Decision No. 304-R-2015

INTRODUCTION

[1] Paragraph 151(4)(c) of the Canada Transportation Act (CTA) calls upon the Canadian Transportation Agency (Agency) to make an adjustment to the Volume-Related Composite Price Index (VRCPI) in relation to the costs a prescribed railway company incurs in replacing any government‑owned hopper cars (government hopper cars) that were originally provided for the movement of regulated grain free of ownership costs.

[2] Paragraph 151(4)(c) states:

the Agency shall make adjustments to the index to reflect the costs incurred by the prescribed railway companies for the purpose of obtaining cars as a result of the sale, lease or other disposal or withdrawal from service of government hopper cars and the costs incurred by the prescribed railway companies for the maintenance of cars that have been so obtained.

[3] On August 15 and 4, 2014, the Canadian National Railway Company (CN) and the Canadian Pacific Railway Company (CP) filed requests for an adjustment to the 2014-2015 VRCPI. CN’s request was a new application that involved the gradual withdrawal of federally-owned aluminum and steel hopper cars between 2007 and 2013 while CP’s request was in the form of a submission related to Decision No. 150-R-2014.

[4] In response to these requests the Agency issued Decision No. LET-R-17-2015 and Reasons for the Decision.

[5] In Decision No. LET-R-17-2015, the Agency determined that an adjustment to the 2014-2015 VRCPI was not warranted with respect to CP’s August 4, 2014 submission due to lack of evidence regarding the number of cars withdrawn and lack of details around the ongoing arrangement with the Canadian Wheat Board (CWB). The Agency granted a partial adjustment to CN for the costs it incurred in replacing withdrawn government hopper cars with leased cars in the case where CN (the prescribed railway company) was the lessee to the leasing arrangements. The Agency deferred consideration of any adjustment for costs submitted by CN in relation to leases where one of its U.S. subsidiary companies was the lessee and stated that it would consider such an adjustment, if and when, following an industry-wide consultation, an appropriate methodology is established in relation to cars obtained by U.S. subsidiaries of prescribed railway companies and subsequently used in regulated grain service.

[6] In Decision No. LET-R-17-2015, the Agency, pursuant to paragraph 151(4)(c) of the CTA, adjusted the 2014-2015 VRCPI upwards to 1.3257 (0.3 percent from its value of 1.3219 set out in Decision No. 150-R-2014) and made this adjustment effective on August 1, 2014 pursuant to subsection 151(6) of the CTA.

[7] Lastly, the Agency stated in Decision No. LET-R-17-2015 that it would conduct a consultation on the matter and that as part of this consultation, the Agency would consider other issues of methodology related to the application of paragraph 151(4)(c) of the CTA, including, but not limited to, the following:

• Whether further amendments to the existing methodologies as established in Decision No. 8-R-2013 are necessary;
• A list of conditions and requirements that would allow for an appropriate adjustment under paragraph 151(4)(c);
• The documents, evidence, data, and metrics necessary to calculate that cost adjustment;
• The appropriate implementation and monitoring framework.

STAFF CONSULTATIONS

[8] The Agency held a staff led industry-wide consultation to establish an appropriate methodology in relation to cars obtained by U.S. subsidiaries of prescribed railway companies and used in regulated grain service by the prescribed railway companies.

[9] On May 5, 2015, Agency staff released a consultation document and asked for comments to be submitted on or before June 5, 2015. Agency staff sought comments on six key questions from railway companies and associations, shipper and shipper associations, governments, producer associations and other interested parties. The Agency received comments from CN and CP only.

DECISION

[10] The Agency has considered the submissions filed in conjunction with the consultative process and determines that an adjustment pursuant to paragraph 151(4)(c) of the CTA is warranted in specified instances where either CN or CP obtains replacement hopper cars from a U.S. subsidiary company for use in regulated grain service.

[11] The Agency establishes a list of criteria that includes the conditions and requirements that allow for an appropriate adjustment under paragraph 151(4)(c) to be calculated, and amends some of the factors of the positive and negative weight formulas that were established in Decision No.‑8‑R-2013 to accommodate the established criteria.

[12] As a result, the Agency varied 8-R-2013">Decision No. 8-R-2013 to reflect these amendments.

[13] The Agency’s methodology consists of a list of criteria and the amended positive and negative weight formulas.

[14] Given the complexity of this determination, it was not possible for the Agency to determine an appropriate methodology before the end of the 2014-2015 crop year. The methodology set out in this Decision requires the prescribed railway companies to enter into commitment agreements with their U.S. subsidiaries when using a U.S. subsidiary’s cars as replacement cars, a condition that the prescribed railway companies could not have anticipated and thus fulfilled. As a result, the Agency will allow an immediate adjustment to be made for this year only by deeming the cars leased by one of CN’s U.S. subsidiaries (based on the lease agreements on file) as “designated replacement cars” and calculates a replacement cost (positive weight) and maintenance cost (negative weight) based on the methodology established in this Decision.

[15] The designation of these replacement cars will only apply to the determination of the 2014-2015 VRCPI. For greater clarity, in subsequent years, no U.S. subsidiary cars will be accepted as replacement cars for the purposes of paragraph 151(4)(c) of the CTA unless they have been identified in a commitment agreement in accordance with the criteria established in this Decision.

[16] The Agency, pursuant to paragraph 151(4)(c) of the CTA, adjusts the 2014-2015 VRCPI upwards to 1.3280 (0.2 percent from its value of 1.3257 set out in Decision No. LET‑R‑17‑2015) and makes this adjustment effective on August 1, 2014 pursuant to subsection 151(6) of the CTA.

[17] The reasons for this Decision are set out below.

ADJUSTMENT TO THE 2015-2016 VRCPI

[18] CN and CP may submit any of their lease or purchase agreements and/or commitment agreements with any of their U.S. subsidiaries for the designation of replacement cars for the calculation of a cost adjustment to the 2015-2016 VRCPI. CN must file a 2015-2016 commitment agreement to replace the 2014-2015 Agency deemed commitment agreement that the Agency allowed in 2014‑2015 for that year only. The deadline for the submission of applications for adjustment of the 2015-2016 VRCPI under paragraph 151(4)(c) of the CTA and all future VRCPI adjustments under paragraph 151(4)(c) thereafter, shall be the deadline for final submissions for the maximum revenue entitlement (MRE) in that year. For crop year 2015-2016, the deadline of the MRE submissions is September 30, 2016.

BACKGROUND

PAST AGENCY DECISIONS

[19] The Agency has made a number of rulings following applications by CN and CP, the prescribed railway companies, for an adjustment to the VRCPI pursuant to paragraph 151(4)(c) of the CTA. The following is a brief description of each these rulings:

Decision No. LET-R-113-2006

[20] The Agency determined that a cost adjustment under paragraph 151(4)(c) of the CTA was warranted following CWB informing CN and CP that it would be offering each of the companies the opportunity to enter into leasing arrangements to secure the use of the hopper cars that had previously been provided free of charge. In 253-R-2006">Decision No. 253-R-2006 dated April 28, 2006, the Agency made the adjustment.

Decision No. 8-R-2013

[21] The Agency adjusted the VRCPI to reflect costs incurred by each of CN and CP in relation to the Saskatchewan Government hopper cars. That Decision established the methodology to be used in making future cost adjustments to the VRCPI under paragraph 151(4)(c) of the CTA. It set out the calculation of the positive and negative weights to be added to the VRCPI to reflect adjustments made pursuant to paragraph 151(4)(c) of the CTA. The appendix to 8‑R-2013">Decision No. 8‑R-2013 contains the formulas for the calculation of the two weights.

[22] That Decision also described two conditions by which an adjustment is to be made, namely (1) the government hopper cars are sold, leased, disposed of or otherwise withdrawn from service, and (2) as a result of the first condition, the railway company obtains hopper cars. The Agency also indicated that it would continue monitoring the use of, and the contracts for, the replacement hopper cars to ensure that the cost adjustment it made continues to reflect actual costs incurred.

[23] In accordance with the principles established in that Decision, the Agency recognizes all the hopper car capacity being obtained by the prescribed railway company as a result of new arrangements to replace withdrawn government hopper cars, up to the capacity being replaced. Further, railway company hopper car capacity must be obtained in relation to the replacement of government hopper cars, otherwise there is no basis for a cost adjustment.

[24] Lastly, the Agency noted “…that the CTA clearly limits the scope of the costs to be considered by the Agency in making an adjustment to those associated with the act of obtaining hopper cars and the maintenance of such cars.”

Decision No. 161-R-2013

[25] In 2013, CP requested the Agency to reflect the added costs for the replacement of the remaining portion of its CWB fleet with hopper cars obtained from its U.S. subsidiary companies. CP proposed that the Agency make the adjustment using a deemed number of replacement cars. The Agency rejected CP’s submission for an adjustment to the 2013‑2014 VRCPI on the grounds that CP’s proposed methodology was highly speculative and, therefore, did not provide a clear basis for making the cost adjustment called for by paragraph 151(4)(c) of the CTA.

[26] The Agency further determined that a railway company in Canada is a separate entity from its wholly-owned subsidiary in the U.S. Paragraph 21 of that Decision states:

While CP, Soo Line and DM&E are related parties, the Agency views Soo Line and DM&E as separate and financially accountable entities. DM&E and Soo Line either own or are named as the lessees in formal leasing arrangements with third party lessors and, therefore, bear the financial responsibility for the use of those hopper cars. Furthermore, for regulatory costing purposes, the Agency does not recognize the financial statements of CP consolidated, but rather only those of its Canadian operations. In principle, obtaining cars at a market rate from a subsidiary should not be treated differently than if they were obtained on the market from a third party.

[27] At paragraph 23 of that Decision, the Agency stated:

The Agency is prepared to accept, in principle, that the increased utilization of a subsidiary’s cars satisfies the requirement of obtaining cars if the subsidiary’s cars are used in regulated grain service and provided that the costs so incurred are quantifiable and based on a verified number of cars used. The Agency understands that as with other intercompany transactions, the charges for the use of CP’s subsidiaries’ cars are subject to company policies and accounting conventions. The Agency therefore intends to seek assurance that they are recorded at no more than fair market value in CP’s accounts. If CP can demonstrate to the Agency that a quantifiable and verifiable amount representing the net increase in the use of its subsidiaries’ cars that is directly attributable to the withdrawal of the CWB cars has been incurred by CP, the Agency will consider making an adjustment. Any required information must be provided to the Agency in time for it to make an informed decision.

Decision No 150-R-2014

[28] On February 7, 2014, CP filed a new proposal and an amount with the Agency for an adjustment under paragraph 151(4)(c) of the CTA in relation to the use of its U.S. subsidiaries’ cars. This time, CP calculated an estimate of what it believed to be the amount using a cost per car derived as a combination of an average of its subsidiary companies’ third-party leasing expenses and depreciation, maintenance and cost of capital expenses incurred by the subsidiary companies for cars that they either owned outright or had obtained through capital leases. That estimated amount per car was then applied against a derived number of cars that was meant to represent the cars actually obtained from its subsidiary companies in replacement of the CWB cars.

[29] The Agency determined that the amount submitted for adjustment did not represent the actual cost incurred by CP for the use of U.S. subsidiary cars to replace the CWB cars, and rejected CP’s request for an adjustment, stating:

The Agency rejects CP’s submission of an amount to be used for an adjustment to the 2014-2015 VRCPI as it considers CP’s proposal to be speculative in nature, not readily quantifiable and verifiable and not based on a verified number of cars obtained by CP for the replacement of the CWB cars.

STAFF CONSULTATION

[30] In its consultation, staff posed the following six questions:

Q1: Does a prescribed railway company incur a cost when using cars obtained by its U.S. subsidiaries in regulated grain service?

Q2: Is the increased utilization of a prescribed railway company’s U.S. subsidiary cars eligible for a cost adjustment under paragraph 151(4)(c), if those cars were already in the U.S. subsidiary’s fleet at the time the government cars ceased to be available?

Q3: Under the current North American operating reality, prescribed railway companies are using U.S. subsidiary cars in regulated grain service. Under which circumstances does the use of a U.S. subsidiary car in regulated grain service meet condition 2 of Decision No. 8-R-2013?

Q4: How should the cost incurred by the prescribed railway company in obtaining the replacement cars be determined?

Q5: How should the cost of obtaining the replacement cars be apportioned between regulated grain service and other services?

Q6: What formula best captures the required cost adjustment under 151(4)(c)?

PRELIMINARY MATTERS

[31] CN asked that the Agency vary Decision No. LET-R-17-2015 on the grounds that the adjustment approved by the Agency in the Decision is an unreasonably small and inadequate adjustment that will compensate CN for only a small fraction of the additional costs it incurred to obtain the replacement cars. It presented figures which it claims show that the cost adjustment approved by the Agency results in only 25 percent recovery of its costs.

[32] CN attributes what it considers an inadequate adjustment to two causes. It claims that it is simply inappropriate for the Agency to exclude the lease costs for cars leased by its U.S. subsidiaries, and it is also inappropriate to make a common VRCPI adjustment such that the upward adjustment to the MRE is split with CP, which results in the prescribed railway company that incurs the replacement cost being compensated with only half the needed adjustment.

[33] CN also states that, in its view, the inadequacy of the adjustment provided under paragraph 151(4)(c) of the CTA will be a strong disincentive for investment in hopper car capacity in the future and that this will have a detrimental impact on the grain handling and transportation system in Canada.

[34] The Agency considers that a review of Decision No. LET-R-17-2015 is unwarranted for the following reasons.

[35] First, the Agency indicated in that Decision that “the 526 cars leased through CN’s U.S. subsidiary could not be considered as having been obtained by CN (the prescribed railway company) but rather by a distinct, though related, entity.” The Agency noted that a methodology to account for costs associated with cars obtained by a U.S. subsidiary company and subsequently used by the prescribed railway company in regulated grain service had not yet been established. The Agency decided that, if and when such a methodology is established following consultation with interested parties, it would consider making the appropriate cost adjustment. The Agency did not dismiss or reject the notion of an adjustment, it only made a partial adjustment, postponing the consideration of the remaining adjustment until a proper methodology can be established.

[36] As further detailed below, the Agency has now identified an appropriate methodology and is making an adjustment to the 2014-2015 VRCPI in relation to CN’s U.S. subsidiary cars used to replace government hopper cars.

[37] Second, the VRCPI is a single index applying to all prescribed railway companies. Section 151 of the CTA makes it clear that all cost adjustments are to be made in the context of that single VRCPI, and that the single index is to be used for the purposes of determining a railway company’s MRE. In other words, the MRE is designed such that any cost adjustment will necessarily be shared between the prescribed railway companies, whether the costs relating to the replacement of government hopper cars are incurred by CN or CP.

[38] CN failed to provide any explanation as to how section 151 of the CTA could be interpreted as it suggests.

KEY ISSUE TO BE CONSIDERED BY THE AGENCY IN ESTABLISHING THE APPROPRIATE METHODOLOGY

[39] In all past instances where the Agency has allowed adjustments pursuant to paragraph 151(4)(c) of the CTA, the arrangements for the acquisition of replacement cars were between a prescribed railway company (either CN or CP) and third-party lessors. However, at issue is whether an adjustment under paragraph 151(4)(c) of the CTA is warranted in relation to hopper cars either owned or leased by their U.S. subsidiary companies and made available to the prescribed railway company in regulated grain service and, if so, the conditions by which such an adjustment is to be made and the methodology to be applied in arriving at an amount for any such adjustment.

[40] In assessing the appropriate methodology for an adjustment under paragraph 151(4)(c) of the CTA, it must be kept in mind that a prescribed railway company can obtain cars by any of the following arrangements:

• Purchase;
• Long-term lease;
• Short-term lease;
• Per-diem rental; and,
• Exchange arrangements

[41] Furthermore, the cars can be obtained from:

• A U.S. subsidiary of the railway company; or
• Third parties (i.e., other railway companies and/or third-party lessors)

[42] Since the beginning of the program, in any given year, prescribed railway companies could have obtained cars in any of these ways. Whether all such arrangements/contracts could constitute the act of obtaining cars pursuant to paragraph 151(4)(c) of the CTA, and if so under what condition, is thus a relevant consideration to address the question at hand.

[43] In selecting the appropriate approach for making the cost adjustment, the Agency must also be mindful that such an approach may potentially need to be applied to other forms of arrangements not foreseen at this time.

ONE-FOR-ONE CAR REQUIREMENT

[44] CN argues that paragraph 151(4)(c) of the CTA does not require a one-for-one car replacement to apply.

[45] CN states that one of the options proposed in the staff Consultation Document was to associate one replacement car to each withdrawn car on a one-for-one basis, and that this fails to account for how a prescribed railway company actually manages grain hopper cars through integration into a common North American fleet. CN notes that the grain hopper cars in its fleet are used for many purposes in addition to regulated grain movements, and that, in light of these different uses, cars that are added to or removed from the fleet cannot be associated with, nor attributed directly to any specific service because of the nature of an integrated multi-purpose fleet.

[46] CN suggests that the capacity of one withdrawn government hopper car can be replaced with a portion of any number of railway-provided replacement cars, and contends that the Agency’s current interpretation does not allow the replacement of one government hopper car with more than one other car. CN suggests that this interpretation totally ignores and is inconsistent with the requirements of efficient fleet management.

[47] The Agency notes that the staff’s proposed approach as presented in the staff Consultation Document allows the prescribed railway company to replace withdrawn government hopper cars with any number of hopper cars of any capacity it chooses. The only condition imposed is that the total carrying capacity of the replacement cars be no more than the total carrying capacity of the withdrawn cars, and that such replacement cars can be truly characterized as cars obtained as a result of the withdrawal of government hopper cars. As such, the Agency is of the opinion that the approach proposed in the staff Consultation Document does address considerations related to the railway companies’ hopper car management practices.

[48] Further, the Agency considers that as it is a common practice, as recognized by CN, for railway companies not to use grain hopper cars in their fleet exclusively for regulated grain, it is necessary for the railway companies to identify the specific cars it obtained for the purpose of replacing the withdrawn cars in the fleet, to ensure that the attendant cost adjustment is for the purpose intended under the CTA. The Agency must, pursuant to paragraph 151(4)(c) of the CTA, calculate the cost incurred by a prescribed railway company for replacement cars; it cannot, as suggested by CN, take into account every car in the fleet for that purpose.

[49] CN claims in paragraph 23 of its submission that the cost of obtaining replacement cars referenced in paragraph 151(4)(c) of the CTA cannot simply be measured as the cost in the crop year where the government hopper cars were used versus the cost in a subsequent crop year where replacement cars were used, as this would unnecessarily introduce many other variables, many of which are already directly accounted for in the MRE formula. The Agency agrees, and it is precisely for this reason that the Agency is of the opinion that the costs incurred to obtain replacement cars cannot be based on measures of fleet utilization (such as tonnes, tonne-miles, car-days, etc.) in the calendar year with the government hopper cars versus similar measures in subsequent years with replacement hopper cars.

[50] The Agency is of the opinion that the requirement for a railway company to establish a quantifiable number of cars ensures that the total carrying capacity of the replacement cars (not the number of cars) can be identified to ensure that the replacement carrying capacity obtained does not exceed the carrying capacity withdrawn.

[51] That said, the Agency agrees with CN’s position that staff’s proposed adjustment formula does not take fully into consideration some features of the use of an integrated North America hopper car fleet. This issue is discussed further in Question 3 in relation to the Agency’s proposed factor reflecting the usage of replacement cars in regulated grain service.

ARRANGEMENTS ENTERED INTO BEFORE THE WITHDRAWAL OF GOVERNMENT HOPPER CARS

[52] In CN’s view, paragraph 151(4)(c) of the CTA does not require as a condition that the arrangements to obtain replacement cars be entered into after the withdrawal of the government hopper cars.

[53] The Agency agrees with CN’s explanation that market conditions and car availability may cause a railway company to decide to enter into contractual arrangements to obtain cars earlier than the government hopper cars’ withdrawal date. Therefore, the Agency’s methodology for cost adjustments under paragraph 151(4)(c) of the CTA will allow cost adjustments to be made for cars obtained in anticipation of the withdrawal of government hopper cars, subject to the conditions set out in this Decision in respect to Question 3.

PURPOSE AND REQUIREMENT OF PARAGRAPH 151(4)(c) OF THE CTA

[54] CP takes issue with the staff Consultation Document’s characterization of the cost adjustments prescribed in paragraph 151(4)(c) of the CTA as a “revenue incentive” to acquire replacement cars. CP points out that it does have a legal obligation, as a common carrier, to move the grain traffic tendered to it, and to acquire cars for that purpose. CP claims that the Agency has, in previous rulings, enforced CP’s level of service obligations under the CTA, and made it clear that CP must acquire cars to meet all traffic demand, no matter how unpredictable or volatile that may be. CP suggests that acquiring cars to meet a legal obligation due to traffic demands is not remotely an incentive to vary its MRE position.

[55] CP also points out that, while the CTA imposes a legal obligation on CP to obtain cars to meet traffic demands, paragraph 151(4)(c) of the CTA imposes a concomitant obligation on the Agency to make cost adjustments to the VRCPI when the cars are acquired, and that the Agency has no discretion to not make the cost adjustment.

[56] The Agency agrees that CP has a legal obligation to acquire cars to meet traffic demands. However, the Agency considers that the statement made in the staff Consultation Document did not purport to suggest that paragraph 151(4)(c) of the CTA serves merely as an incentive for railway companies to vary their MRE positions. As stated by the Agency in 8‑R‑2013">Decision No. 8‑R‑2013:

The Agency considers that the adjustment called for under paragraph 151(4)(c) of the CTA is meant to make CN and CP whole – no worse off nor better off with respect to the VRCPI determinations, as compared to what the situation would have been had railway companies not have had to incur these costs if the previous arrangement for government hopper cars had been maintained. In other words, the Agency is to make a cost adjustment such that a railway company’s grain revenue entitlement is adjusted through an adjustment to the VRCPI to offset the net cost impact of having obtained cars as a result of the sale, lease or other disposal or withdrawal from service of government hopper cars.

[57] In that Decision, the Agency also made it clear that it must make an adjustment when the relevant conditions are met, as follows:

Therefore, the Agency must make adjustments when the conditions in paragraph 151(4)(c) of the CTA are satisfied. The conditions that trigger the requirement to make the hopper car adjustment are (1) the government hopper cars are sold, leased, disposed of or withdrawn from service, and (2) as a result of the first condition, the railway company obtains hopper cars.

[58] CP also takes issue with the statement in the staff Consultation Document that a cost adjustment based on assessing costs due to increased utilization of existing U.S. subsidiary cars is “extremely difficult, if not impossible.” According to CP, this means the staff Consultation Document proposes that the increased utilization of existing subsidiary cars may not be eligible for adjustment under paragraph 151(4)(c) of the CTA. CP argues that, as the Agency’s administration of the MRE provisions under the CTA is replete with modelling methodologies, regressions, relationships, and proxies, that context should be considered before the Agency concludes that legitimate railway company costs under paragraph 151(4)(c) of the CTA are not to be assessed.

[59] In this respect, the Agency considers that the statement in the staff Consultation Document merely asserts that it is difficult, if not impossible, to identify the costs incurred to obtain replacement cars solely from measuring utilization of cars in the year with the government hopper cars versus in the year with the replacement hopper cars. Too many variables affect fleet utilization for it alone to serve as a reasonable measure of the cost of replacement cars. This only supports the conclusion that the cost adjustment must be determined using a measure other than car utilization.

[60] It is important to note that the MRE, by design, has no built-in productivity sharing mechanisms, and thus railway companies are not obliged to pass on these gains in the form of lower rates to grain shippers. It follows that the vast improvements in the fleet productivity since the program was established could be retained by the prescribed railway companies as the VRPCI is designed such that costs for cars in the base year that may no longer exist can be subject to an annual price adjustment. In this context, the Agency must have a clear way of distinguishing cars that are subject to an annual price adjustment from cars that are considered replacement cars requiring a cost adjustment.

[61] In 161-R-2013">Decision No. 161-R-2013, the Agency recognized that the more efficient use of the existing fleet of cars of the prescribed railway companies does not constitute a cost pursuant to section 151(4)(c) of the CTA, as these cars are already subject to a price adjustment through the VRCPI. Objective and reasonable criteria are required to distinguish “replacement cars” from the other cars in the fleet. The distinction between the existing cars (for which the prescribed railway company can retain all the associated productivity gains) and the replacement cars (for which railway companies are entitled to a cost adjustment) otherwise becomes blurred and unmanageable.

[62] The prescribed railway companies already benefit from a price adjustment through the VRCPI in respect to cars that are no longer in their fleet. The Agency considers that Parliament could not have also intended to allow remaining cars in the fleet to benefit from both an inflation through the VRCPI and a cost adjustment for the purposes of paragraph 151(4)(c) of the CTA.

DETERMINATION OF ISSUES RAISED IN THE STAFF CONSULTATION DOCUMENT’S QUESTIONS

QUESTION 1: DOES A PRESCRIBED RAILWAY COMPANY INCUR A COST WHEN USING CARS OBTAINED BY ITS U.S. SUBSIDIARIES IN REGULATED GRAIN SERVICE?

Industry responses

[63] Both CN and CP state that the prescribed railway company incurs costs when using cars owned by its U.S. subsidiaries, as both the Agency and tax authorities consider the two to be separate legal entities and therefore require arms-length transactions between them.

Analysis

[64] The Agency notes that in accordance with section 1201.03 of the Uniform Classification of Accounts (UCA), the costs of railway companies must reflect the consumption of an economic resource for the purpose of providing rail transportation service. The Agency is of the opinion that cars of prescribed railway companies’ U.S. subsidiaries used by the prescribed railway companies in regulated grain service after the withdrawal of government hopper cars are economic resources that have been consumed in the provision of rail service. The consumption of the economic resource will result in a cost being borne by the prescribed railway companies, CN and CP.

Findings

[65] The Agency finds that CN and CP do in fact incur a cost when using the cars of their U.S. subsidiary companies on or after the withdrawal of government hopper cars in regulated grain service.

QUESTION 2: IS THE INCREASED UTILIZATION OF A PRESCRIBED RAILWAY COMPANY’S U.S. SUBSIDIARY CARS ELIGIBLE FOR A COST ADJUSTMENT UNDER PARAGRAPH 151(4)(C) OF THE CTA OF THE CTA, IF THOSE CARS WERE ALREADY IN THE U.S. SUBSIDIARY’S FLEET AT THE TIME THE GOVERNMENT CARS CEASED TO BE AVAILABLE?

Industry responses

[66] CN suggests that all cars used in regulated grain service should be considered when assessing the replacement of government hopper cars. CN concedes that if the U.S. subsidiary cars were already being used in the Canadian fleet at the time of the withdrawal, then no adjustment should be available, but suggests that if utilization of these cars increased after the withdrawal of the government hopper cars then this is sufficient evidence that these costs are the result of the withdrawal.

[67] CP states that it is unclear why the staff Consultation Document claims that “it is extremely difficult, if not impossible, to determine how much of an increase in the utilization of a hopper car can be attributed to a replacement of the government hopper cars, due to the existence of other factors that may have led to the increase, such as, but not limited to, shifts in market conditions, management decisions, on operating strategies, and an increase in volumes of regulated grain.” CP claims that it is only necessary to estimate the amount of regulated grain that would have been moved by the government hopper cars, had they not been returned, in any given crop year. CP suggests that this estimate is the amount of capacity that must be replaced, and then it only follows to determine what cost was incurred to provide that capacity.

[68] CP maintains that the only other alternative is to assume that some or all of the government hopper cars were not replaced with new hopper car capacity, which is equivalent to assuming that the government hopper cars, had they not been returned, would not have moved any regulated grain or, indeed, any grain at all in the current year.

[69] CP proposes that, given that government hopper cars are used interchangeably without consideration to the car type or car provider, the cost calculation can be done by examining historical utilization of the government hopper car fleet relative to the total amount of grain moved, and the historical usage can then be set into the context of the current crop year to estimate the capacity that must be replaced.

[70] CP suggests that the “other factors” referred to in the staff Consultation Document are mainly captured in the “car days” operating statistic. According to CP, car days reflect the time spent by each car servicing regulated grain, which are captured in the total inter-company car-hire expense via the per-diem cost. CP proposes that the estimate of capacity to be replaced should be limited by the number of car days that the government hopper cars would have been available, had they not been replaced.

Analysis

[71] In 161-R-2013">Decision No. 161-R-2013, the Agency determined that, in principle, the increased utilization of a U.S. subsidiary’s cars satisfies the requirement of obtaining cars if the subsidiary’s cars are used in regulated grain service and provided that the costs incurred are quantifiable and based on a verified number of cars. The Agency further stated that if CP can demonstrate to the Agency that a quantifiable and verifiable amount representing the net increase in the use of its subsidiaries’ cars that is directly attributable to the withdrawal of the government hopper cars has been incurred by CP, the Agency will consider making an adjustment under paragraph 151(4)(c) of the CTA.

[72] The Agency agrees that increased utilization of U.S. subsidiary cars could result from withdrawal of the government hopper cars. The Agency disagrees, however, with CN’s view that an observed increase in utilization of the subsidiary hopper cars before and after the withdrawal is sufficient evidence that the attendant increase in cost is due to the withdrawal of the government hopper cars, which is a condition for a cost to be eligible for an adjustment under paragraph 151(4)(c) of the CTA. Further demonstration would have to be made to distinguish what portion of that increase resulted from new fleet deployment strategies in a North American context, or an anomaly in a specific year, to ensure that the cost adjustment to be made truly represents a cost incurred for cars obtained as a result of the withdrawal of government hopper cars.

[73] The Agency is of the opinion that CP’s suggestion to estimate the amount of grain that would have been moved and then use that estimate as the capacity that must be replaced for the purposes of paragraph 151(4)(c) of the CTA would not result in a methodology that recognizes costs incurred that are quantifiable and based on a verified number of cars used.

[74] As both CP and CN have pointed out, cars are used as part of an integrated North American fleet. How the individual cars are used in the fleet depends on myriad market factors and management decisions. Assessing how grain would have moved is a hypothetical exercise that cannot serve as a basis for calculating the actual cost incurred. Furthermore, as indicated previously, the Agency is of the opinion that this approach would not provide the Agency with objective and reasonable criteria to characterize cars as “replacement cars,” distinct from other cars in the railway company’s fleet.

[75] The Agency also finds unclear CP’s claim that measuring car days performed by U.S. subsidiary cars before and after the withdrawal somehow avoids the problem of using utilization as a basis for the measure of costs incurred due to the withdrawal, as the car days metric is itself a measure of utilization.

[76] The Agency is of the opinion that historical or expected utilization of the withdrawn cars cannot be used as the basis for the calculation of a cost adjustment under paragraph 151(4)(c) of the CTA, because it is impossible to determine with sufficient accuracy how much of the utilization increase is attributable to the replacement of the government hopper cars. This increase cannot be isolated from the increase attributable to other factors, such as, but not limited to, shifts in market conditions, management decisions on operating strategies, and an increase in the volume of regulated grain.

[77] Any attempt to determine the portion of an increase in car utilization that is attributable to the withdrawal of government hopper cars would be based on arbitrary assumptions to isolate one causal factor from the others and it would result in a notional figure of capacity that does not meet the requirement set out in Decision No. 161-R-2013 that the cost must be quantifiable, verifiable and based on a verified number of cars. Furthermore, this method would not be based on objective and reasonable criteria for the characterization of cars as replacement cars, distinct from the other cars in the railway company’s fleet, which is necessary for the purpose of the VRCPI determination.

[78] The Agency’s discretion in assessing costs must be exercised reasonably, not arbitrarily. The Agency recognized that there are costs incurred by the prescribed railway company whenever it increases the use of the cars of its U.S. subsidiaries. However, the Agency, after considering all options, including those proposed by CN or CP, has not identified a methodology to properly isolate the portion, if any, of the increase in the utilization of U.S. subsidiary cars that will accurately reflect replacement car capacity obtained as a result of the capacity withdrawn. The Agency finds CN and CP’s suggestion that “any” increase in the use of U.S. subsidiary cars is the result of the withdrawal of government hopper cars to be unfounded.

Findings

[79] For the reasons explained above, the Agency finds that the increased utilization of existing U.S. subsidiaries hopper cars (in CN and CP’s North American fleet) cannot be used as the basis for estimating the cost incurred by a prescribed railway company to replace withdrawn government hopper cars.

QUESTION 3: UNDER THE CURRENT NORTH AMERICAN OPERATING REALITY, PRESCRIBED RAILWAY COMPANIES ARE USING U.S. SUBSIDIARY CARS IN REGULATED GRAIN SERVICE. UNDER WHICH CIRCUMSTANCES DOES THE USE OF A U.S. SUBSIDIARY CAR IN REGULATED GRAIN SERVICE MEET CONDITION 2 OF 8-R-2013">DECISION NO. 8-R-2013?

[80] Question 3 of the staff Consultation Document solicited consultation participants’ comments regarding eight proposed criteria which in the opinion of staff would assist the Agency in determining whether the act of obtaining cars was related to the withdrawal of government hopper cars. Participant responses to question 3 and to each criterion are reported separately to assist the reader.

Criterion 1 – Third-party evidence in support of the withdrawal of government hopper cars

Staff Consultation Document

[81] The prescribed railway company would need to provide to the Agency third-party evidence that indicates how many government hopper cars were withdrawn from service, when these cars were withdrawn, and the car identification number for each of the withdrawn cars. Adequate third-party evidence constitutes an official letter from the rightful owner of the withdrawn hopper cars (i.e., federal government, provincial government, CWB) in which the owner of the cars would attest to the Agency the above required information.

[82] This information would ensure that paragraph 151(4)(c) of the CTA has been triggered and allows staff to calculate the carrying capacity withdrawn, which sets the maximum carrying capacity to be replaced.

Industry responses

[83] CN submits that it submitted a list of cars and will attest that these cars are no longer in service. Further, CN invites the Agency to validate the above claim with the owners of those cars as part of its audit, should the Agency wish to do so.

[84] CP states that third-party evidence of withdrawal or disposal of government hopper cars will be provided.

Analysis

[85] In 8-R-2013">Decision No. 8-R-2013, the Agency determined that two conditions ought to be met for an adjustment to be warranted under paragraph 151(4)(c) of the CTA, as follows:

(1) the government hopper cars are sold, leased, disposed of or withdrawn from service, and (2) as a result of the first condition, the railway company obtains hopper cars.

[86] Condition 2 of 8-R-2013">Decision No. 8-R-2013 requires a causal relationship between the withdrawal of government hopper cars and the act of obtaining cars, and is contingent on the prior sale, lease or other disposal or withdrawal from service of government hopper cars (condition 1).

[87] The Agency considers that the responsibility is on the prescribed railway company seeking a cost adjustment to demonstrate that these two conditions are met. To fulfill that responsibility, the railway company must provide evidence to satisfy the Agency that the government hopper cars in relation to which the railway company is seeking an adjustment are no longer part of that railway company’s fleet, by providing confirmation of the withdrawal from the rightful owner of these cars. The Agency is of the opinion that failure to provide such evidence would result in the application for a cost adjustment being an incomplete application and it will not be considered further.

Findings

[88] The Agency adopts criterion 1, third-party evidence in support of the withdrawal of government hopper cars, as follows:

The prescribed railway company is required to provide to the Agency third-party evidence that indicates how many government hopper cars were withdrawn from service, when these cars were withdrawn, and lastly the car identification number for each of the withdrawn cars.

Adequate third-party evidence constitutes an official letter from the rightful owner of the withdrawn hopper cars (i.e., federal government, provincial government, Canadian Wheat Board) where the owner of the cars would attest to the Agency the above required information.

This information will ensure that paragraph 151(4)(c) of the CTA has been triggered and will facilitate the calculation of the carrying capacity withdrawn, which will set the maximum carrying capacity to be replaced.

[89] The Agency will examine future applications/submissions for compliance with this criterion. Applications/submissions that are non-compliant with the adopted criterion will be deemed incomplete and returned to the applicant.

Criterion 2 – new arrangements entered into by the prescribed railway company

Staff Consultation Document

[90] Hopper cars would need to be obtained as a result of new arrangements entered into by the prescribed railway company and/or its U.S. subsidiary with a third party (an entity other than the prescribed railway company), on or after the date on which the government hopper cars were withdrawn from service. As proof of the new arrangement, the prescribed railway company would provide to the Agency, along with its application for an adjustment under paragraph 151(4)(c) of the CTA, copies of the lease or purchase agreement(s) along with the car identification numbers of the cars obtained. The renewal of an existing lease would qualify as a new arrangement as long as the renewal occurs on or after the withdrawal of the government hopper cars.

Industry responses

[91] CN agrees with the suggestion that only cars obtained through new arrangements would be eligible. CN adds that new arrangements could occur subsequent to the withdrawal of the government hopper cars or in anticipation of the withdrawal. CN also agrees that the acquisition of cars could be via purchase, lease or per-diem rental and the cars can be obtained from railway companies, including CN’s U.S. subsidiaries, which are separate legal entities, or other third parties. Lastly, CN adds that the increased utilization of U.S. subsidiary cars, after the withdrawal of the government hopper cars, should qualify as a new arrangement.

[92] CP states that cars can be acquired on a one-to-one car replacement and/or by obtaining capacity from a pool of U.S. subsidiary cars on a per-diem basis. CP states that the latter acquisition is not limited to specific cars by car I.D. Lastly, CP states that it will provide all agreements and identify third-party/subsidiary cars used in the service of regulated grain as a pool of cars and/or on a one-to-one car replacement basis.

Analysis

[93] The Agency recognizes that a prescribed railway company may enter into an arrangement to obtain cars in anticipation of the withdrawal of government hopper cars, to ensure that it will have adequate capacity to meet its operating requirements. Market conditions may also influence the timing of those arrangements. Based on this, the Agency has determined that arrangements entered into before the withdrawal of government hopper cars could be eligible for an adjustment. However, whether an arrangement entered into prior to the withdrawal of the government hopper cars is eligible for an adjustment will depend on whether the prescribed railway company has demonstrated to the satisfaction of the Agency that the cars were obtained for the purpose of replacing the cars withdrawn. A sufficient link between the act of acquiring and withdrawing cars must be established by the prescribed railway company. Such determination will be made on a case-by-case basis.

[94] Further, the Agency has considered what arrangements would be taken into consideration for an adjustment under paragraph 151(4)(c) of the CTA. Agency staff in the staff Consultation Document proposed that a new arrangement between the U.S. subsidiary and a third party (other than the prescribed railway company) could be considered as a “new arrangement” for an adjustment under paragraph 151(4)(c) of the CTA.

[95] After considering the issue, including the submissions by CN and CP, the Agency concludes that staff’s proposal regarding a new arrangement between the U.S. subsidiary and a third party other than the prescribed railway company cannot be adopted for the following reasons.

[96] In all past instances where the Agency has allowed adjustments pursuant to paragraph 151(4)(c) of the CTA, the new arrangements examined were lease agreements between the prescribed railway company and a third party (lessor). Under such an agreement, the prescribed railway company was adding a stock of identifiable replacement cars to its pool of cars in exchange for an agreed upon monthly lease rate. Further, for the duration of the lease agreement, the replacement hopper cars were available to the prescribed railway company for use as it deemed appropriate. As well, the prescribed railway company had to pay to the lessor the agreed upon lease rate regardless of the actual use of the leased cars, even if the leased cars were parked.

[97] The cost commitment in these agreements is identifiable and quantifiable. Further, the cars acquired were not for the short term. That is, the railway company was acquiring the right to have access to a “stock of cars” for a specified period, not entering into an agreement to pay for capacity on an as-required basis. This made it possible for the Agency to conclude that the railway company had acquired a stock of cars “as a result of” the withdrawal of another stock, the government hopper cars.

[98] All of the above also hold true in a lease agreement between a U.S. subsidiary and a third-party lessor. That is, the cars leased by a U.S. subsidiary are added to the pool of cars of the U.S. subsidiary, are available to the U.S. subsidiary to be used as deemed appropriate by the U.S. subsidiary, and lastly, the U.S. subsidiary will have to pay to the lessor the agreed upon lease rate even if those cars are parked.

[99] However, the cars leased by a U.S. subsidiary are not automatically added to the pool of cars of the prescribed railway company, and hence, are not available to the prescribed railway company in the same way as cars leased directly by the prescribed railway company would be. This is why the prescribed railway company has to incur per-diem charges when it uses cars (either owned or leased) of its U.S. subsidiary, in Canadian service.

[100] The existence of a per-diem charge incurred by the prescribed railway company is evidence that a car has been used by the prescribed railway company, but it does not constitute evidence that the prescribed railway company “obtained” those cars for the purposes of paragraph 151(4)(c) of the CTA. As explained above, the prescribed railway companies have, historically, obtained cars from their U.S. subsidiaries on a per-diem basis as needed, and the actual use of U.S. subsidiary cars in any specific year might result from factors such as new fleet management practices or crop patterns in North America. As such, it is difficult to distinguish between subsidiary cars obtained for the purpose of replacing the withdrawn government hopper cars with those obtained as a result of other factors.

[101] For this reason, the Agency considers that, in respect of the use of its U.S. subsidiary cars, a prescribed railway company will only be considered to have “obtained cars” for the purposes of paragraph 151(4)(c) of the CTA if this use is governed by a written agreement between the prescribed railway company and its U.S. subsidiaries. Such agreement should contain the parties’ commitment of a specific number of identified U.S. subsidiary cars (owned or leased), for use by the prescribed railway company in regulated grain service in a manner similar to the historical use of the withdrawn government hopper cars for a minimum of one year. The requirement to make the identified U.S. subsidiary cars available for a minimum of one year is to distinguish between subsidiary cars used by the prescribed railway company on an as-needed basis and the designated replacement cars. This reflects the fact that until the government hopper cars are withdrawn, the stock of government hopper cars remains completely available to the prescribed railway company to use in Canadian service as it sees fit. Therefore, the replacement cars need to be available on a similar basis over the crop year at a minimum, and not to be available only on an as-needed basis.

[102] The Agency notes that while the prescribed railway companies and their U.S. subsidiaries are separate entities from a tax and regulatory perspective, they are not in effect operating at arms‑length from one another, as they are related entities. Any intercompany transactions with U.S. subsidiaries will be eliminated on the consolidated financial statements of CN and CP (that is, the per-diem charges between the two entities - the prescribed railway company and its U.S. subsidiaries, represent cost for one and a revenue for the other, and cancel out in the consolidated financial statements).

[103] Therefore, while an agreement can easily be produced between the “two parties” to support a cost adjustment, this agreement would be void of any practical meaning if it was not backed by a true commitment by which the U.S. subsidiary will commit to make available to the prescribed railway company a list of cars and the prescribed railway company will commit to use these cars in regulated grain service, in a manner consistent with the historical use of the government hopper cars in regulated grain service. It is for this reason that the Agency requires the prescribed railway company to include such a commitment in the written agreement. The Agency will monitor the usage of these designated replacement cars in regulated grain service to verify that the obligations committed to are fulfilled.

[104] This approach is in line with the Agency’s view that the prescribed railway companies and their U.S. subsidiaries “are separate and financially accountable entities” and recognizes the Agency’s legislative obligation to reflect only the costs incurred by the prescribed railway company as a result of withdrawal of government hopper cars.

Findings

[105] The Agency accepts the following arrangements as means by which a prescribed railway company has obtained replacement hopper cars for the purposes of paragraph 151(4)(c) of the CTA:

1. Hopper cars purchase agreement between the prescribed railway company and a third party;
2. Hopper cars lease agreement between the prescribed railway company and a third-party lessor;
3. Hopper cars obtained via a written agreement (commitment agreement) between the prescribed railway company and its U.S. subsidiary company for the commitment of a specific number of the U.S. subsidiary’s identified owned or leased hopper cars (designated replacement cars) for Canadian regulated grain service for a minimum of one year.

[106] Further, the Agency will accept to make an adjustment, if the following conditions are met:

Lease or purchase agreements (Items 1 and 2)

[107] Contractual arrangements for the lease or purchase of hopper cars may be entered into by the prescribed railway company at any time.

[108] However, where the purchase or lease agreements pre-date the withdrawal of government hopper cars, such agreements will be accepted provided that the following conditions are met:

1. The prescribed railway company has notified the Agency of its intent to enter into an arrangement to obtain cars to replace government hopper cars not yet withdrawn and of the expected date of withdrawal;
2. The prescribed railway company has provided the Agency with third-party evidence that the government hopper cars have been withdrawn, including the number of cars withdrawn and the effective date of the withdrawal of each car and car I.D.

[109] The adjustment to the VRCPI for the replacement costs incurred for arrangements that pre-date the withdrawal of the government hopper cars will take effect on or after the withdrawal as determined by the Agency. The cost adjustment under paragraph 151(4)(c) of the CTA will not take effect before the withdrawal date of the government hopper cars.

[110] The Agency’s decision to allow cost adjustments to be made for cars obtained in anticipation of the withdrawal of government hopper cars will be based on the facts of each situation, in particular, having regard to whether the Agency is satisfied that the prescribed railway company has established a sufficient connection between the acts of withdrawing and obtaining of cars. Should the prescribed railway company fail to notify the Agency of its intent to enter into a contract to obtain replacement hopper cars in advance of the withdrawal of government hopper cars, or should there be a long lag between the decision to acquire replacement hopper cars and the withdrawal of government hopper cars, the Agency may consider that the conditions for making an adjustment have not been met and refuse to make such an adjustment.

Commitment agreement (Item 3)

[111] Commitment agreements that may be accepted must:

1. be made in writing
2. be entered into by the prescribed railway company and its U.S. subsidiary prior to the actual use of the designated replacement cars in a given crop year
3. provide specific car identification numbers of the U.S. subsidiary cars committed for use in Canadian service in replacement of the withdrawn government hopper cars (designated replacement cars)
4. specify a commitment of the U.S. subsidiary to make the designated replacement cars available for use by the prescribed railway company in Canadian service for a minimum of one year.
5. Specify a commitment of the prescribed railway company to use the designated replacement cars in a manner similar to the average historical usage of the government hopper cars in regulated grain service in the year during which the agreement is in effect.

Criteria 3 and 4 - carrying capacity of replacement hopper car; maximum carrying capacity to be replaced

Staff Consultation Document

3. When a hopper car obtained is identified as a replacement of a free government hopper car, the carrying capacity (tonnes) of the obtained car would count towards the total carrying capacity which the prescribed railway company is entitled to replace for the purposes of paragraph 151(4)(c), regardless of the intensity of the usage of the asset.

4. The carrying capacity of the cars obtained that may be taken into account should not exceed the carrying capacity of the cars withdrawn from service. Where the carrying capacity obtained exceeds the carrying capacity withdrawn, the Agency would apply an equivalency factor to make the obtained capacity equal to the withdrawn capacity.

CN’s response

[112] CN claims that there is no need to identify a specific hopper car as a replacement car and that this is especially true if the replacement cars are obtained via car hire that have no fixed term. CN points out that as it manages its hopper fleet on a consolidated basis, any hopper car obtained by any of CN’s U.S. subsidiaries after the withdrawal of a government hopper car should be deemed as a replacement car when that car is used in regulated grain service, though the adjustment should be limited to effective capacity of the cars withdrawn.

[113] CN expresses reservations regarding the proposal about the intensity of the usage of the obtained cars. CN claims that if one car that is used 100 percent of the time in regulated grain service is replaced with two cars that are used 50 percent of the time in regulated grain service, then the adjustment should not be limited to the one car that was withdrawn, but rather be based on 100 percent regulated utilization. CN suggests that for the adjustment to accurately reflect the costs incurred by CN to replace the government hopper cars consistent with paragraph 151(4)(c) of the CTA, it should be based on the capacity withdrawn, regardless of the manner or number of cars by which the capacity is replaced.

[114] With respect to criterion 4 CN agrees that effective capacity of the withdrawn cars, rather than the number of withdrawn cars, is an acceptable basis to calculate the adjustment.

CP’s response

[115] CP states that for the cases of a one-to-one replacement, where a specific lease car can be identified as a replacement car, the formula should not be adjusted for any difference in the tonnage between the withdrawn and the replacement car as this factor is considered by CP when deciding to acquire cars. For instance, CP states that when replacing 10 government hopper cars with a capacity of 90 tonnes each, CP might acquire 9 replacement cars with a capacity of 100 tonnes and even if the cost per-car may be higher for the larger capacity cars, the total cost will reflect an equivalent capacity. As a result a tonnage factor adjustment is not required.

[116] With respect to the acquisition of cars from a U.S. subsidiary’s pool of cars, as the number of acquired cars will be higher than the withdrawn government hopper cars, a capacity factor adjustment is necessary to calculate the equivalent number of cars from the pool. CP concludes that the correct approach is to cap the aggregate tonnage of the replacement capacity to that of the withdrawn government hopper cars. That is, if 10 government hopper cars at 90 tonnes each are replaced with cars that have 100 tonnes capacity, then the railway company could replace the 10 withdrawn government hopper cars with a maximum of 9 100-tonne capacity cars.

[117] CP submits that, in this respect, the Carrying Capacity Ratio (Factor B in the positive weight formula) penalizes the railway company for obtaining a higher capacity car. CP suggests that the correct approach is not to adjust the per-car cost based on a capacity ratio, but instead to cap the aggregate tonnage capacity of the replacement cars to be no greater than that of the government hopper cars. That is, if 10 government hopper cars at 90 tonnes each are replaced with cars that have a 100‑tonne capacity, then the railway company could designate a maximum of 9 of those cars as replacement cars.

Analysis

[118] As stated in 8-R-2013">Decision No. 8-R-2013, the act of obtaining hopper cars must be in relation to government hopper cars no longer being available under the original terms and conditions. Under the original terms and conditions, CN and CP were provided with a fleet of cars that, when used in regulated grain service, was free of charge. CN and CP were provided with a number of cars representing a fixed carrying capacity. The decision around the utilization of these cars in regulated grain service or other service was a business decision left to be made by CN and CP to suit their operating requirements.

[119] As a result, the replacement capacity for the purposes of paragraph 151(4)(c) of the CTA is the carrying capacity lost when the government hopper cars were withdrawn from service and not the historical or expected utilization of those cars as suggested by the prescribed railway companies. This is precisely why the Agency, in multiple decisions, has determined that the cost adjustment had to be based on a verified number of cars obtained to replace the carrying capacity of the cars withdrawn.

[120] If the Agency were to use CN’s proposed assumptions, where one car that was used 100 percent in regulated grain service may be replaced by any number of cars whose combined utilization is 100 percent in regulated grain, it would be replacing the historical utilization of the withdrawn cars and not the carrying capacity of the withdrawn cars.

[121] CP claims that in the cases where a specific lease can be identified, the formula should not adjust for any differences between the carrying capacity of the withdrawn and the replacement car, on the grounds that this is a factor CP takes into consideration when deciding how many and what tonnage cars to lease. The Agency does not agree with CP’s contention that the total carrying capacity of the cars obtained as replacement cars is irrelevant in determining the cost adjustment due to it being a business decision by the railway company.

[122] In the Agency’s formula for cost adjustment, Factor B of the positive weight represents the carrying capacity ratio (CCR) and is calculated as total carrying capacity (tonnes) of the withdrawn government hopper cars divided by total carrying capacity of the obtained replacement cars. The purpose of this ratio is to ensure that the adjustment to the VRCPI reflects replacement up to the maximum carrying capacity lost.

[123] CP states that the Agency, instead of capping the cost adjustment to reflect the carrying capacity withdrawn, should cap the aggregate carrying capacity of the replacement cars. This seems contradictory to CP’s own claims regarding integrated fleet management, and invites unnecessary regulatory intervention into corporate decision-making. This issue is discussed further in the analysis of Question 6 of the staff Consultation Document.

Findings

[124] The Agency is of the opinion that the staff proposed CCR allows for the cost adjustment to reflect no more than the total carrying capacity of the withdrawn cars, while allowing the prescribed railway company the flexibility to obtain any number of cars of whatever capacities it needs as replacement cars to suit its fleet management objectives. This conclusion is demonstrated by the following illustration.

[125] Using CP’s example, the maximum total carrying capacity lost is 10 cars x 90 tonnes=900 tonnes and the replacement capacity obtained is 9 cars x 100 tonnes=900 tonnes.

[126] As a result, the CCR will equal 1 and this equivalency would not impact the calculation of the cost adjustment.

[127] If, however, the 10 cars at 90 tonnes were replaced with 9 cars at 120 tonnes, then the CCR would calculate an adjustment factor of 0.833. In this example, foregoing the adjustment factor would result in CP replacing 900 tonnes of carrying capacity with 1,080 tonnes of carrying capacity. Applying the CCR ensures that CP will be compensated for obtaining replacement carrying capacity equal to the withdrawn carrying capacity, that is 1,080 x 0.833 = 900 tonnes.

[128] Here it is important to note that if the 10 cars of 90 tonnes were replaced by 9 cars of 90 tonnes, then the CCR would result in a value of 1.11 and it would be set to 1 as CP in the future can apply to the Agency for replacement of the remaining lost carrying capacity.

[129] Based on the above, CP’s proposal to not adjust the positive weight in the case of lease or purchased replacement cars must be dismissed because such an adjustment is required to ensure that the prescribed railway company will get a cost adjustment that does not exceed the carrying capacity lost with the withdrawal of government hopper cars.

[130] The Agency finds that CN’s proposal regarding the utilization of assets must also be dismissed as the relevant quantity for an adjustment under paragraph 151(4)(c) of the CTA is the carrying capacity lost and not the utilization of the carrying capacity lost.

[131] Based on the above, the Agency adopts criteria 3 and 4 as follows:

Criterion 3 - carrying capacity of replacement hopper car

When a hopper car obtained is identified as a replacement of a government hopper car, the carrying capacity (tonnes) of the obtained car will count towards the total carrying capacity that the prescribed railway company is entitled to replace for the purposes of paragraph 151(4)(c) of the CTA, regardless of the subsequent usage of the asset.

Criterion 4 - maximum carrying capacity to be replaced

The carrying capacity of the cars obtained that will be taken into account shall not exceed the carrying capacity of the cars withdrawn from service. Where the carrying capacity obtained exceeds the carrying capacity withdrawn, the Agency will apply an equivalency factor to make the obtained capacity equal to the withdrawn capacity (Factor B of the positive weight formula).

Criteria 5 to 8: recognition of replacement cars only when used in regulated grain service; substitution of replacement cars; usage levels of replacement cars in regulated grain service; and, renewal arrangements for replacement cars.

Staff Consultation Document

5. The hopper cars obtained would be recognized only to the extent that they are used in regulated grain service. A preliminary view is that, the car identification numbers and utilization of the obtained cars as recorded in the Grain Traffic Database (GTDB) for the crop year for which the adjustment is sought will form adequate evidence of usage.

6. When a hopper car is accepted by the Agency as a replacement hopper car for the purpose of an adjustment pursuant to paragraph 151(4)(c), that car would retain its characterization as a “replacement hopper car” for the purpose of the determination of the annual VRCPI, until the termination of the lease agreement by which the prescribed railway or its U.S. subsidiary obtained the car, or in the case of purchase, until the disposal or retirement of the asset from service. That is, no substitutions of replacement cars would be allowed while an arrangement for which an adjustment has been made is still in effect.

7. If, in any given year, a replacement car is not used in regulated grain movement, then zero cost will be recognized in the VRCPI for that year in relation to that car.

8. When an arrangement for replacement cars terminates (e.g. the lease agreement expires or the replacement cars owned by a railway are scrapped or sold), the prescribed railway company could be eligible for an adjustment again if it enters into a new arrangement that meets the requirements set out in points one to six above.

Industry responses

[132] CN is of the opinion that criteria 5 through 8 would result in CN being undercompensated for the replacement of the withdrawn cars. CN suggests that the adjustment should be based on the withdrawn capacity and that it is sufficient to establish once that the cars have been replaced. Upon establishment, there should not be a requirement to track the replacement cars on the grounds that the withdrawn capacity will always influence CN’s fleet decisions. With respect to criterion 6, CN claims that the proposal for “no substitution of replacement cars” ignores its operating reality.

[133] CN disagrees with criterion 7 and states that the railway company should not be penalized if due to market conditions the replacement cars end up being stored in a crop year. CN states that this is a similar treatment to Governments still incurring the ownership cost of the cars when they were in storage.

[134] CN, overall, disagrees with the association of withdrawn and replacement cars on a one-for-one basis as their usage will change from period to period. CN also disagrees with the designation of specific cars as replacement cars and with the monitoring of their usage, with no allowance for different cars being replacement cars. CN claims that this is impractical and inconsistent with the purpose of paragraph 151(4)(c) of the CTA. Lastly, CN argues that if it chooses to replace a withdrawn car with one car in 100 percent regulated grain service, or two cars in 50 percent regulated grain service or ten cars in 10 percent regulated grain service, the amount of adjustment should be the same, 100 percent. This is the reason CN cites that ongoing monitoring of the deemed replacement cars is not required.

[135] CP states with respect to criteria 6, 7 and 8 that replacing hopper cars with a pool of cars makes some points raised by Agency staff regarding one-to-one replacements irrelevant.

Analysis

[136] The Agency considers that the identification of replacement cars is to prevent double-counting of costs in the VRCPI, i.e., to prevent the same car from being considered both as a replacement car (to which a cost adjustment must be applied) and as part of the historical cost base (which must be price inflated through the application of the VRCPI in the MRE formula). It is not intended, as suggested by CN and CP, to associate withdrawn and replacement cars on a one-to-one basis. As stated earlier, the Agency accepts the proposition that a withdrawn car could be replaced by any number of replacement cars, with adjustments made to ensure that no more than the total carrying capacity withdrawn would be eligible for the cost adjustment.

[137] The Agency notes that the VRCPI contains mechanisms to account for changes in the prices of input items relative to the cost base. For example, changes in the prices of purchased cars are accounted for in the cost of capital and depreciation price indices, and changes in the prices of leased cars are accounted for in the leased car price index. Thus, the designation of additional capacity obtained (for example, cars acquired in new leases) as replacement cars for the purposes of paragraph 151(4)(c) of the CTA would allow for the costs of these cars to be included in the paragraph 151(4)(c) of the CTA adjustment, but prevents the same cars from being included in other adjustment mechanisms (such as the leased car price index).

[138] The Agency is of the opinion that, for this reason, the requirement to identify the additional carrying capacity obtained as “replacement cars”, with no allowance for changing the designation of the car as either a “replacement” car or a “leased” car during the period of the lease, needs to be maintained.

[139] Such designation is also required for the purpose of monitoring the actual usage of the designated replacement cars obtained via a commitment agreement.

[140] With respect to monitoring the usage of the designated replacement cars in regulated grain, the Agency agrees with CN and CP that the relevant concept for determining usage in grain service is not the future use of the replacement cars, but the historical use of the government hopper cars. Accordingly, the Agency finds that monitoring the usage of the replacement cars other than designated cars obtained from U.S. subsidiaries would be unnecessary. In the case of cars obtained from U.S. subsidiaries through written commitment agreements, the Agency is of the opinion that, without such monitoring, the commitment to use the cars could simply be a beneficial paper exercise between two related entities.

[141] Both CN and CP operate an integrated North American fleet. CP states that under this approach hopper cars are used “interchangeably” and without consideration to the car type or provider. CN states that hopper cars in its fleet can be deployed in any service. Further, CN states that any hopper cars that are added or removed from the fleet cannot be associated and be directly attributable to any specific service because of the nature of operating an “integrated multi‑purpose fleet.”

[142] This means, although replacement cars will be obtained as a result of the withdrawal of government hopper cars, the replacement cars will be used for all purposes irrespective of the fact that they are replacement cars. These cars may end up in regulated or non-regulated grain service, as part of the overall fleet. This also means that when replacement cars are engaged in non-regulated grain service other cars (not designated as replacement cars, including U.S. subsidiary cars) may be used to perform the required regulated grain service.

[143] For this reason, the Agency agrees with CN that limiting the cost adjustment to the actual usage of the replacement hopper cars could result (if actual use was less than historical use) in an underestimate of the cost incurred to replace the withdrawn government hopper cars. At the same time, the Agency also notes that the approach adopted in this Decision for recognizing designated cars from U.S. subsidiaries is based on the assumption that there is a true commitment to make a stock of cars available for use in regulated grain. As this commitment is being made between two related entities, and as there is no financial consequence to CN or CP’s consolidated financial statements if it is being met or not, monitoring the use of the cars becomes necessary to ensure that the commitment is true.

Findings

[144] In recognition of the operating reality of CN and CP under which cars in the North American fleet are used interchangeably, the Agency will not adopt criteria 5 and 7. It will instead use the prescribed railway companies’ historical average usage of the government hopper cars in regulated grain service. This will allow the adjustment to properly reflect CN and CP’s replacement car cost incurred, as when the replacement cars are used to move non-regulated grain or in other services, non-replacement cars in the fleet, increased utilization of existing U.S. subsidiary cars, and other fleet management techniques may be employed to make up the capacity shortfall.

[145] The Agency will use a five-year average of the historical utilization of the government hopper cars in regulated grain service (based on the last five years of utilization prior to the withdrawal), in place of the actual utilization of the replacement cars that was suggested in the staff Consultation Document, for cost calculation purposes under paragraph 151(4)(c) of the CTA. As the volume of grain being moved in different markets can be highly volatile, a five-year average would smooth out potential annual variations in the use of the government hopper cars and be more representative of the capacity being lost in regulated grain service. Criteria 5 and 7 of the staff Consultation Document are replaced with the historical average usage of the government hopper cars in regulated grain service.

[146] Finally, in recognition of the fact that the fulfillment of the commitment to make a stock of U.S. subsidiary cars available for use in regulated grain can only be assessed based on actual usage, the Agency will monitor the usage of all government hopper cars (comprising all replacement cars plus the remaining government hopper cars). Criterion 5 describes the monitoring requirements applicable when designated replacement cars have been obtained.

Criterion 5 - historical average usage of government hopper cars in a prescribed railway company’s fleet and monitoring requirements for designated cars obtained via commitment agreements with a U.S. subsidiary

[147] For replacement cars obtained via lease or purchase agreements of the prescribed railway company with third parties, Factor D of the positive weight will be equal to the five-year historical average usage of the original government hopper car fleet in regulated grain service. This Factor will remain unchanged for the duration of the lease term in the case of lease agreements or until the disposal or retirement of the replacement cars in the case of purchase agreements unless replacement hopper cars have been obtained via a commitment agreement, in which case, the monitoring requirements may result in an adjustment that would vary Factor D.

[148] For replacement cars obtained via commitment agreements between the prescribed railway company and its U.S. subsidiary, Factor D will be equal to the five-year historical average usage of the original government hopper car fleet in regulated grain service for the first three years.

[149] During this triennial period, the Agency will monitor the usage of all government hopper cars (comprising all replacement hopper cars plus the remaining government hopper cars), and expects that the average annual actual usage of these cars in regulated grain service will reasonably compare to the five-year historical average usage of the original government hopper car fleet, in regulated grain service, in any given crop year.

[150] At the end of the triennial period, the Agency will compare the five-year historical average usage of the original government hopper car fleet with the average annual usage of the combined replacement hopper cars and remaining government hopper cars and determine whether an adjustment to Factor D is warranted. If the Agency determines that an adjustment to Factor D is warranted then the new Factor D will be applied to all categories of replacement hopper cars and retained until the next triennial review.

[151] The Agency notes that monitoring of the subsequent usage of all replacement and remaining government hopper cars will only be warranted when designated replacement cars have been obtained via a commitment agreement between the prescribed railway company and its U.S. subsidiary.

Criterion 6 - substitution of replacement cars

[152] Criterion 6 - substitution of replacement cars, is adopted as follows:

When a hopper car is accepted by the Agency as a replacement hopper car for the purpose of an adjustment pursuant to paragraph 151(4)(c) of the CTA, that car retains its characterization as a “replacement hopper car” for the purposes of the determination of the annual VRCPI, until the termination of the lease or commitment agreement by which the prescribed railway company obtained the car, or in the case of purchase, until the disposal or retirement of the asset from service. That is, no substitutions of replacement cars are allowed while an arrangement for which an adjustment has been made is still in effect.

Criterion 7 - renewal arrangements for replacement cars

[153] Criterion 8 - renewal of replacement cars arrangements is renumbered to criterion 7 and adopted as follows:

When an arrangement for replacement cars terminates, the prescribed railway company will be eligible for an adjustment again if it enters into a new arrangement or renews an existing arrangement (lease or commitment).

The prescribed railway company would have to file a new application with the Agency that would meet the requirements of all the criteria set out in the Decision for the determination of an adjustment under paragraph 151(4)(c) of the CTA. The resulting adjustment will come into effect as determined by the Agency.

[154] As a general rule, unless circumstances change warranting some modifications, the criteria adopted in this Decision will be used in determining the appropriate weights to the VRCPI for the purposes of an adjustment under paragraph 151(4)(c) of the CTA.

[155] The Appendix to this Decision contains a summary of the criteria adopted by the Agency.

QUESTION 4: HOW SHOULD THE COST INCURRED BY THE PRESCRIBED RAILWAY COMPANY IN OBTAINING THE REPLACEMENT CARS BE DETERMINED?

Staff Consultation Document

[156] For cars obtained by the prescribed railway companies via purchase or lease with a third-party lessor, the monthly or annual lease rates as per the prevailing lease agreement, or the annual depreciation cost (including the associated cost of capital) represent the cost to the prescribed railway company of obtaining the replacement cars. In these cases, the lease or depreciation costs (including the associated cost of capital) are adjusted to reflect the need to ensure that the total carrying capacity of the obtained capacity is no more than the total carrying capacity of the withdrawn cars.

[157] However, when cars are obtained by a U.S. subsidiary of the prescribed railway company on or after the withdrawal of government hopper cars and are used by the prescribed railway company in regulated grain service, two options were presented for determining the cost to the prescribed railway company for the usage of the cars acquired by a U.S. subsidiary.

Option 1: Intercompany Costs

[158] The prescribed railway company incurs a per-diem cost when U.S. subsidiary cars are used in Canadian service. In the staff Consultation Document, Agency staff proposed that an adjustment could be based on the per-diem costs incurred by the railway company for the actual cars it identified as replacement cars for a given crop year. Staff suggested that for verification purposes, the railway companies would need to submit the GTDB supporting the usage of those cars and verifiable proof of the intercompany per-diem costs incurred, i.e., invoices at the car level.

[159] Staff also indicated that the recognition of the costs incurred by the prescribed railway company and the subsequent adjustment to the VRCPI would necessarily lag the year the costs were incurred by a year, as there would not be sufficient data for an adjustment to be made in the initial year of usage and that all subsequent adjustments would be made with this one-year lag.

[160] Staff noted that, while this approach results in costs that are quantifiable, verifiable and based on a verified number of cars obtained, it requires significant effort on an annual basis from both prescribed railway companies and Agency staff to collect and to verify the data at the individual car level. It also noted that as more and more cars are retired the required effort would increase accordingly.

[161] In summary under Option 1 the replacement costs would be:

Option 2: Third-party lease or purchase cost

[162] In the staff Consultation Document, Agency staff positioned that a valid method for recognizing costs in this situation is for the Agency to assume that the third-party lease rate (i.e., the prevailing lease rate based on the lease agreement between a U.S. subsidiary and a third party lessor) or the average annual depreciation and cost of capital cost per hopper car, as calculated for Canadian regulatory costing purposes, (i.e., based on the Canadian methodology for the determination of depreciation and the regulatory cost of capital), constitute the cost incurred by the prescribed railway company. Such would be conditional on Agency staff’s verification of the lease or purchase agreement and verification of the actual use of the leased or purchased cars in moving regulated grain, as reflected in the GTDB . The lease or depreciation costs (including the associated cost of capital) would be adjusted to ensure that the total carrying capacity of the obtained capacity is no more than the total carrying capacity of the withdrawn cars.

[163] This option would be much simpler to administer, because it would not require extensive data collection and verification, and would thus reduce the prescribed railway company’s administrative burden.

[164] In summary under Option 2, the replacement costs incurred would be:

Industry responses

[165] CN states that costs should be determined one of three ways:

• Using depreciation and cost of capital for cars that are purchased
• Using lease rates for cars that are leased
• Using car hire rates for cars obtained via car hire

[166] CN proposes that for cars leased by a U.S. subsidiary company and subsequently charged to the Canadian company (the prescribed railway company) using intercompany car hire agreements, the average lease rate would be logical because CN manages its fleet on a consolidated basis. However, CN states, given the Agency’s previous ruling that the subsidiary company is a distinct legal entity, that the technically correct approach is to use the car hire rates as these are the costs incurred by CN’s Canadian operations. Therefore, CN’s preference is Option 1.

[167] CN suggests, however, that the Agency should not attempt to track each replacement car or the costs specific to each car on a going forward basis as is proposed under Option 1, because in its view identifying and tracing individual cars during the complete crop year is difficult and provides limited added value. CN proposes that the Agency should use instead an average cost over a reasonably large sample of cars, which should produce a more stable and representative value.

[168] CP states that it obtains U.S. subsidiary cars through an exchange arrangement based on per-diem rentals. It points out that the per-diem rentals are market rates that are charged between railway companies and administered for all North American railway companies by the AAR through the Railinc clearing system. Under this system the rates are either negotiated between railway companies or default rates are used. CP indicates that it does not negotiate rates with its U.S. subsidiaries, and that subsidiary inter-company car hires are priced using the Railinc rates.

[169] CP states that recognizing the leasing costs and costs of ownership incurred by a U.S. subsidiary as if these were the costs incurred by the prescribed railway company “is inconsistent with UCA accounting practices and with all other practices under the “costing and MRE regulations.”“ It also believes that this option would “set a worrying precedent” because the costs and revenues generated by the non-regulated entities may now be considered under the regulations.

[170] CP is of the opinion that, nevertheless, if a U.S. subsidiary enters into a third-party agreement for sole or partial use by the prescribed railway company as specified in the terms and conditions of the agreement, the third-party lease rate should be recognized as the appropriate cost.

[171] CP suggests that, for recognizing the cost in the year it occurs, the Agency could calculate per‑diem and/or lease cost similar to other forecasted inputs in the VRCPI, and that a one-year lag or retroactivity would not be required.

[172] In summary, under CN and CP’s options, the replacement costs would be:

Analysis

[173] It is clear from the railway companies’ submissions that for cars obtained by U.S. subsidiary companies and subsequently used in regulated grain, both generally prefer the use of per-diem charges (along with applicable maintenance charges) as the basis for determining the costs incurred rather than the prevailing lease rate for the cars identified as replacement cars.

[174] Both CN and CP propose to convert the industry standard car-hire charges into annual costs by straight multiplication of hourly rates by the number of hours in a year, or daily rates by the number of days in a year, and use these costs in lieu of the actual lease rates incurred by a U.S. subsidiary. The Agency is of the opinion that this proposal grossly overstates the cost incurred by the prescribed railway company. The Agency understands that no railway company would agree to pay per-diem charges for an asset it intends to use on a long-term basis if it was not paid to a related entity, and thus was not able to eliminate those intercompany charges upon consolidation of the financial statements. Hourly and per-diem charges are, by definition, intended for very short-term use of the assets; longer-term usage is covered by longer-term leases at commensurate rates. Therefore, factoring up hourly and per-diem rates into annual rates does not reflect the actual use of the cars, and the annualized short-term costs so obtained represent notional, not real costs.

[175] In the case of designated replacement cars (that is replacement cars obtained via a commitment agreement between the prescribed railway company and a U.S. subsidiary by which the U.S. subsidiary will make available to the prescribed railway company specific cars for use in regulated grain service for a minimum term of one year), the Agency is of the opinion that a better approximation of the real cost to be attributed to the prescribed railway company would comprise annual lease costs based on the leased car price index. The Agency notes that the actual cost incurred for the use, by the prescribed railway company, of designated replacement cars is a car-hire cost. However, this cost can only be determined through verification of the actual usage of the designated replacement cars so obtained. Furthermore, this cost is reflective of usage on a very short-term basis, and as such is not consistent, once annualized, with the lease rates that can be obtained in the open market for cars obtained on an annual basis.

[176] This presents two choices for establishing the actual cost incurred by the prescribed railway company when using the designated replacement cars obtained from a U.S. subsidiary: i) use the annual leased rates based on the leased car price index for the replacement cars as a proxy for the actual costs incurred by the prescribed railway company, and permit capture of the costs incurred by increased utilization of existing U.S. subsidiary cars and short-term car hires for fleet management purposes by means of an adjustment to Factor D of the positive weight to reflect the five-year average historical usage of the government hopper cars in regulated grain service, or, ii) calculate the actual costs incurred based on the per-diem rates charged to the prescribed railway company, for the actual usage of the designated replacement cars in regulated grain service.

[177] For reasons stated earlier, the Agency is of the opinion that costs based on the actual usage of the replacement cars would understate, while costs based on the annualized per-diem costs would overstate, the costs incurred by the prescribed railway company, and concludes that the annual lease costs based on the leased car price index with the proposed adjustment to Factor D is to be used.

Findings

[178] The Agency adopts Option 2 in the staff Consultation Document with adjustment to Factor D of the positive weight to reflect a five-year average historical usage of the government hopper cars in regulated grain service and annual lease costs based on the leased car price index as a proxy for the cost incurred for the usage of designated replacement cars obtained via a commitment agreement with a U.S. subsidiary.

QUESTION 5: HOW SHOULD THE COST OF OBTAINING THE REPLACEMENT CARS BE APPORTIONED BETWEEN REGULATED GRAIN SERVICE AND OTHER SERVICES?

Staff Consultation Document

[179] Agency staff proposed criteria for apportioning the costs incurred by the prescribed railway companies between regulated and non-regulated service. This apportionment was to ensure that any adjustments under paragraph 151(4)(c) of the CTA reflect only the use of the replacement cars in moving regulated grain. Staff proposed that, for each replacement car, the apportionment be based on revenue tonne miles (RTMs) performed in regulated grain service versus total RTMs performed in all services.

[180] Staff also proposed that for the first year of a successful adjustment claim involving cars obtained by the prescribed railway company, the historical average regulated grain usage (RGU) of the replacement cars would be used but in subsequent years the actual RGU of the identified cars would be used. In the case of cars obtained by a U.S. subsidiary and subsequently used by the prescribed railway company, the five-year historical average of the U.S. subsidiaries cars would be used in the first year and the actual in subsequent years.

[181] Finally, staff also proposed that the RGU of the obtained cars be monitored annually and the costs adjusted each year accordingly.

Industry responses

[182] Both CN and CP agree that the RGU should be based on RTMs generated in regulated grain versus total RTM generated. CN rejected the notion that the actual RGU of the replacement cars should be used in the calculation and proposed that the average historical RGU of the cars being replaced be used instead. CP proposed that the RGU be calculated as the RTMs in regulated grain service divided by total RTMs performed in Canada. Neither railway company embraces the notion of continuous monitoring of the RGU of selected cars followed by annual updates to the costs.

Analysis and findings

[183] The Agency finds that this matter is no longer relevant, given the Agency’s proposal to no longer monitor the use of the replacement cars to apportion the costs. Under the approach set out in this Decision, once a car has been recognized as a replacement car by the Agency, there is no further need to monitor its use. Instead, the actual usage of all replacement cars (leased, purchased, and designated replacement cars) and remaining government hopper cars in regulated grain service will be compared to the five-year historical average usage of the government hopper cars to ensure a reasonable match. The Agency may adjust the replacement cost in future determinations to reflect the actual usage of the replacement and remaining government hopper cars, if such an adjustment is warranted.

[184] The Agency notes that monitoring of the subsequent usage of all replacement and remaining government hopper cars will only be warranted when designated replacement cars have been obtained via a commitment agreement between the prescribed railway company and its U.S. subsidiary.

QUESTION 6: WHAT FORMULA BEST CAPTURES THE REQUIRED COST ADJUSTMENT UNDER PARAGRAPH 151(4)(C) OF THE CTA?

CP’s response

[185] CP proposes that, as railway companies can replace withdrawn government hopper cars by either entering into an agreement with a third party or with a U.S. subsidiary to lease cars, the cost should be calculated as either a one-to-one basis wherever possible (with some adjustment), or as a pool of cars. CP offers formulas for each option as follows.

Option 1: One-to-one car replacement

[186] CP provides two scenarios of where one on one adjustment is applicable: a scenario where regulated per-diem data is available per car I.D., and one where it is not. CP proposes that:

a) where regulated per-diem data is not available per car I.D., the appropriate adjustment should be calculated as:

Positive Weight = A x C x D x E

where:

A = Number of cars

C = Sum of per-diem rate + per-mile rate

D = RTM performed in regulated grain movement / RTM performed in Canada

E = overhead + contribution ratio

b) where regulated per-diem data is available per car I.D., the appropriate adjustment should be calculated as:

Positive Weight = A x C x E

where

A = Number of cars

C = (Sum of annual per-diem rate + per-mile rate) (regulated Canada)

E = overhead + contribution ratio

Option 2: Pool replacement from U.S. subsidiary

[187] CP proposes that, for the option where the railway company obtains a pool of cars from a U.S. subsidiary, the appropriate adjustment should be:

Positive Weight = B x C x D x E

where:

B = Average government hopper car capacity / average U.S. subsidiary car capacity

C = Sum of annual (per-diem rate + per-mile rate) x MIN (1, car-days performed by withdrawn cars / car-days performed by U.S. subsidiary cars)

D = RTM performed in regulated grain movement / RTM performed in Canada

E = overhead + contribution ratio

[188] Finally, CP explains that its factor E in all options represents an overhead plus contribution ratio. CP claims that the overhead should be set at 11 percent to cover not just negotiating and administering the lease agreements, but also the full activities in UCA 800 (General Railway Administration) and UCA 500 (Equipment Administration). In addition, CP suggests that a system contribution to fixed costs of 24 percent must be added. That is, CP claims that its factor E must be set at 35 percent.

Analysis of CP’s proposed methodology

General approach

[189] CP presents two ways of replacing withdrawn government hopper cars, and presents the proposed adjustments as applying to one alternative or other. CP does not indicate whether it has used or intends to use either scenario exclusively or if it reserves the flexibility to use one option to replace a set of withdrawn cars in year, and the option for other replacements in another year, or both options for different sets of replacement cars in the same year. Should CP elect to use both options at the same time, it is unclear what portion of the total withdrawn capacity would be replaced by one option or the other, thus making calculation of the adjustments costs difficult.

One-to-one car replacement

[190] In CP’s opinion, the factor the Agency is proposing to equalize the carrying capacity would represent “double counting the weight capacity which is already reflected in CP’s decision to obtain a specific number of cars.” However, CP’s proposal does not explain what “one-to-one car replacement” means in practice as it does not explain whether it means equal numbers of withdrawn and replacement cars of the same carrying capacity, or different numbers of withdrawn and replacement cars but with equal total carrying capacity, or something else.

[191] The cost adjustment formula for the “one-to-one car replacement,” proposes that “instead of a car capacity ratio, the number of replacement cars included should be limited such that the total replacement capacity (tonnes) is equivalent to that of the cars being replaced.” In effect, CP seems to be proposing that the Agency should, in ways that are not apparent in the formula, impose a limit on the number of replacement cars to fit the total capacity withdrawn. This seems to be an unwarranted intrusion on the ability of the prescribed railway company to purchase the number of cars and to utilize them as it sees fit to best meet all its common carrier obligations.

[192] Suppose, for example, CP has 100 government hopper cars each of 100‑tonne capacity withdrawn from service, representing a total of 10,000 tonnes of carrying capacity that needs to be replaced. CP’s proposal would appear to require the Agency to prescribe an arbitrary limit on the number of cars that CP must obtain to provide the 10,000‑tonne capacity.

[193] By contrast, the Agency’s proposed methodology allows CP to obtain any number of replacement cars it thinks best to meet its integrated fleet planning needs, but to limit the replacement cost charged under paragraph 151(4)(c) of the CTA to the total carrying capacity withdrawn. Thus, if CP chooses to replace the withdrawn capacity with 100 cars of 120 tonnes each, resulting in a total carrying capacity of 12,000 tonnes, a factor of 10,000/12,000 or 5/6 would be applied to the total replacement cost to reflect the total capacity withdrawn.

[194] CP’s proposed “one-to-one car replacement” formula, if accepted, would require the Agency to either impose an arbitrary number of replacement cars on CP, or accept whatever number of cars CP chooses to use to replace the withdrawn cars without question, which would not conform with good regulatory practice.

[195] Further, CP’s factor C proposed in its formula does not specify whether per-diem data for specific car I.D.s is known or unknown.

Pool replacement from U.S. subsidiary

[196] CP’s proposed adjustment formula has many serious deficiencies:

• there is no number of cars that is clearly identified so there is no way to verify the total carrying capacity obtained relative to the total carrying capacity withdrawn;
• its factor B, as it simply represents the ratio of average car capacities for the withdrawn and replacement cars, is meaningless for cost estimation purposes without the relative numbers of withdrawn and replacement cars;
• its factor C is described as “the sum of daily lease rates” which is meaningless when the number of cars over which the lease rates are summed is unknown; and,
• the ratio of the car-days of withdrawn cars relative to car-days of U.S. subsidiary cars is also meaningless when the number of U.S. subsidiary cars in the pool (whose car-days are to be summed) is also unknown.

Overhead + contribution factor

[197] CP’s proposed factor E, which it calls an “overhead + contribution ratio” does not reflect the purpose of Factor E, i.e., compensation for the marginal costs incurred to negotiate and administer the agreements to obtain replacement hopper cars. The long-standing practice of the Agency in estimating the costs incurred by railway companies for negotiation and administration of all contractual agreements is 3 percent for contract amounts up to $50,000, 2 percent for contract amounts of $50,000 to $100,000, and 1 percent for amounts above $100,000.

[198] These percentages are set-out in the Guide to Railway Charges for Railway Construction and Maintenance published by the Agency annually, and no concerns have been raised by CN or CP. While the Agency expects the negotiation and administration of car lease agreements to involve amounts far in excess of $100,000, the Agency nevertheless approved in Decision No. 8‑R-2013 a contract administration fee of 2 percent, double the usual rate, for Factor E. CP’s proposal of an 11 percent “overhead” charge for the contract administration cost is without foundation.

[199] The Agency considers that CP’s proposal for an additional 24 percent to Factor E as “contribution to fixed costs” does not align with the nature and purpose of the contribution to fixed costs. This is because the contribution to fixed cost is applied to rates determined by the Agency for a rail movement or transportation service performed by a railway company, where the Agency’s regulatory costing model has been used to determine the variable costs incurred by the railway company in the performance of that movement or service. The contribution to fixed cost is applied to the estimated variable cost, to allow the railway company to recover both its variable and fixed costs of performing the movement or service.

[200] A contribution to fixed costs is meaningless when applied to the labour, fuel, material, or capital inputs used by the railway company to produce rail movements or other transportation services. In effect, if the Agency were to apply the contribution to fixed costs to an input being obtained, as suggested by CP, it would result in the fixed costs contribution being counted twice, i.e., first as a contribution towards the acquisition of the input, and then, subsequently as another contribution when the input is actually put into use.

CN’s response

[201] CN’s proposed methodology to estimate the cost adjustment to be made to the VRCPI follows closely the adjustment formula proposed by the Agency, with the exception of the calculation of the annual cost incurred to obtain the replacement cars (Factor C in the formula); and, the regulated grain utilization ratio (Factor D).

[202] CN’s view is that the proposal in the staff Consultation Document to prorate annual costs by the number of months in use, and then also prorate for regulated grain usage in Factor D will double‑count the same adjustment. Instead, CN proposes that the annual cost per car be determined for the whole year and then prorated to reflect the regulated grain usage ratio of the withdrawn cars, not the replacement cars.

Analysis

[203] The Agency is of the opinion that the staff proposed method for the calculation of Factor C in the staff Consultation Document is appropriate. The adjustment for the number of months reflects the proportion of the year for which the yearly costs are applicable ($400 per car per year would only be $200 for the year in which these cars would be obtained mid-year). The adjustment for the utilization achieves a different purpose, namely to ensure that the costs recognized by the Agency only reflect the cost incurred to replace capacity lost in regulated grain service.

[204] For most years the replacement cars would have been in use the entire crop year, so pro-rating would have no effect. The Agency’s proposal to pro-rate the annual cost to reflect the days or months during which the replacement cars were available during the crop year would have an effect only in the year of initial replacement, if the replacement of the government hopper cars occurred after the start of the crop year.

[205] The Agency is of the opinion that CN’s proposal to calculate the Factor C as the full annual cost would cause an over-estimate of the cost incurred in the first year of replacement, and directs that pro-rating be applied as needed. The Agency notes that this may require different adjustments to be applied in the first year of replacement and in the subsequent years of operation of the replacement cars.

[206] CN proposes that the regulated grain usage ratio (Factor D) be based on the historical ratio of the withdrawn cars and roughly in line with the crop size used to convert the dollar adjustment into a VRCPI percentage adjustment. The Agency has given serious consideration to this proposal from the viewpoint of the argument submitted by both railway companies regarding their integrated fleet usage across North America.

[207] According to both CN and CP, although a given set of cars may be obtained to replace the withdrawn government hopper cars, the obtained cars would function as part of an integrated fleet. Thus, if the designated replacement cars are utilized less than the withdrawn cars in moving regulated grain, the slack would be taken up by other cars in the fleet, to meet the full grain movement obligations. Therefore, the staff Consultation Document’s formulas focus on calculating the regulated grain ratio for only the designated replacement cars would understate the total cost incurred to replace withdrawn government hopper cars.

[208] The Agency already determined that the actual use of the cars is irrelevant. However, it is not for the same reasons as argued by CN and CP. Once the Agency has characterized that the capacity has been obtained as a result of the withdrawal of car capacity in regulated grain, its mandate is limited to determining the cost incurred by the prescribed railway company for that capacity, irrespective of its use. The Agency notes that the withdrawn cars could likewise be used by the prescribed railway company in any way it wishes. The Agency’s mandate is to ensure that the prescribed railway companies are properly compensated for car capacity that they have obtained as a result of the act of withdrawal, and no more.

Findings

[209] The Agency rejects CP’s proposed “one-to-one car replacement” formula as well as its “car pool replacement from U.S. subsidiary” formula. The Agency further rejects CN’s proposal to remove pro-rating of annual costs in Factor C. However, the Agency accepts CN’s proposal to replace the regulated grain usage ratio of replacement cars (Factor D) with the five-year historical average usage of government hopper cars in regulated grain service. The five-year historical average usage will be based on the last five years prior to the date of withdrawal.

[210] The recommended Positive weight formula may be summarized as:

POSITIVE WEIGHT

Cost = A x B x C x D x E

where:

A number of replacement cars.

B carrying capacity ratio

= total carrying capacity (tonnes) of withdrawn cars/ total carrying capacity (tonnes) of replacement cars; if B> 1, then B is set to 1.

C Defined as below

	Lease by the prescribed railway company	Purchase by the prescribed railway company	Commitment agreement with U.S. subsidiary
Prescribed Railway Company	Annual Lease Cost (Note 1)	Annual depreciation cost + Cost of Capital (Note 1)	Annual lease cost based on the leased car price index (Note 1)

Note 1: When the lease or commitment agreement comes into effect or expires during a crop year then the annual lease cost per car will be prorated for the months during which the lease and or commitment agreement were in effect. Similarly, annual cost of capital and depreciation costs for cars purchased during the crop year will be pro-rated for the months when the purchased cars were in use.

D five-year historical average usage of the government hopper cars in regulated grain service. Based on the last five years prior to date of withdrawal.

E contract administration cost, recommended at 2 percent.

NEGATIVE WEIGHT

Staff Consultation Document

[211] In the staff Consultation Document, Agency staff proposed to continue to apply a negative weight adjustment in accordance with the quantitative approach set out in 8‑R‑2013">Decision No. 8‑R‑2013.

Industry comments

[212] CN states that the cars they obtained from its subsidiaries on a per-diem basis have similar characteristics with those on a net lease (i.e., CN is responsible for their maintenance) and as such a negative weight adjustment is not necessary. In other words, as the cars being replaced were also obtained on a net lease basis (i.e., CN was also responsible for their maintenance), there would be no need for a negative weight adjustment.

[213] CP takes a totally different position. It states that per-diem arrangements are to be treated as full service leases (i.e. CP is not responsible for the maintenance of these cars) and as a result require a negative weight adjustment (to remove the maintenance costs that are already in the base) and this adjustment should be calculated as described in 8-R-2013">Decision No. 8-R-2013.

Analysis and findings

[214] The Agency is of the opinion that in the case of a commitment agreement with a U.S. subsidiary a negative cost weight adjustment should be made. This is warranted because the 2014-2015 and 2015-2016 leased car price index reflects lease agreements with full service; hence, the proxy used for the annual lease cost of the designated replacement cars is inclusive of maintenance costs. For cars leased by the prescribed railway company, the terms of these leases (triple net or full service lease) should determine whether or not a negative weight adjustment should be included to account for avoided maintenance costs.

[215] Factor A of the negative weight is defined as follows in 8-R-2013">Decision No. 8-R-2013:

A Already defined in the positive weight

[216] Where Factor A of the positive weight in 8-R-2013">Decision No. 8-R-2013 is defined as:

A The number of hopper cars obtained up to but no more than the number of government hopper cars returned.

[217] For clarity purposes, the Agency amends Factor A to reflect the number of replacement cars and adds Factor B, the carrying capacity ratio in the negative weight model.

[218] The purpose of this amendment is to ensure that the determination of the negative weight will not be calculated based on a number of replacement cars that exceed the number of withdrawn cars as the multiple of Factors A times B will not exceed the number of the withdrawn government hopper cars.

[219] Factors B, C, D and E of the negative weight as established in Decision No. 8-R-2013 are also renumbered to C, D, E and F to accommodate the addition of the carrying capacity ratio factor (new Factor B).

[220] The recommended Negative weight formula may be summarized as:

NEGATIVE WEIGHT

Applicable if lease and commitment agreements are on a full lease basis.

Negative weight = A x B x C x D x E x F

where,

A Number of replacement cars

B carrying capacity ratio

total carrying capacity (tonnes) of withdrawn cars/ total carrying capacity (tonnes) of replacement cars; if B> 1, then B is set to 1.

The multiple of A times B not to exceed the number of withdrawn cars

C 2007-2008 Government hopper car maintenance cost per RTM represents the maintenance costs per RTM used in calculating the “actual” hopper car maintenance costs in Decision No. 67-R-2008 . This amount is based on the specific hopper car fleet in question assigned to the prescribed railway company and is adjusted to remove maintenance still performed by the railway company (i.e., gates and hatches) Note that the figure set out in Decision 67-R-2008 includes overhead costs and a contribution level of 3.45 percent, so there is no need to establish a distinct scaling up factor in the formula.

D Specific maintenance inflation represents the estimated inflation related to freight car maintenance from 2007-2008 to the relevant crop year, consistent with the Agency’s methodology set out in the 2008 Decision.

E Specific freight car productivity

Represents the estimated productivity gains (or losses) in freight cars from 2007-2008 to the relevant crop year, consistent with the Agency’s methodology set out in the 2008 Decision.

F Projected RTM

Represents the estimated RTM associated with the replacement hopper cars.

[221] Based on the above amendments, the Agency, pursuant to section 32 of the CTA, finds that there has been a change in facts and circumstances since the issuance of Decision No. 8-R-2013 and varies that Decision to reflect the amendments set out above.

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APPENDIX

Below is a summary of the Canadian Transportation Agency (Agency) adopted criteria and the amended positive and negative weight formulas.

METHODOLOGICAL FRAMEWORK

General criteria

Criterion 1 – Third-party evidence in support of the withdrawal of government hopper cars

[1] The prescribed railway company is required to provide to the Agency third-party evidence that indicates how many government hopper cars were withdrawn from service, when these cars were withdrawn, and lastly the car identification number for each of the withdrawn cars.

[2] Adequate third-party evidence constitutes an official letter from the rightful owner of the withdrawn hopper cars (i.e., federal government, provincial government, Canadian Wheat Board) where the owner of the cars would attest to the Agency the above required information.

[3] This information will ensure that paragraph 151(4)(c) of the Canada Transportation Act (CTA) has been triggered and will facilitate the calculation of the carrying capacity withdrawn, which will set the maximum carrying capacity to be replaced.

[4] The Agency will examine future applications/submissions for compliance with this criterion. Applications/submissions that are non-compliant with the adopted criterion will be deemed incomplete and returned to the applicant.

Criterion 2 - new arrangements entered into by the prescribed railway company

[5] The Agency accepts the following arrangements as means by which a prescribed railway company has obtained replacement hopper cars for the purposes of paragraph 151(4)(c) of the CTA:

1. Hopper cars purchase agreement between the prescribed railway company and a third party;
2. Hopper cars lease agreement between the prescribed railway company and a third-party lessor;
3. Hopper cars obtained via a written agreement (commitment agreement) between the prescribed railway company and its U.S. subsidiary company for the commitment of a specific number of the U.S. subsidiary’s identified owned or leased hopper cars (designated replacement cars) in Canadian regulated grain service for a minimum of one year.

[6] Further, the Agency will accept to make an adjustment, if the following conditions are met:

Lease or purchase agreements (Items 1 and 2)

[7] Contractual arrangements for the lease or purchase of hopper cars may be entered into by the prescribed railway company at any time.

[8] However, where the purchase or lease agreements pre-date the withdrawal of government hopper cars, such agreements will be accepted provided that the following conditions are met:

1. The prescribed railway company has notified the Agency of its intent to enter into an arrangement to obtain cars to replace government hopper cars not yet withdrawn and of the expected date of withdrawal;
2. The prescribed railway company has provided the Agency with third-party evidence that the hopper cars have been withdrawn, including the number of cars withdrawn and the effective date of the withdrawal of each car and car I.D.

[9] The adjustment to the VRCPI for the replacement costs incurred for arrangements that pre-date the withdrawal of the government hopper cars will take effect on or after the withdrawal as determined by the Agency. The cost adjustment under paragraph 151(4)(c) of the CTA will not take effect before the withdrawal date of the government hopper cars.

[10] The Agency’s decision to allow cost adjustments to be made for cars obtained in anticipation of the withdrawal of government hopper cars will be based on the facts of each situation, in particular, having regard to whether the Agency is satisfied that the prescribed railway company has established a sufficient connection between the acts of withdrawing and obtaining of cars. Should the prescribed railway company fail to notify the Agency of its intent to enter into a contract to obtain replacement hopper cars in advance of the withdrawal of government hopper cars, or should there be a long lag between the decision to acquire replacement hopper cars and the withdrawal of government hopper cars, the Agency may consider that the conditions for making an adjustment have not been met and refuse to make such an adjustment.

Commitment agreement (Item 3)

[11] Commitment agreements that may be accepted must:

1. be made in writing
2. be entered into by the prescribed railway company and its U.S. subsidiary prior to the actual use of the designated replacement cars in a given crop year
3. provide specific car identification numbers of the U.S. subsidiary cars committed for use in Canadian service in replacement of the withdrawn government hopper cars (designated replacement cars)
4. specify a commitment of the U.S. subsidiary to make the designated replacement cars available for use by the prescribed railway company in Canadian service for a minimum of one year
5. Specify a commitment of the prescribed railway company to use the designated replacement cars in a manner similar to the average historical usage of the government hopper cars in regulated grain service in the year during which the agreement is in effect.

Criterion 3 - carrying capacity of replacement hopper car

[12] When a hopper car obtained is identified as a replacement of a government hopper car, the carrying capacity (tonnes) of the obtained car will count towards the total carrying capacity that the prescribed railway company is entitled to replace for the purposes of paragraph 151(4)(c) of the CTA, regardless of the subsequent usage of the asset.

Criterion 4 - maximum carrying capacity to be replaced

[13] The carrying capacity of the cars obtained that will be taken into account shall not exceed the carrying capacity of the cars withdrawn from service. Where the carrying capacity obtained exceeds the carrying capacity withdrawn, the Agency will apply an equivalency factor to make the obtained capacity equal to the withdrawn capacity (Factor B of the positive weight formula).

Criterion 5 - historical average usage of government hopper cars in a prescribed railway company’s fleet and monitoring requirements for designated cars obtained via commitment agreements with a U.S. subsidiary

[14] For replacement cars obtained via lease or purchase agreements of the prescribed railway company with third parties, Factor D of the positive weight will be equal to the five-year historical average usage of the original government hopper car fleet in regulated grain service. This Factor will remain unchanged for the duration of the lease term in the case of lease agreements or until the disposal or retirement of the replacement cars in the case of purchase agreements unless replacement hopper cars have been obtained via a commitment agreement, in which case, the monitoring requirements may result in an adjustment that would vary Factor D.

[15] For replacement cars obtained via commitment agreements between the prescribed railway company and its U.S. subsidiary, Factor D will be equal to the five-year historical average usage of the original government hopper car fleet in regulated grain service for the first three years.

[16] During this triennial period, the Agency will monitor the usage of all government hopper cars (comprising all replacement hopper cars plus the remaining government hopper cars), and expects that the average annual actual usage of these cars in regulated grain service will reasonably compare to the five-year historical average usage of the original government hopper car fleet, in regulated grain service, in any given crop year.

[17] At the end of the triennial period, the Agency will compare the five-year historical average usage of the original government hopper car fleet with the average annual usage of the combined replacement hopper cars and remaining government hopper cars and determine whether an adjustment to Factor D is warranted. If the Agency determines that an adjustment to Factor D is warranted then the new Factor D will be applied to all categories of replacement hopper cars and retained until the next triennial review.

[18] The Agency notes that monitoring of the subsequent usage of all replacement and remaining government hopper cars will only be warranted when designated replacement cars have been obtained via a commitment agreement between the prescribed railway company and its U.S. subsidiary.

Criterion 6 - substitution of replacement cars

[19] When a hopper car is accepted by the Agency as a replacement hopper car for the purpose of an adjustment pursuant to paragraph 151(4)(c) of the CTA, that car retains its characterization as a “replacement hopper car” for the purpose of the determination of the annual VRCPI, until the termination of the lease or commitment agreement by which the prescribed railway company obtained the car, or in the case of purchase, until the disposal or retirement of the asset from service. That is, no substitutions of replacement cars are allowed while an arrangement for which an adjustment has been made is still in effect.

Criterion 7 - renewal arrangements for replacement cars

[20] When an arrangement for replacement cars terminates, the prescribed railway company will be eligible for an adjustment again if it enters into a new arrangement or renews an existing arrangement (lease or commitment).

[21] The prescribed railway company would have to file a new application with the Agency that would meet the requirements of all the criteria set out in the Decision for the determination of an adjustment under paragraph 151(4)(c) of the CTA. The resulting adjustment will come in to effect as determined by the Agency.

POSITIVE WEIGHT

[22] Cost = A x B x C x D x E

where:

A number of replacement cars.

B carrying capacity ratio

= total carrying capacity (tonnes) of withdrawn cars/ total carrying capacity (tonnes) of replacement cars; if B> 1, then B is set to 1.

C Defined as below

	Lease by the prescribed railway company	Purchase by the prescribed railway company	Commitment agreement with U.S. subsidiary
Prescribed Railway Company	Annual Lease Cost (Note 1)	Annual depreciation cost + Cost of Capital (Note 1)	Annual lease cost based on the leased car price index (Note 1)

Note 1: When the lease or commitment agreement comes into effect or expires during a crop year then the annual lease cost per car will be prorated for the months during which the lease and/ or commitment agreement were in effect. Similarly, annual cost of capital and depreciation costs for cars purchased during the crop year will be pro-rated for the months when the purchased cars were in use.

D five-year historical average usage of the government hopper cars in regulated grain service. Based on the last five years prior to date of withdrawal.

E contract administration cost, recommended at 2 percent

NEGATIVE WEIGHT

Applicable if lease and commitment agreements are on a full lease basis.

[23] Negative weight = A x B x C x D x E x F

where,

A Number of replacement cars

B carrying capacity ratio

total carrying capacity (tonnes) of withdrawn cars/ total carrying capacity (tonnes) of replacement cars; if B> 1, then B is set to 1.

The multiple of A times B not to exceed the number of withdrawn cars

C 2007-2008 Government hopper car maintenance cost per RTM represents the maintenance costs per RTM used in calculating the “actual” hopper car maintenance costs in Decision No. 67-R-2008 . This amount is based on the specific hopper car fleet in question assigned to the prescribed railway company and is adjusted to remove maintenance still performed by the railway company (i.e., gates and hatches) Note that the figure set out in Decision 67-R-2008 includes overhead costs and a contribution level of 3.45 percent, so there is no need to establish a distinct scaling up factor in the formula.

D Specific maintenance inflation represents the estimated inflation related to freight car maintenance from 2007-2008 to the relevant crop year, consistent with the Agency’s methodology set out in the 2008 Decision.

E Specific freight car productivity

Represents the estimated productivity gains (or losses) in freight cars from 2007-2008 to the relevant crop year, consistent with the Agency’s methodology set out in the 2008 Decision.

F Projected RTM

Represents the estimated RTM associated with the replacement hopper cars.