms of Union. There was simply no need to do this, if Newfoundland only has "legal equality" with other Maritime provinces. It already had achieved legal equality by virtue of its new status as a province of Canada. Accordingly, I subscribe to the view that Term 32(2) acts as a "ceiling" or "cap" to rates to Newfoundland.

PART II

Calculation of a Terms of Union Rate

Term 32(2) requires the Government of Canada, through CN, to provide freight service to Newfoundland. This obligation commenced when the Newfoundland Railway was transferred to CN.

CN was charged with the responsibility of providing rail rates to Newfoundland. This responsibility was confirmed in the Memorandum of Understanding. The Government of Canada and the Government of the Province of Newfoundland and Labrador agreed to the closure of the Newfoundland Railway and the establishment of a multi-modal containerized freight service, utilizing road, rail and water. They specifically declared this change in mode was subject to the Terms of Union.

I agree with the Government of Newfoundland and Labrador that rail rates include the inter-modal transfer of freight by CN commencing at the point where CN takes control and concluding at the point it relinquishes control.

Therefore, I believe the "rail rates" contemplated in Term 32(2) encompass the inter-modal movement of freight and include the movement of flour, insulation and pool car freight, which are the subjects of this complaint.

Published Tariffs and Confidential Contracts

In the (1951) Board of Transport Commissioners case, Terms of Union rates could be calculated by the Board, using Maritime rates developed by the Board.

The Review Committee in ACE (1987), realizing that railways set their own rates, nevertheless, had the luxury of having all Maritimes rates in published tariffs. It was able, therefore, to declare that a Terms of Union rate to Newfoundland had to be based on a visible Maritime Rate Structure extrapolated for distance.

Unfortunately, since the passage of the NTA, 1987 and the introduction of confidential contracts, the numbers of visible rates (published tariffs) have diminished, and "so-called structures" have collapsed.

Yet the question remains, should published tariffs only be used in the calculation of a Terms of Union rate, or does Term 32(2) evolve and attract new factors and criteria, like confidential contracts?

CN's evidence at the hearing stated that some 60-70% of its Maritime freight now goes under confidential contract. This number has steadily increased since 1988, and is expected to level off in the 70-80% range. Also, some 64% of traffic, by revenue, moving into Newfoundland goes by confidential contract. No CN traffic moving out of Newfoundland goes by confidential contract.

In light of the above, I am of the view that without the use of confidential contracts, it becomes practically impossible to develop comprehensive Terms of Union rates for the transportation of a wide spectrum of freight to and from Newfoundland.

Development of a Terms of Union rate based on declining published tariffs now comprising 20-30% of Maritimes traffic is too narrow and too selective. It would in many cases deprive Newfoundland of any meaningful comparisons or equalities with the other Maritime provinces. In addition, Term 32(2), at the time of confederation, contemplated "all rates" and I believe it should continue to do so.

At the hearing, a great deal of evidence was presented by ACE, CN, Atlantic Provinces Transportation Commission and the Government of Newfoundland and Labrador regarding the legal efficacy of using confidential contracts in light of the prohibition against disclosure contained in subsection 120(5) of the NTA, 1987, as well as the practical difficulties associated with quantifying a confidential contract.

ACE argued that confidential contracts are the antithesis of visibility, and incapable of comparison because these contracts are developed by negotiations between the railways and individual customers. They are tailor-made for particular shipping requirements and have indeterminate revenue, due to volume commitments, penalties, escalation provisions, multi-year rates, service specifications, rebates, national contracts and various other factors. They are incapable of being used for development of other rates.

The Government of Newfoundland and Labrador and the Atlantic Provinces Transportation Commission argued that confidential contracts are quantifiable and are visible to CN and the Agency for the development of Terms of Union rates. There is no need to disclose. Nevertheless, even if the establishment of a specific Terms of Union rate exposed parts or all of a confidential contract, it does not matter. The Terms of Union have priority over the NTA, 1987 and section 111 of the NTA, 1987 specifically makes all confidential contracts subject to Term 32.

After considering the evidence, Term 32 and the relevant statutory provisions of the NTA, 1987, I have come to the conclusion that the central issue to this matter is whether or not confidential contracts can or should be used in the calculation of a Terms of Union rate.

I believe that if the Agency is to accept and extend the rationale and effect of the decisions reached by the Board in the (1951) Board of Transport Commissioners Decision, and the Review Committee in ACE (1987), there is no choice but to use confidential contracts.

Otherwise, general Maritime Rate equality granted to Newfoundland in the Terms of Union and applied in these two cases would be destroyed, as Terms of Union rates could be easily eroded and rendered redundant by the accelerating use of confidential contracts in the Maritimes.

Who would this benefit? If there is no basis upon which to calculate a specific Terms of Union rate, that rate must pass the compensatory test of section 112 of the NTA, 1987. Where previously a Terms of Union rate could be developed by comparing it with a similar Maritime rate, it now becomes a cost based rate, thereby rendering the practical effect of Term 32(2) redundant.

I do not believe the drafters of the NTA, 1987 intended the legislation to have this effect.

A number of additional reasons can be used to support the inclusion of confidential contracts in calculating Terms of Union Rates:

The Constitution of Canada is the Supreme Law of Canada and is superior to the NTA, 1987.
Section 120 of the NTA, 1987 does not bar the Agency from using confidential contracts. There are exceptions. While section 120 allows for confidential contracts, which by nature are discriminatory and invisible rates, section 3, paragraph 60(d), and subsections 62(2) and 137(4) are levelling sections which illuminate confidential rates to the Agency, and reign in the rights granted under section 120 in order that national policy objectives are met, so that confidential rates are not used for purposes that amount to gross unfairness to particular regions or competing shippers.
The NTA, 1987 allows for specific exclusions from various provisions of the legislation. Section 111, the interpretation section, states that section 120 is subject to Term 32(2) of the Terms of Union between Canada and Newfoundland.
Disclosure of the contents of confidential contracts is barred by subsections 62(2) and 120(5) of the NTA, 1987. They are statutory exceptions to general administrative law provisions regarding fairness, full disclosure, legitimate interventions and the right to comment.
However, in establishing a Terms of Union rate, only CN, who is charged with setting the rate, and the Agency, who must assess the legitimacy of the rate, need be privy to the contents of confidential contracts.
Quantification of confidential contracts is taking place as:
1. CN indicated in evidence that while they do not use Maritime confidential contracts to set Terms of Union rates, they look at them and compare them to the Terms of Union rates they quote. I believe if CN are comparing; they are also quantifying.
2. I take judicial notice of the fact that Maritimes Freight Rates Act payments are being made to rail companies by the Agency on confidential rail contracts.
3. Agency Decision No. 509-R-1989, a preliminary decision to this case, stated at page 5 that the Agency:
  
  ...considered the contents of relevant confidential contracts on file with it;
  
  in determining that box car rates to the Maritimes are compensatory.
4. Confidential contracts can be quantified for rate-making purposes even though factors like rebates may not crystallize for some time. A reasonable measurement of value is all that is required. CN and the Agency have the means to assess the rate of the vast majority of confidential contracts. In the event that a confidential contract is so obscure, it is incapable of quantification, the onus is on CN to prove this to the Agency. If CN is successful that contract should be excluded.
In the event of a conflict between the Terms of Union and the rules against disclosure contained in subsections 62(2) and 120(5) of the NTA, 1987, the Terms of Union must prevail.

Only CN rates should be used, as it is the company charged by the Government of Canada, with the responsibility to provide freight service to Newfoundland. It would be improper to use data derived from Canadian Pacific Limited (hereinafter CP) records, as it is in no way associated with these proceedings, nor in my view, did the drafters of the Terms of Union ever intend to include CP data in Term 32(2) rate calculations.

Two additional factors to consider in the development of a Terms of Union rate are routing and equipment.

The route used by CN for the establishment of a Terms of Union rate involves two choices.

Either use the historical gateway route, being North Sydney-Port aux Basques, as well as the mileage from the new defunct Newfoundland Railway; or base the rates on the actual route the freight travels.

All parties at the hearing stated that Terms of Union rates should be based on the historical route, as the Constitution provides for it, and CN, shippers and competitors are familiar with it. I see no good reason to depart from this rationale.

The equipment to be used in calculating a Terms of Union rate also involves two choices. Do you use mainland Maritime equipment or only equipment capable of serving Newfoundland? In some circumstances these might be identical, however, in others, Maritime rail equipment has the potential to provide a lower rate than Newfoundland equipment. For example, if a 150,000 lb. box car is being used to haul specific freight in the Maritime provinces, whereas similar Newfoundland freight is moved in 60,000 lb. containers, should a Terms of Union rate reflect the former or the latter?

Commissioner Wardrope, in the 1951 Board of Transport Commissioners hearing dealt with this same problem. He decided that a Terms of Union rate should disregard more expensive Newfoundland equipment.

I agree with this viewpoint, and suggest that a Term 32(2) rate should be developed using equipment which gives Newfoundland equivalency with the Maritime provinces.

Conclusion

A Terms of Union rate should:

include published rates, confidential contracts and agreed charges;
be based on the traditional constitutional routing;
utilize equivalent Maritime equipment.

Granting Newfoundland shippers a "blended Maritime rate" calculated from all applicable Maritime published tariffs, agreed charges and confidential contracts will not give shippers to and from Newfoundland, collectively, lower rates than their Maritime counterparts.

Since a Term 32(2) rate will generally equal an average blended Maritime rate, extrapolated for distance, Newfoundland will be placed in the precise competitive position it was "rate wise" at the time of its confederation with Canada.

Alternatively, if confidential contracts and non-container equipment are excluded, the Maritime equivalency contemplated in Term 32(2) becomes practically meaningless, as Newfoundland's shippers and consumers will pay rail freight rates which reflect Newfoundland's disadvantageous geographical position. Unit freight rates per mile to Newfoundland will be greater than to other Maritime provinces. This result, in my view, flies in the face of the original intent of the Terms of Union, and the legal precedents preceding this case. It should not be accepted.

PART III

Costing Analysis

All parties at the hearing who addressed the costing issue, suggested that rail freight to and from Newfoundland should be costed as it moves. As the guarantee contained in Term 32(2) relates to maximum rates and does not require a special costing methodology, I am of the opinion that this is basically a sound position and in this regard, I generally concur with the costing methodology contained in the majority decision of the Agency.

I do, however, find myself unable to concur with that portion of the majority decision which concludes that Maritime rates upon which Terms of Union rates are based, must be costed as the traffic actually moves into Newfoundland. The majority uses as an example container traffic and maintains that "for example, if the traffic is being transported to Newfoundland by container, then a container cost to the Maritimes must be used to determine if the Maritime rate is compensatory.".

With respect, I cannot agree to this proposition, as I believe Terms of Union rates should be based on all available compensatory Maritime rates for the movement of the same, similar or analogous freight, regardless of the use of any particular railway equipment. It is only in this way that Newfoundland will receive rates equivalent to those available in other Maritime provinces.

PART IV

Development of a Terms of Union Rate and the Role of the Agency

I am of the view that CN is charged with the responsibility of developing Terms of Union rail rates to Newfoundland using the Maritime Rate factors I have previously outlined. Once developed, a Term 32(2) rate acts as a rate ceiling for Newfoundland, above which rail rates cannot rise.

Rates

Theoretical concepts are often best explained by the use of practical examples.

A Terms of Union rate could be established as follows:

A bona fide shipper to Newfoundland could approach CN and request a rate for the shipment of a specific item, such as kitchen furniture from Montréal to St. John's.
In establishing a Terms of Union rate for this particular shipper, CN would be required to develop a rate that reflects a blended published tariff, confidential contract and agreed charge rate to the Maritimes. CN would have to adjust the specific rate to Newfoundland to reflect the type of equipment that it uses to move this freight in the Maritimes.
CN should also compare this rate to the movement of similar or analogous goods.
The Terms of Union rate established as set out above, should then be extrapolated from the historical rail terminus of North Sydney to St. John's, by combining the distance between North Sydney and Port aux Basques with the mileage of the now-defunct Newfoundland Railway.
The rate should be adjusted to reflect any service enhancement a Newfoundland container might have over a Maritime box car.

CN and the shipper would be free to choose whether the Terms of Union rate established to move kitchen furniture was in a published tariff or a confidential contract.

Complaints

In my view, a complaint regarding rail rates to Newfoundland could come about in two principal ways:

A competitor will launch a complaint that rail rates, generally or specifically, to Newfoundland are not compensatory as required by subsection 112(2) of the NTA, 1987. (This case is an example of this type of complaint.)
The Agency's powers are set out in section 113 of the NTA, 1987. It can require CN to furnish particulars regarding the rate pursuant to subsection 113(3) or the Agency can develop its own cost estimate to determine if the rate charged is compensatory.

In the event the rate is compensatory, that is the end of the matter. However, if the rate is found to be non-compensatory by the Agency, the onus shifts to CN to prove to the Agency that the rate charged does not affect competition or harm a competitor.

If CN does not discharge this onus, the Agency can disallow the rate and require the company to substitute a compensatory rate.

An additional defense for CN to subsection 112(2) of the NTA, 1987 is that a rate or rates are Terms of Union. If CN uses this defense, the onus is on them to provide the Agency with details regarding their calculation of the rate or rates. These details should comply with the factors I have previously outlined, for the development of a Terms of Union rate. Applicable Maritime published tariffs, applicable Maritime confidential contracts, equivalent Maritime equipment, and the traditional North Sydney, Port aux Basques, and the route of the former Newfoundland Railway should be used in the calculation of the rate.

I am of the view that the Agency should then review CN's calculation and make a finding as to whether the rate is a Terms of Union rate or not. If the rate is a Term 32(2) rate, it need not be compensatory as subsection 52(2) of the Constitution Act, 1982 enshrines the pre-eminence of the Terms of Union over the NTA, 1987. This is also recognized in the NTA, 1987, wherein the Terms of Union are declared to be an exception to compensatory requirements under subsection 112(2).

However, in the event that it is determined that the rate is below Terms of Union, CN should raise the rate to a compensatory level or to Terms of Union, whichever is the lesser.
A shipper, groups of shippers or the Government of Newfoundland and Labrador may complain to the Agency that rates charged by CN are above Terms of Union.
The Agency under section 35 of the NTA, 1987, can inquire into or hear this matter. Generally, CN should be required to furnish to the Agency the methodology and data it has used to calculate the Terms of Union rate. All factors I have previously outlined in calculating a Term 32(2) rate should be included. The Agency should then evaluate the data CN provides and determine if the rate complies with the Terms of Union. If it does, nothing further need be done. If it does not, I believe that the Agency can, under section 35 of the NTA, 1987, order CN to provide rates to Newfoundland that are equivalent to those provided to the other Maritime provinces (Terms of Union rates).

While I believe that CN must disclose all applicable Maritime rates to the Agency for analysis, these rates do not need to be disclosed to other parties or interveners to the complaint.

In my view, the Agency will perform its mandate, if it outlines in its decision, the methodology it has used to determine if a rate or rates are Terms of Union. There is no necessity for the Agency to disclose the precise details of rates it evaluated to come to a decision. In the vast majority of cases, complete confidentiality of comparative rates will be maintained. However, if the development of a specific Term 32(2) rate to Newfoundland unmasks comparable Maritime rates, this is a consequence which flows from the application of this constitutional provision.

The stature and pre-eminence of the Constitution allow for it, and I note subsection 120(5) of the NTA, 1987 is declared to be subject to the Terms of Union.

PART V

Conclusion

ACE has complained to the Agency that CN rates to Newfoundland for flour from Montréal, insulation from Ottawa and pool car traffic from Toronto and Montreal are not consistent with the Terms of Union.

CN did not move flour to Newfoundland, and cancelled its published tariffs on flour to Newfoundland subsequent to ACE's complaint.

With respect to pool car traffic from Montréal and Toronto, and insulation from Ottawa, to Newfoundland, CN no longer moves that freight under published tariff rates and accordingly, the published tariffs have been cancelled. However, CN does move pool car traffic from Toronto and Montreal, and insulation from Ottawa, to Newfoundland by confidential contract.

In a preliminary decision, being Agency Decision No. 509-R-1989 (at page 5), the Agency has determined that box car rates to the Maritimes for pool car traffic from Montréal and Toronto and insulation from Ottawa are compensatory:

In relation to the complaint filed pursuant to section 113 of the NTA, 1987, the Agency has costed, using the Agency's methodology with consideration to all comments received by the parties, the movements of box car traffic to the Maritimes (Truro, Sydney, Moncton and Halifax) relating to the transportation of insulation from Ottawa, flour from Montreal and pool car traffic from both Montreal and Toronto. The Agency has compared these costs to the relevant CN rates and finds that CN's box car rates to Truro, Sydney, Moncton and Halifax for insulation from Ottawa, flour from Montreal and pool car traffic from Montreal and Toronto are compensatory. (Emphasis added)

A considerable length of time has passed since the above-noted preliminary decision; therefore, I would have CN review its confidential contracts for the movement of pool car traffic from Toronto and Montréal and insulation from Ottawa to the Maritimes and ensure they are compensatory. I would then require CN to extrapolate these rates to Newfoundland destinations according to the methodology set out in this dissent. I would also have CN provide all calculations to the Agency for verification.

Under the NTA, 1987, CN is free to set and charge rates as it sees fit. While the Agency will only review rates to Newfoundland under complaint, CN should be cognizant of the special provisions set out in Term 32(2) of the Terms of Union, and, in my view, set rates according to the principles outlined in this dissent.

ERRATUM

May 23, 1991

Decision No. 266-R-1991 dated May 22, 1991 - Atlantic Container Express Inc.

D2985-89/2

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Date modified:: 1991-05-22

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Decision No. 266-R-1991

APPEARANCES

INTRODUCTION

JURISDICTION

BACKGROUND

EVIDENCE AND ARGUMENT

AGENCY ANALYSIS

Terms of Union

Identifiable Maritime Rate Structure

Confidential Contracts

Terms of Union Rate Development

Rate Ceiling

Routing

Paper Rates

Cost Development

CONCLUSION

Dissenting Opinion of Mr. Kenneth Ritter to Decision No. 266-R-1991

ANALYSIS AND DECISION

Jurisdiction

Term 32(2)

PART I

Historical Background

Role of the Constitution in Canadian Law

Analysis and Interpretation of Constitutional Provisions

Previous Decisions

Conclusion

PART II

Conclusion

PART III

Costing Analysis

PART IV

Development of a Terms of Union Rate and the Role of the Agency

Complaints

PART V

Conclusion

ERRATUM