Decision No. 348-R-1989

July 12, 1989

File Nos. 39310.163
39310.178
39310.233
39310.261
39310.262
39310.301
39310.306

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HEARD in Charlottetown, Prince Edward Island, on April 24, 25 and 26, 1989 and in Summerside, Prince Edward Island, April 27, 1989.

BEFORE:

E.J. O'Brien Member, National Transportation Agency

K. Penner Member, National Transportation Agency

APPEARANCES:

A. Jenkins for the National Transportation Agency

T. Hall for the Canadian National Railway Company

W.G. Lea, Q.C. for the Province of Prince Edward Island

The Honourable S. Lee Minister of Transportation-Province of New Brunswick

P.A. MacNutt, Q.C. for the Province of New Brunswick

M. Ledwell for the City of Charlottetown

D. Flanagan

R. Brown

D.F. Riopelle for C-I-L INC.

W. Sabine for Westisle Farm Supply Ltd.

D. Wood for Malpeque Fertilizers Ltd.

R.A. Bennett for the United Transportation Union

B.J. McInnis for the Brotherhood of Maintenance of Way Employees

D.Vessey

H. MacKinnon for The Greater Charlottetown Area Chamber of Commerce

M. Campbell

G. Macphee for Greenisle Management, Inc.

D.A. Scales for Island Fertilizers Ltd.

J. Rankin for Atlantic Warehousing Ltd.

G. Swallow for Brookville Manufacturing Company

R.W. Perry for Island Rail Foundation

W. Easter for the National Farmers Union

J. Rodd for the National Farmers Union - District 1, Region 1

U. Laughlin

J.C. MacLellan (Mrs.) Public Interest

W. Lacey Public Interest

J.P. Hendricken Public Interest

M. Boyd for The Social Action Committee

St. C. Duffy

HISTORY OF THE APPLICATIONS

On November 1, 1972, the Canadian National Railway Company (hereinafter CN) applied to the Canadian Transport Commission (hereinafter the CTC) for authority to abandon the operation of the Souris Subdivision (Elmira Spur). Similarly, applications for abandonment were received August 3, 1976 for the Murray Harbour Subdivision, January 23, 1979 for the Montague Subdivision, October 17, 1983 for both the Souris Subdivision and the Kensington Subdivision (Linkletter to Tignish). Pursuant to various orders, the Railway Transport Committee ordered CN to continue the operation of these Subdivisions. On January 1, 1988, the National Transportation Act, 1987, R.S.C. 1985, c. 28 (3rd Supp.) (hereinafter the NTA, 1987) came into effect, and these applications were required to be reconsidered under section 171 of the NTA, 1987. On December 6, 1988 CN applied to the National Transportation Agency (hereinafter the Agency), pursuant to section 160 of the NTA, 1987, for authority to abandon the Borden, Kensington (Emerald Junction to Linkletter) and Tormentine Subdivisions.

HISTORICAL SUMMARY

Under the Statutes of the Colony of Prince Edward Island, provisions were made for the construction of a railway. The Dominion Government took over responsibility for its operation when the Island Colony joined Confederation on July 1, 1873. The Souris Subdivision was opened January 4, 1875.

Authorization to build the Elmira Spur from Harmony Junction to Elmira was granted in 1908 and construction of the line was completed by the Canadian Government Railways in 1912.

In 1871, authorization was granted to construct a narrow gauge railway between Alberton and Georgetown. The Dominion Government acquired the Georgetown Subdivision from Mount Stewart to Georgetown in 1873 and in 1875 this line was opened for service.

The Montague Subdivision from Montague Junction to Montague was constructed by the Canadian Government Railways and was opened in 1906. On October 27, 1968 the Georgetown Subdivision from Mount Stewart Junction to Montague Junction plus the original Montague Subdivision from Montague Junction to Montague became known as the Montague Subdivision. At the same time, that portion of the former Georgetown Subdivision from Montague Junction to Georgetown was renamed the Georgetown Spur.

The Murray Harbour Subdivision was constructed in 1905. In 1930 the Lake Verde Subdivision was constructed from Maple Hill to Lake Verde to re-route traffic around the Hillsborough River Bridge which was unsafe to accommodate heavier equipment. Subsequently the trackage from Maple Hill through Lake Verde to Murray Harbour became known as the Murray Harbour Subdivision and the former portion of the Subdivision between Lake Verde and Mount Herbert became known as the Mount Herbert Spur.

In 1871, the Kensington Subdivision was constructed by the Prince Edward Island Railway. The Dominion Government took over responsibility for its operation when the Island Colony joined Confederation on July 1, 1873.

In 1871, under authority from Prince Edward Island's Colonial Government, the Borden Subdivision (from Charlottetown to Emerald Junction) was constructed by the Prince Edward Island Railway. Construction of the section of the Borden Subdivision between Emerald Junction and Borden was completed in 1919 in conjunction with the inception of year-round ferry service.

The Tormentine Subdivision was built by the New Brunswick and Prince Edward Island Railway Company having been incorporated to extend the Intercolonial Railway from Sackville New Brunswick to Cape Tormentine in 1886. An extension of the line was to be built and completed in 1919 from Cape Tormentine to the Prince Edward Island Ferry Terminal by order of the Dominion Government also in conjunction with the implementation of year-round ferry service from Cape Tormentine to Borden.

On January 20, 1923, CN was entrusted to manage and operate all of these lines.

PHYSICAL CONDITION

Generally, the condition of the branch lines can be described as being in fair to poor condition. The Souris, Montague, Murray Harbour and Kensington Subdivisions, and Elmira Spur are comprised of rail ranging from 56 to 85 pounds per yard in fair to poor condition with pit-run ballast also in fair to poor condition. The Borden and Tormentine Subdivisions are comprised primarily of 85 to 100 pound per yard rail in fair to poor condition with fair to poor pit run ballast. The condition of the numerous bridges located on these Subdivisions ranges from good to bad. The majority of the track ties are untreated and are in fair to poor condition with an average age ranging from 10 to 40 years.

OPERATIONAL DATA

Present train service is provided by a way-freight operating out of Borden on an as and when required basis servicing various points in the Province of Prince Edward Island. Since 1986, there have been no train operations on the Elmira Spur, the Murray Harbour Subdivision or the portion of the Souris Subdivision from York to Souris. There have been no train operations on the Montague, Souris (Royalty Junction to York) and Kensington (Linkletter to Tignish) Subdivisions since December 1987. Any traffic offered on these lines since the above dates has been transshipped to alternative rail points at CN's expense. The Tormentine Subdivision is serviced by trains operating out of Moncton once a week on Sunday night when railcars are ferried over and returned on the midnight ferry crossing.

The maximum allowable gross weight per car on the Souris, Souris/Elmira Spur, Montague, Murray Harbour and Kensington (Linkletter to Tignish) Subdivisions ranges between 142,000 and 177,000 pounds. The maximum weight per car allowed on the Kensington (Emerald Junction to Linkletter), Borden and Tormentine Subdivisions ranges between 220,000 and 263,000 pounds.

The maximum permissible train speeds on these Subdivisions range from 15 to 30 miles per hour.

TRAFFIC

Subdivision	1985 IN	1985 OUT	1985 TOTAL	1986 IN	1986 OUT	1986 TOTAL	1987 IN	1987 OUT	1987 TOTAL
Souris	116	186	302	106	45	151	2Note 1	4Note 1	6Note 1
Elmira Spur	0	3	3	0	0	0	0	0	0
Montague	245	41	286	229	15	244	117	3	120
Murray Harbour	6	4	10	1	0	1	2Note 1	0	2Note 1
Kensington (M. 19.45 M. 84.61)	164	554	718	199	81	280	77	17	94
Kensington (M. 0.00 M. 19.45)	933	513	1446	920	122	1042	623	73	696
Borden	1180	361	1541	1074	74	1148	662	86	748
Tormentine	5	28	33	4	15	19	1	0	1

NOTE:

No traffic was reported by CN for the year 1988 in respect of Souris/Elmira Spur/Montague/Murray Harbour/Kensington (mileage 19.45 to mileage 84.61), subsequent to December 1987.

MATTERS CONSIDERED AND FINDINGS:

Constitutional Issue

The Province of Prince Edward Island (hereinafter the Province) raised the argument that the Agency does not have the jurisdiction to make the order of abandonment sought in CN's application because to do so would be contrary to the Constitution of Canada.

The Province argued that the Prince Edward Island Terms of Union of 1873 have constitutional status and any statute that is inconsistent with them, is to the extent of the inconsistency, ultra vires. The Province submitted that the Terms of Union imposed upon Canada the obligation to operate the railway on Prince Edward Island and to continue to operate the Tormentine Subdivision in order to keep the province in continuous communication with the railway system of the Dominion. The relevant paragraphs from the Prince Edward Island Terms of Union are:

"That the Dominion Government shall assume and defray all the charges for the following services, viz:-...

Efficient Steam Service for the conveyance of mails and passengers, to be established and maintained between the Island and the mainland of the Dominion, Winter and Summer, thus placing the Island in continuous communication with the Intercolonial Railway and the railway system of the Dominion; ...

That the railways under contract and in course of construction for the Government of the Island, shall be the property of Canada;"

The Province supported its argument based on the following premises: that the railway obligation and the obligation to maintain the Island in continuous communication with the Canadian railway system as set out in the Terms of Union, cannot be read in isolation from one another; the obligations cannot be read without regard to the fact they are expressed in political language and not technical legal language; the best evidence of the correct interpretation of the obligations are expressed in the conduct of the parties; the Terms of Union are subject to the Interpretation Act, R.S.C. 1985, c. I-21 and section 10 of that Act states that the law is always speaking:

"... so that effect may be given to the enactment and every part thereof according to its true spirit, content and meaning."

The Province reviewed some of the cases and material filed, in support of its arguments. In particular, the Province referred to the case Her Majesty the Queen in the right of the Province of Prince Edward Island v. Her Majesty the Queen in the right of Canada (hereinafter the Ferry Case) which was heard in Federal Court, Trial Division by Mr. Justice Cattanack on January 28, 1976 and in the Federal Court of Appeal by Chief Justice Jackett, et al, with judgment rendered on December 5, 1977. This case reviewed the Terms of Union and other relevant documents with a view to determining the legal obligations of the Dominion as a result of a strike that stopped ferry service between Cape Tormentine, New Brunswick and Borden, Prince Edward Island. The Federal Court of Appeal upheld the decision of the Trial Division that the Federal Government was responsible for the operation of the ferry and therefore responsible to provide uninterrupted service to the mainland.

The Province submitted that this case and other relevant Privy Council orders and documents supported its argument that the express purpose of the continuous communication provision was to place the Prince Edward Island in continuous communication with the Intercolonial Railway and the railway system of the Dominion. The Province submitted that railway service will end if an abandonment order is issued by the Agency, and that this would be inconsistent with the Terms of Union.

CN argued that the Agency has jurisdiction to proceed with the abandonment applications as filed and that there is no inconsistency with the Constitution Act, 1867, 30 & 31 Victoria, c. 3 (U.K.) to prevent the Agency's jurisdiction. CN submitted that the continuous communication obligation referred to in the Terms of Union has been a problem but that it was clearly interpreted in the Ferry Case to refer to the ferry service. CN compared section 4 of the British Columbia Terms of Union with the above cited sections of the P.E.I. Terms of Union and submitted that the word "communication" in this context means a steam vessel or ship. CN also submitted that if any obligation for "communication" to the Intercolonial Railway and the railway system in Canada exists, this communication would be effected by the CN intermodal service in existence today.

CN argued that the Dominion had acquired the subject railways but that there is no obligation in perpetuity for maintenance or continuation of that service. CN submitted that there is clearly no federal obligation to continue a rail service in Prince Edward Island.

The Agency has reviewed the arguments presented and the materials filed. The Agency has not been persuaded by the Province of the obligation to operate the railway in Prince Edward Island or of the obligation to continue to operate the Tormentine Subdivision in order to keep the Province in continuous communication with the railway system of the Dominion.

First, the meaning of the term "continuous communication" must be addressed. The phrase "steam communication" set out in paragraph 4 of the British Columbia Terms of Union (1871) indicates the use of the word "communication" at that time to mean "ship or vessel". Further, pursuant to the Ferry Case the words "continuous communication" as used in the Prince Edward Island Terms of Union (1873) must mean continuous or uninterrupted ferry service between the Island and the mainland.

In addition, while the Tormentine Subdivision was built in 1886, no railway link was built from Cape Tormentine to the Prince Edward Island ferry terminal until 1919. This would support the position that it was continuous ferry service that was required to keep the Island in continuous communication with the Intercolonial Railway and the railway system of the Dominion, and not a railway link.

Secondly, the Prince Edward Island Terms of Union conveyed ownership of the railways in Prince Edward Island to the Government of Canada. There was no requirement for the Government to operate or maintain these railways any differently than any other railways in Canada. As such, the railways in Prince Edward Island are subject to all railway laws and regulations within federal jurisdiction. One of the provisions in the NTA, 1987 allows the railway to apply to abandon the operation of branch lines, subject to certain conditions.

Consequently, the Agency finds that it has the jurisdiction under the NTA, 1987 to order abandonment of the operation of the branch lines on Prince Edward Island.

Actual Losses Incurred

In accordance with section 163 of the NTA, 1987 the Agency has reviewed CN's statements of actual losses for the subject lines in respect of the prescribed years 1985, 1986 and 1987; has determined the amounts of CN's actual losses attributable to the branch lines in each of the prescribed accounting years; and on April 11, 1989 as amended by an erratum dated April 20, 1989 issued public notice of the determined actual losses for the subject lines. No persuasive evidence was presented at the hearing to require revision of those determinations. These actual losses as determined by the Agency pursuant to the provisions of the Railway Costing Regulations SOR/80-940 and section 157 of the NTA, 1987, are as follows:

Souris Subdivision

Year	Total Costs $	Revenues $	Actual Losses $
1985	1,032,211	516,196	516,015
1986	753,867	226,459	527,408
1987	245,475	23,325	222,150

Souris Subdivision / Elmira Spur

Year	Total Costs $	Revenues $	Actual Losses $
1985	29,011	6,912	22,099
1986	20,972	210	20,762
1987	19,188	242	18,946

Montague Subdivision

Year	Total Costs $	Revenues $	Actual Losses $
1985	574,799	461,712	113,087
1986	586,262	410,715	175,547
1987	428,242	205,977	222,265

Murray Harbour Subdivision (including the Mount Herbert Spur)

Year	Total Costs $	Revenues $	Actual Losses $
1985	95,215	37,700	57,515
1986	47,162	2,083	45,079
1987	43,595	4,800	38,795

Kensington Subdivision (Linkletter to Tignish)

Year	Total Costs $	Revenues $	Actual Losses $
1985	1,811,200	1,420,712	390,488
1986	968,318	451,826	516,492
1987	611,866	228,597	383,269

(a) Kensington Subdivision (Emerald Junction to Linkletter)

Year	Total Costs $	Revenues $	Actual Losses $
1985	3,098,300	3,863,104	(764,804)
1986	2,412,080	2,705,749	(293,669)
1987	1,880,934	1,995,697	(114,763)

(b) Borden Subdivision

Year	Total Costs $	Revenues $	Actual Losses $
1985	3,289,918	3,398,268	(108,350)
1986	2,687,071	2,408,137	278,934
1987	2,218,879	1,999,906	218,973

(c) Tormentine Subdivision

Year	Total Costs $	Revenues $	Actual Losses $
1985	195,292	63,746	131,546
1986	144,035	44,292	99,743
1987	154,448	6,806	147,642

(d) Total Kensington, Borden and Tormentine Subdivisions

Year	Total Costs $	Revenues $	Actual Losses $
1985	6,583,510	7,325,118	(741,608)
1986	5,243,186	5,158,178	85,008
1987	4,254,261	4,002,409	251,852

Economic/Uneconomic Determination

Section 164 of the NTA, 1987 requires the Agency to determine if the line is economic or uneconomic, and if uneconomic, whether there is a reasonable probability of the branch line becoming economic in the foreseeable future.

It is essential to establish the context in which the economic determination is to be made. CN is of the view that the context for determining whether a branch line is economic or uneconomic is contained on pages 396 to 398 of the CTC's Reasons for Order No. R-6313 concerning Costs Regulations made under section 330 of the Railway Act, R.S.C. 1970, c. R-2. The Province is of the opinion that these Regulations no longer have validity as they were made in respect of an Act no longer in force and made without the representation of the Province. It is the Province's position that the economic/uneconomic determination should be considered in the broader sense of the net economic benefits for Canada and its regions. If viewed in this context, the Province argued that the subject lines are economic and will continue to be economic in the future as they offer and will continue to offer net economic benefits (lower overall costs) than do the alternatives to rail abandonment.

The Agency is of the view that CTC Order No. R-6313 and the reasons attached thereto as amended which are not inconsistent with the new legislation are still valid. It is appropriate to consider what the Reasons for Order No. R-6313 stated in respect of the economic/uneconomic determination of branch lines on pages 396 to 398.

To approach the determination of whether a branch line is economic or uneconomic on the broad basis advocated by the Province would raise the possibility that lines incurring actual losses (unprofitable lines) could be designated as economic and under section 167 of the NTA, 1987 determined to be required in the public interest and, therefore, in accordance with paragraph 169(1)(a) of the NTA, 1987 the application would be dismissed. Upon dismissal of the application the railway company would not be eligible for subsidy under section 178 of the NTA, 1987. Such a result would be contrary to paragraph 3(1)(f)of the NTA, 1987 which states that "... each carrier or mode of transportation, so far as practicable, receives fair and reasonable compensation for the resources, facilities, and services that it is required to provide as an imposed public duty..."

The Agency finds that the determination, pursuant to section 164 of the NTA, 1987, of whether the operation of a branch line is economic or uneconomic must be put in a narrower context than that proposed by the Province in order to avoid conflict with any of the other precepts of the stated national transportation policy. Therefore the Agency finds that a determination pursuant to section 164 should be made in the context of the performance of railway operations as opposed to the broader economic approach supported by the Province.

Having established the context in which the economic/uneconomic determination is to be made, it is necessary to distinguish between the incurring of actual losses in the operation of a branch line (unprofitability) and an uneconomic branch line. The NTA, 1987 clearly contemplates, as did the Railway Act, that the finding of "economic or uneconomic" is a subsequent and more comprehensive determination than the determination of actual losses, if any. The difference between an unprofitable branch line and an uneconomic one is aptly described on page 398 of the Reasons for Order No. R-6313 in the second and fourth paragraphs. The CTC's determination in this regard was "... that the expression \uneconomic\, as used in reference to branch lines ... means the line must not only be unprofitable, but it must be incapable of being rendered profitable within the scope of all feasible alterations in the operating practices of the railway, the scheduling and routing of traffic, or the restructuring of the branch lines themselves."

In respect of these applications, the Agency intends to apply this definition to determine whether the subject branch lines are economic or uneconomic.

The evidence related to the economics of CN's operation of these lines is divergent and may be capsulized as follows:

CN's Evidence

Since the early 1970's, rail traffic volumes on P.E.I. lines have been slowly declining due to increased truck competition, particularly in the movement of potatoes (the major outbound commodity) from Prince Edward Island to Quebec and Ontario markets. Since 1978, provincial highway policy has been to allow increased gross vehicle weights and the use of tri-axle trucks thereby permitting greater payloads for truckers. CN contended that the significant shift of the potato traffic from rail to truck during the 1980's was a result of this provincial highway policy. In the early 1980's, efforts were made to retain and regain lost potato traffic by offering lower freight rates than the truckers, by investing in new insulated box cars, and by participating in a provincial/federal project to rationalize potato loading points. Despite these efforts, traffic continued to decline. Customers in the Quebec and Ontario markets demanded second morning delivery of potatoes from Prince Edward Island. Truckers could provide this type of service whereas all rail movements to these markets took five to six days. As road weight limits were increased, the truckers' payload increased resulting in a continued shift of potato shipments to truck. By 1986, CN had lost the majority of these shipments to truckers. CN was also losing traffic of certain inbound commodities due to truck competition and commodity market shifts. In order to reduce the increasing amounts of actual losses being incurred at this time in the operation of the P.E.I. lines, CN took action to reduce operating costs and increase revenues from the remaining rail traffic though a series of biannual rate increases. These latter actions admittedly accentuated the already established trend of declining rail traffic.

CN's estimated break-even point for the P.E.I. lines including the Tormentine Subdivision is 3144 carloads. CN's development of the break-even point is based on the Agency's actual loss determinations and on the assumptions that the 1987 traffic mix at 1987 freight rates remain constant and that no line rehabilitation costs are incurred. The 1987 traffic level was 1667 carloads and CN did not foresee any substantial increase in traffic which would approach the break-even level. CN, therefore, contended that all the lines, except the east end of the Kensington Subdivision which showed declining profits, were unprofitable with little probability of being rendered profitable in the foreseeable future through operational, scheduling or organizational changes within the company.

The Province of Prince Edward Island's Evidence

According to the Agency's determination of actual losses in respect of the Kensington, Borden and Tormentine Subdivisions, the aggregated total revenues exceeded the total costs for the prescribed accounting years of 1985 to 1987. Therefore, the Province contended that these three lines are presently economic. Furthermore, the Province argued that neither CN's financial evidence for the years 1986 or 1987 nor the Agency's determinations based on that evidence were meaningful in determining the economics of any of the lines because CN had taken positive action beginning in 1986 to "offload" traffic from rail to their intermodal service by reducing rail service and increasing rail rates. The purpose of such an undertaking, according to the Province, was CN's premeditated plan to create an uneconomic environment through "demarketing" its rail services in order to support applications for the abandonment of these lines.

Representatives of three companies, namely Brookville Manufacturing, Atlantic Warehousing Ltd., and Island Fertilizers Ltd., indicated a combined total of 1,000 to 1,100 carloads which CN had off-loaded to truck or intermodal service could be offered for rail shipment if CN would provide the type of rail service

and train scheduling available prior to 1985 at rates comparable to either those at mainland points or to intermodal rates currently in effect. The representative of the Department of Transportation and Public Works stated that, given competitive rates and reasonable service, 1987 traffic levels would be exceeded by 1,800 carloads. This infusion of additional traffic would bring the total traffic above CN's break-even point of 3,144 carloads. Based on these projections, the Province suggested that lines under consideration could become economic in the foreseeable future and that their operation should be continued.

Evidence was presented suggesting that the Agency, in determining the present and future economic viability of the lines, should consider the impact of CN's achievements in recent years of reducing system operating costs on the level of off-line costs charged to the PEI lines. The Province's calculations of the savings to be realized suggested that the determined actual losses on the Kensington, Borden and Tormentine Subdivisions would be either eliminated or significantly reduced. Presumably the impact on the five reconsideration lines would be the same.

Further significant cost savings could have been and could in the future be achieved if CN adopted certain short line railway operating practices. One area of significant potential savings is the railway labour environment and its payroll structure. In the Province's estimation, labour forces performing duties "across craft lines" and payment on a salary rather than on an hourly wage basis would result in substantially lower labour costs. The Province stated that CN has the capability to operate the PEI lines in a more efficient and economic manner than it has to date. The Province contended that these savings, which it illustrated are attainable, would render these lines economic now and in the future and therefore CN's applications should be denied.

The Agency finds that the shift in the shipment of potatoes from rail to truck in the 1980's was a direct result of the provincial policy of increasing the allowable gross vehicle weight on highways and increased deregulation of the trucking industry during the mid-1980's. Despite rationalization of potato loading points in the early 1980's and favourable freight rates, CN's market share of potato shipments by 1985 had declined drastically due to increased truck competition which offered transit times to markets which could not be matched by an all rail movement. CN's initiation of intermodal service for potato shipments off Prince Edward Island was a logical and legitimate response to the demands of the market place for this product. Unfortunately for the remaining shippers, their volume of traffic was not sufficient to warrant continued train service at the previous frequencies. CN did attempt to retain and perhaps attract additional traffic by maintaining rates or postponing rate increases and in some cases even lowering rates. The evidence before the Agency indicates that throughout this period the allowable road weight limitations were increased thereby allowing the truckers to increase their payloads thereby enhancing their competitiveness with CN for not only shipments of potatoes but other commodities as well.

CN's reaction to this competitive pressure in the Prince Edward Island transportation market was to expand its intermodal service to include as much of the remaining rail traffic as possible in order to protect its share of the Prince Edward Island transportation market from its competitors. CN's actions of increasing rail rates and decreasing train service to once a week no doubt resulted in the shift of some of its rail traffic to the intermodal alternative. However, the Agency does not agree with the Province's contention that CN's conduct was primarily responsible for creating the unprofitability or declining profitability of the PEI lines. It is the Agency's view that the trend towards unprofitability was already well established prior to 1986 and 1987 as a result of provincial deregulation of the trucking industry. CN's actions of "demarketing" its rail service did not create the situation of unprofitable branch lines but only accentuated the decline in rail traffic offered.

The Province's contention that the operation of the Kensington, Borden and Tormentine Subdivisions should be considered to be economic for the prescribed accounting years because the aggregated yearly revenues exceed the aggregated yearly costs by approximately $405,000 cannot be accepted. Paragraph 163(1)(b) of the NTA, 1987 requires the Agency to establish the amounts of actual loss in each of the prescribed accounting years.

Aggregation of the yearly results for the purposes of determining the current and future economic status of the lines would distort the reality of the present situation; that is, these lines are becoming more unprofitable in the most recent years costed.

The Province's evidence that the operation of these lines are and would continue to be economic if consideration were given to cost reducing factors such as system efficiencies achieved by CN during the 1980's and adoption of certain operating characteristics of short line railways is seriously questionable and can not be accepted as valid.

Firstly, system-wide cost reductions resulting from operating efficiencies achieved by CN during the years 1985 to 1987 have already been incorporated into the development of the Agency's approved off-line costs for these years through the Agency's verification and approval process of system unit costs for these years. Secondly, it is unreasonable to expect that CN would be successful in negotiating with its labour unions the types of agreements necessary to permit the adoption of the types of short line railway operating practices which the Province suggested were and could be achievable to reduce present operating costs and render these lines economically viable.

CN's "Break-Even Determination" for all the lines under consideration based on 1987 traffic mix, revenues and the Agency's actual loss determinations for 1987, excluding line rehabilitation costs, indicated a required traffic level of 3,144 carloads. Witnesses for the Province indicated that up to 1,800 additional carloads of traffic (of which a maximum of 1,100 carloads was identified by shipper witnesses) could be offered for rail shipment, thus surpassing CN's required break-even figure.

The offering of up to 1,800 additional carloads assumed freight rates lower than those in existence in 1987. If a lower rate structure were assumed in CN's "Break-Even Determination", revenues would be lower and the break-even level would increase beyond the 3,144 carloads.

Westisle Farm Supply Ltd. at O'Leary and Malpeque Fertilizers Ltd. at Travellers Rest on the Kensington Subdivision, two major rail shippers until 1987, indicated that in anticipation of the possible abandonment of the Kensington Subdivision they have worked with CN in transferring their traffic to intermodal movements thus further reducing the base of rail traffic to be offered in the future.

The Agency determines that it is unlikely that a sufficient volume of traffic would be offered in the foreseeable future to reach the break-even point or render the PEI lines profitable.

Upon consideration of all the evidence concerning the economic status of the subject lines, the Agency finds that all of the lines are currently uneconomic and likely to continue to be uneconomic in the foreseeable future.

Public Interest

All of the interveners who appeared at the hearing presented their views concerning matters relevant to the public interest. While it is not intended to recount the testimony of each and every intervener, highlights of the common themes of this evidence and in several instances specific comments concerning the evidence presented follows.

Generally, concerns were strongly expressed by all intervening parties as to the adverse effect abandonment of these lines would have on the economy of Prince Edward Island through added transportation costs, increased highway and municipal road maintenance costs and potential job losses. The uncertainty of the current and future availability of alternative transportation facilities offered at reasonable rates and levels of service was a concern of all the shippers as well as to public officials and commercial organizations. The majority view was that abandonment of these lines would not be in the public interest.

A number of interveners, namely the Province of New Brunswick, the City of Charlottetown, Westisle Farm Supply Ltd. and Malpeque Fertilizers Ltd., in addition to expressing their concerns regarding the impact abandonment of the subject lines would have on the area and their operations, requested that the Agency initiate specific actions or make certain recommendations in the event the lines were ordered abandoned. The common request of all these parties was that the Agency recommend to the Minister of Transport that payments be made under section 175 of the NTA, 1987 to offset additional costs which would be incurred as a result of abandonment.

If the Agency authorizes the abandonment of a branch line under section 165 of the NTA, 1987, subsection 175(6) would be applicable to cases where interveners were seeking financial compensation to offset additional costs incurred as a result of abandonment. It is recognized that abandonment of the subject branch lines will place a greater financial burden on some of the interveners as indicated in their evidence. For example, the Provinces of Prince Edward Island and New Brunswick and the City of Charlottetown will incur incremental highway and road maintenance costs and shippers such as Westisle Farm Supply Ltd., Malpeque Fertilizers Ltd. and Atlantic Warehousing Ltd. will incur incremental capital and transportation costs as a result of the proposed branch line abandonments. In view of the foregoing, the Agency urges the interveners to pursue the matter of financial compensation by petitioning the Minister of Transport pursuant to the provisions of subsection 175(6) of the NTA, 1987 which could lead to a compensation agreement.

The Province of New Brunswick and the City of Charlottetown also requested that, in the event of the abandonment of the rail lines within their constituencies, the Order authorizing abandonment be made conditional upon the specific disposition of the railway's property. The Province requested that the trackage of the Tormentine Subdivision be left in place as a contingency for its future use as a transportation corridor in the construction of the "fixed link project" between mainland New Brunswick and Prince Edward Island. The City of Charlottetown requested that CN be required to convey its waterfront properties to the City at a nominal cost, if any.

In consideration of these requests, it should be noted that upon the abandonment of the operation of a branch line, the right-of-way property ceases to be subject to the jurisdiction of the Agency. However, CN is requested to deal reasonably with any proposals it may receive concerning the disposition of such property.

In addition to supporting the retention of the subject lines in the public interest, the United Transportation Union (hereinafter UTU) requested that if the Agency found these lines to be uneconomic and likely to remain so, the abandonment of these lines be conditional pending agreement between CN and the UTU concerning job protection for five running trades of UTU members on Prince Edward Island. While the Agency shares the UTU's concerns for its members, it is noted that the existing collective agreement with CN addresses layoff and job relocation situations, albeit, allegedly inadequately. The evidence indicates that the inadequacies of the existing collective agreement related to job protection are currently under negotiation.

The National Farmers Union (hereinafter NFU) presented a brief detailing the organization's concerns regarding the rail line abandonment process in Canada and its implications for Prince Edward Island farmers. Those sections of the NFU's brief concerning the economic context within which CN's application ought to be considered, expressed the same basic opinions held by the Province and they have been previously addressed in this Decision. The NFU essentially asked the Agency to adopt its concept of what the transportation policy of Canada should be and order the continuation of the operation of these lines.

The Agency is directed by the existing legislation which sets out the criteria against which abandonment applications are to be tested. In summary, the first legislative test is the determination pursuant to section 164 of the NTA, 1987 of whether a branch line is economic or uneconomic and, if it is uneconomic, whether there is a reasonable probability of it becoming economic in the foreseeable future. The second test is the determination pursuant to section 166 of the NTA, 1987 of whether an economic branch line or an uneconomic one which has the potential to be economic in the foreseeable future is required in the public interest.

If in the first test, the operation of the branch line is determined to be uneconomic and there is no reasonable probability of it becoming economic in the foreseeable future, the Agency, pursuant to section 165 of the NTA, 1987, must order the abandonment of the operation of the line. However, if the first test determines that a branch line is economic or that although uneconomic there is a reasonable probability of it becoming economic in the foreseeable future, the second test of determining whether or not the line is required in the public interest is applied. As the subject abandonment applications have not passed the first test, the second test does not apply.

CONCLUSIONS

Further to the above and pursuant to section 164 of the NTA, 1987, the Agency determines that the subject branch lines are uneconomic and that there is no reasonable probability of these lines becoming economic in the foreseeable future.

Accordingly, in compliance with subsection 165(1) of the NTA, 1987, the Agency must order that the operation of the subject branch lines be abandoned.

Section 168 of the NTA, 1987 governs the time limits within which the Agency must order abandonment of the operation of a branch line. Subsection 168(2) applies in cases where no passenger service exists on a branch line and requires that the date fixed for abandonment shall not be less than thirty (30) days or more than one (1) year from the date of the order.

The Agency determines that the operation of the Souris Subdivision from Royalty Junction (mileage 0.00) to Souris (mileage 55.02), the Elmira Spur, off mileage 50.2 of the Souris Subdivision, from Harmony Junction (mileage 0.00) to Baltic (mileage 5.00), the Montague Subdivision from Mount Stewart Junction (mileage 0.00) to Montague (mileage 25.61), the Murray Harbour Subdivision from Maple Hill (mileage 0.00) to Uigg (mileage 17.77) including the Mount Herbert Spur (mileage 0.00 to mileage 4.60) and the Kensington Subdivision from Linkletter (mileage 19.45) to Tignish (mileage 84.61) shall be abandoned thirty (30) days from the date of the order giving effect to the Agency's decision.

In view of the volume of traffic currently offered on the Kensington (Emerald Junction to Linkletter) and Borden Subdivisions, the Agency determines that the shippers located on these lines be allowed sufficient time to adjust their operations to alternative transportation facilities and that the UTU and CN be allowed sufficient time to complete negotiations concerning job protection for UTU members affected by the abandonment of these branch lines. Therefore, the Agency determines that the Kensington Subdivision from Emerald Junction (mileage 0.00) to Linkletter (mileage 19.45), the Borden Subdivision from Charlottetown (mileage 0.00) to Borden (mileage 42.40) and the Tormentine Subdivision from Sackville (mileage 0.00) to Tormentine (mileage 35.39) shall be abandoned on December 31, 1989.

An Order will issue accordingly.