Decision No. 374-R-2015

INTRODUCTION

[1] On October 2, 2015, CP filed with the Canadian Transportation Agency (Agency) an application, pursuant to paragraph 151(4)(c) of the CTA, for an adjustment to the VRCPI related to cars obtained from its U.S. subsidiary companies to replace withdrawn Canadian Wheat Board (CWB) hopper cars (CP’s application).

[2] On October 16, 2015, CN filed with the Agency an application for a variance of Decision No. 304-R-2015, which sets out the 2014-2015 VRCPI (CN’s application).

[3] CN and CP are requesting adjustments to the 2014-2015 VRCPI. The Agency will deal with both applications in this Decision; however, as CN is requesting a variance of a previously established adjustment, the Agency will consider CN’s application first.

BACKGROUND

[4] On August 4 and 15, 2014, CP and CN respectively filed requests for an adjustment to the 2014‑2015 VRCPI. In Decision No. LET-R-17-2015 (Reasons for that Decision followed), the Agency:

• rejected CP’s request for an adjustment to the 2014-2015 VRCPI as the proposed methodology and evidence filed in support of CP’s request did not satisfy the requirements for an adjustment as described in both Decision No. 8‑R‑2013 and Decision No. 150‑R‑2014;
• granted an adjustment to CN for the costs it incurred for cars obtained through lease agreements where the lessee is CN, and adjusted the 2014-2015 VRCPI upwards to 1.3257, effective August 1, 2014; and,
• deferred consideration of any adjustment to the VRCPI related to leases where one of CN’s U.S. subsidiaries is the lessee, and stated that it would not consider such an adjustment, until the establishment, following consultation, of an appropriate methodology for adjustment in those situations.

[5] On September 18, 2015, the Agency issued Decision No. 304-R-2015. In that Decision, the Agency specified the conditions under which an adjustment may be made in situations where either CN or CP obtains replacement hopper cars from a U.S. subsidiary company for use in regulated grain service. The Agency determined the criteria and associated conditions and requirements by which an adjustment is to be calculated. The Agency also adjusted the 2014‑2015 VRCPI upwards by 0.2 percent from 1.3257 to 1.3280 with respect to CN’s use of its U.S. subsidiary cars. The Agency provided CN with a confidential appendix detailing the calculations of the adjustment made.

CN’S APPLICATION

[6] CN requests that the Agency reconsider the adjustment to the 2014-2015 VRCPI made in Decision No. 304-R-2015, because of a minor clerical error in the calculation of the car lease rates; and the value used for the Canada/U.S. exchange rate.

Clerical error

[7] The Agency acknowledges the clerical error in the calculation of the average cost per car set out in the confidential appendix to Decision No. 304-R-2015. Following an examination of the spreadsheet used by staff in its calculation, it was confirmed that a minor error occurred when a hardcoded number, rather than a formula driven one, was inadvertently included. This warrants an upwards adjustment to the 2014-2015 VRCPI, the revised value of which is set out below in paragraph 13.

Exchange rate

[8] CN points out that the exchange rate used by Agency staff in its calculation of the average cost per car was a different value than the average exchange rate for 2014-2015. CN claims that the exchange rate that should have been used to calculate the adjustment to the VRCPI set out in Decision No. 304-R-2015 is the average actual exchange rate for the crop year which, according to the Bank of Canada, is 0.8386. CN views Agency staff’s use of a different number as a clerical error. However, this is not the case. The exchange rate used by Agency staff was the 2014-2015 forecasted value of 0.893 which was approved by the Agency in Decision No. 150‑R‑2014 when the 2014-2015 VRCPI was initially established in April of 2014.

[9] The Agency has considered this matter and agrees with CN that a more appropriate exchange rate, where a cost adjustment is calculated after the crop year has ended, would be an average of actual values for the Canada/U.S. exchange rate and not the forecasted value set prior to the start of the crop year. The Agency therefore finds that the VRCPI for 2014-2015 should be further adjusted to reflect the average actual Canada/U.S. exchange rate for the 2014-2015 crop year. The revised 2014-2015 VRCPI is reflected in paragraph 13 below.

[10] The Agency, pursuant to paragraph 151(4)(c) of the CTA, has the discretion to make a cost adjustment at any time that it considers appropriate and determine the date when the adjusted index takes effect. The Agency will, in future determinations for adjustments pursuant to paragraph 151(4)(c) only, apply the standard approach set out below with regards to the Canada/U.S. exchange rate.

[11] Specifically, the exchange rate figure used in such calculations will be based on the most recently available exchange rate information at the time the adjustment is made on the following basis: 1) if the adjustment is made in the first six months of the crop year, the forecasted rate set at the beginning of the year will be used; or 2) if the adjustment is made within the last six months of the crop year, the average of actual to date figures will be used.

[12] Once the amount is set in that manner, it will not be further updated. The Agency considers this necessary to ensure predictability. For greater clarity, the fluctuations in the Canada/U.S. exchange rate (up or down) in a given crop year would not be accepted as a change in facts or circumstances that would warrant resetting the VRCPI at the end of each crop year.

[13] The Agency acknowledges that before receiving the appendix to Decision No. 304-R-2015, CN could not have known about the clerical error or the value used in the calculation of the 2014‑2015 VRCPI adjustment. As such, in this specific instance, the Agency finds that there are new facts or circumstances that warrant a variance of Decision No. 304-R-2015. The Agency, pursuant to section 32 of the CTA, varies Decision No. 304-R-2015 and adjusts the 2014-2015 VRCPI upwards from its value of 1.3280 as previously set in Decision No. 304-R-2015 to 1.3287 to reflect the corrected average cost per car in the 2014-2015 crop year.

CP’S APPLICATION

[14] CP filed a Railcar Use Agreement (RUA) entered into with its U.S. subsidiary companies on October 7, 2015 and a letter issued by CWB referencing the return of CP’s fleet of CWB owned hopper cars. CP states that the RUA conforms with paragraphs 105 and 111 of Decision No. 304‑R-2015, i.e., the requirement of a “Commitment Agreement” (CA).

[15] CP claims that, while no formal CA was in place during the 2014-2015 crop year, an implicit arrangement was in place as of August 1, 2013 where CP had decided to replace the CWB cars with its U.S. subsidiaries’ fleets by way of its integrated fleet program. CP requests that the Agency recognize that it incurred a cost to replace the CWB cars with U.S. subsidiary cars during the 2014-2015 crop year and make an adjustment to reflect this.

Considerations

[16] In Decision No. 8-R-2013 and Decision No. 304-R-2015, the Agency determined that an adjustment must meet the following:

• Government hopper cars have been sold, leased, disposed of or otherwise withdrawn from service. This is to be demonstrated by third-party evidence indicating the specific car identification number of each car withdrawn and when they were withdrawn, specifically an official letter from the rightful owner of the withdrawn hopper cars.
• The railway company has obtained hopper cars as a result of the above.
• When the replacement cars are obtained from a U.S. subsidiary, the use of those cars is governed by a CA 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. The CA must also:

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; and,
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.

ANALYSIS AND FINDINGS

1. Withdrawal of CWB cars

[17] CP filed a letter from CWB dated October 2, 2015 which states that as of July 31, 2014, before the start of the 2014-2015 crop year, CP had withdrawn from service and returned a specified number of hopper cars to the CWB. The letter also states that all remaining cars (of the original 1661 car fleet) were returned as of October 2, 2015.

[18] The Agency is satisfied that the CWB letter constitutes adequate third-party evidence of the number of cars withdrawn and the return date of these cars for the 2014-2015 crop year.

2. and 3. Obtaining replacement cars and the CA

[19] CP’s RUA was signed on October 7, 2015, and covers a period including the 2015-2016 crop year. The RUA specifically set out that it was meant to formalize an arrangement already in place in August 1, 2013 that will continue until July 31, 2016. CP requests that the Agency recognize the implicit nature of this arrangement and the costs it incurred in obtaining hopper cars from its U.S. subsidiaries for the replacement of the withdrawn CWB cars during the 2014‑2015 crop year. CP also seeks an adjustment to the 2015-2016 VRCPI based on the RUA.

[20] The Agency finds that some of the requirements of Decision No. 304-R-2015 have been met within CP’s RUA; specifically, the RUA is in writing, the term commitment is for at least one year, and the agreement is between the prescribed railway company and its U.S. subsidiaries.

[21] However, the Agency finds that one aspect of the CA does not meet the requirements of Decision No. 304-R-2015 in that the RUA designates the entire fleet of the U.S. subsidiary companies as replacement cars for the purpose of replacing withdrawn CWB hopper cars. Pursuant to the principles established in Decision No. 304-R-2015, it is necessary that a distinction be made between cars available to a prescribed railway company on an as-needed basis (per-diem rentals) and those available through a CA. It is also necessary that the CA makes a “stock” of cars available.

[22] In this respect, the Agency held at paragraphs 100 and 101 of Decision No. 304-R-2015:

[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. [Emphasis added]

[23] The Agency finds that the RUA does not reflect a true commitment of a specified number of cars to be used in regulated grain service in a manner similar to the historical use of the withdrawn CWB cars. It is, rather, an arrangement for the use of hopper cars on an as-needed basis at established Association of American Railroads per-diem rates. The Agency notes that subsidiary cars obtained through per-diem rentals have been in use since the beginning of the maximum revenue entitlement (MRE) program and that freight car per-diem rental and leasing costs are already included in the MRE cost base. As noted above, for the purpose of a cost adjustment under paragraph 151(4)(c) of the CTA, costs incurred to obtain cars to replace withdrawn government hopper cars must be distinguishable from costs already included in the base year costs. The RUA does not allow for such a distinction.

[24] Further, the Agency stated the following in Decision No. 304-R-2015:

[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.

[25] The Agency notes that in the RUA, some 11,000 subsidiary cars are designated as replacement cars. It is obvious that CP could not use that many cars up to the level of the historical five-year average usage of the returned CWB cars.

[26] For these reasons, the Agency finds that CP’s RUA is not an acceptable CA.

Should an adjustment to the 2014-2015 VRCPI be made despite the shortcomings in the CA?

[27] In Decision No. 304-R-2015, the Agency found that CN and CP do incur costs when using cars of their U.S. subsidiary companies to replace withdrawn government hopper cars in regulated grain service. Such costs could qualify for an adjustment if certain conditions were met. However, CP’s request for an adjustment was denied because it had not provided sufficient evidence of the return of the CWB cars and had not filed sufficient details of the arrangements it had with CWB for the remaining cars it still had in its possession in the 2014-2015 crop year.

[28] CP has now complied with those specific requirements and the evidence indicates that during the 2014-2015 crop year, CP did incur costs for using its U.S. subsidiary cars in the replacement of withdrawn CWB cars.

[29] As pointed out in CP’s application, until the issuance of Decision No. 304-R-2015, CP did not know whether or not costs associated with acquiring cars from its U.S. subsidiaries would be eligible for an adjustment. The Agency also notes CP’s statement that it was under the impression that it would be given the opportunity to file evidence, based on the criteria set out in Decision No. 304-R-2015, in due time for an adjustment to the 2014-2015 VRCPI.

[30] In Decision No. 304-R-2015, the Agency granted CN’s request for a cost adjustment to the 2014‑2015 VRCPI, even though CN did not have an acceptable CA that governed the usage of its subsidiary cars, as follows:

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.

[31] The Agency recognizes the similarity between CP’s situation and that of CN as it relates to the use of U.S. subsidiary sourced cars in 2014-2015.

[32] Given these circumstances, and considering that CP has now complied with the provision of adequate third party evidence regarding the return of CWB hopper cars, the Agency allows an immediate adjustment to the 2014-2015 VRCPI by deeming the number of cars that CP had returned by the beginning of the 2014-2015 crop year as “designated replacement cars”. This adjustment to the VRCPI will be based on the methodology established in Decision No. 304‑R‑2015, will incorporate the exchange rate approach set out above, and will be allowed for the 2014-2015 crop year only.

[33] Therefore, the Agency, pursuant to paragraph 151(4)(c) of the CTA, varies Decision No. 304‑R‑2015, and further adjusts the 2014-2015 VRCPI from 1.3287 as established above in paragraph 13 to 1.3322 for the 2014-2015 crop year only.

Should an adjustment to the 2015-2016 VRCPI be made despite the shortcomings in the CA?

[34] The Agency finds that an adjustment to the 2015-2016 VRCPI is not appropriate at this time given the deficiencies found in the RUA. CP may file a revised RUA or a new agreement that meets the conditions for an acceptable CA as set out in Decision No. 304-R-2015 if it still seeks an adjustment to the 2015-2016 VRCPI. CP should ensure that any such agreement designates a specific number of cars that will be made available for use in regulated grain service in replacement of the withdrawn CWB cars, that is, cars that are distinct from the general fleet of its U.S. subsidiary companies. These cars should be used in a manner similar to the historical use of the withdrawn government hopper cars. CP is encouraged to file such an agreement as soon as possible.

CONCLUSION

[35] As a result of the findings made with respect to CN’s and CP’s applications above, the Agency adjusts the 2014-2015 VRCPI upwards to 1.3322 (0.3 percent from its value of 1.3280 set out in Decision No. 304-R-2015) and makes this adjustment effective on August 1, 2014 pursuant to subsection 151(6) of the CTA.