Decision No. 385-R-1990

July 17, 1990

July 17, 1990

IN THE MATTER OF an investigation pursuant to section 113 of the National Transportation Act, 1987, R.S.C., 1985, c. 28 (3rd Supp.), to determine whether a railway freight rate contained in Item 309 of Burlington Northern Railroad Company's Tariff No. 4407-C is non-compensatory.

File No. D2985-89/3


INTRODUCTION

On November 24, 1989, Canadian Pacific Limited (hereinafter CP) filed an application pursuant to section 113 of the National Transportation Act, 1987 (hereinafter the NTA, 1987) alleging that a freight rate published by the Burlington Northern Railroad Company (hereinafter BN) is not compensatory and therefore in violation of section 112 of the NTA, 1987. The rate under appeal is for the movement of canola oil in shipper-owned or leased tank cars from Winnipeg, Manitoba to Warren, Minnesota.

CP submitted that the rate under appeal had been published pursuant to an agreement between CSP Foods Limited and BN and provided the National Transportation Agency (hereinafter the Agency) with a copy of the agreement dated October 30, 1989. On November 13, 1989, CSP Foods Limited made application to the Agency to have it establish three Competitive Line Rates (hereinafter CLRs) to Winnipeg for furtherance to Warren, Minnesota and submitted that the BN rate be used as the basis for the calculation of the CLRs. The Agency, however, prescribed the CLRs using methodology which did not incorporate the use of the BN tariff rate.

LEGISLATION

Section 112 of the NTA, 1987 requires that every rate subject to the Agency's jurisdiction shall be compensatory, that is, it must exceed the variable cost of the movement of the traffic, as determined by the Agency. Section 113 of the NTA, 1987 sets out the manner in which the Agency is to deal with a complaint that a rate is not compensatory. That process is, in essence, a two stage process. Upon receiving a complaint that a rate is not compensatory, the Agency is required to conduct such investigation of the rate as, in its opinion, is warranted to determine whether the rate is compensatory. If the Agency determines that the rate is not compensatory, it makes an Order disallowing the rate and requiring the carrier to substitute a rate which is compensatory, unless the railway company which established the rate establishes to the Agency's satisfaction that the rate does not have the effect or tendency of substantially lessening competition or significantly harming a competitor and was not designed to have that effect. This Decision presents the Agency's determination of whether the BN rate complained of is compensatory.

FACTS

The rate under appeal was published by BN on October 31, 1989 as Item 309 in BN Tariff 4407-C. The rate of US$0.19 per hundred pounds is for the movement of canola oil in shipper-owned or leased tank cars.

The physical transportation of the canola oil traffic between Winnipeg, Manitoba and Warren, Minnesota involves four railways;

  • Burlington Northern (Manitoba) Limited Railway (hereinafter BNML), a wholly-owned subsidiary of BN,
  • Canadian Pacific Limited,
  • Canadian National Railway Company (hereinafter CN), and
  • Burlington Northern Railroad Company.

The traffic is picked up by a BNML engine and crew at the CP-BNML interchange in Winnipeg and is transported over BNML, CP and CN track to CN's Portage Junction in Winnipeg. At that point, the cars are assembled into a "pool train" of CN and BN traffic for movement to the international boundary at Emerson, Manitoba. The pool train is hauled by CN engines operated by CN crews over CN's Letellier Subdivision. BN traffic in the pool train is transported by CN pursuant to agreements made in 1912 and 1983 between BN and CN. CN does not participate in rate negotiations for the BNML originated traffic or receive a "division" or share of the revenue. In essence, CN acts as a subcontractor for the movement of the traffic, receiving compensation in accordance with the aforementioned agreements.

At Emerson, Manitoba/Noyes, Minnesota, the CN engines and crews are replaced by BN engines and crews for movement over BN trackage to Warren, Minnesota. The distance between Winnipeg and Warren is approximately 130 miles. Approximately 69 miles, or 53 percent of the movement, takes place within Canada.

The BN rate was represented to the Agency as a "stand alone, single line" rate. However, on March 6, 1990, BN amended the rate, effective March 27, 1990, by adding the condition that the "Rate can only be used for movement beyond.". The amendment altered the nature of the rate to that of a "proportional" rate, one which can only be used in conjunction with another rate to ultimate destination. On April 26, 1990, after the amendment to the rate had been brought to its attention by CP, the Agency directed BN to explain the reason for the amendment. BN, in its response, indicated that, effective April 28, 1990, the rate had been restored to its original status as a stand alone rate, but offered no explanation of the reason why the rate had been altered, nor any assurance that it would not be altered again in the future.

PUBLIC HEARING

The NTA, 1987 requires that all rates be compensatory and a rate is deemed compensatory when it exceeds the variable cost of the movement of the traffic concerned, as determined by the Agency. Determining whether a rate is compensatory consists of two elements

  • determining the variable costs incurred by the railway company for performing the movement, and
  • comparing that cost with the revenue received for performing the movement.

In the present case, however, because the rate complained of is for a movement only partially within Canada, there was a question relating to the Agency's jurisdiction to conduct an investigation into the rate. Related to the issue of jurisdiction are issues of whether the Agency can determine costs incurred outside of Canada or allocate revenues and costs to the Canadian portion of the movement. The Agency determined that it should hear arguments and receive evidence on these preliminary matters. Therefore, a public hearing was held on March 26, 1990 to consider the following matters:

  1. The extent of the Agency's jurisdiction to investigate the alleged non-compensatory nature of BN's international through rate between Winnipeg, Manitoba and Warren, Minnesota;
  2. the appropriate methodology to be used by the Agency for determining and verifying the variable cost of the BN movement between Winnipeg and Warren; and
  3. if the Agency's jurisdiction does not extend to the entire international movement between Winnipeg and Warren, the appropriate methodology for
    • determining the portion of the published rate for the portion of the BN movement subject to the Agency's jurisdiction, and
    • determining the variable cost of the portion of the BN movement subject to the Agency's jurisdiction.

AGENCY JURISDICTION

At the public hearing, the Agency first heard argument from all parties on the issue of the Agency's jurisdiction. The following ruling was made:

We have listened carefully to all your arguments and we find that the points raised by Mr. Lemieux and Mr. Rothstein would require us to interpret the provisions of the NTA of 1987 in a narrow and literal sense, a sense which would lead to an anomaly in railway rate regulation in Canada.

As a starting point, the NTA of 1987 provides that there may be no railway rate unless it is provided for either in a tariff or otherwise provided for in the NTA or the Railway Act. We are firmly of the view that this rate being partly in Canada is subject to the provisions of the NTA for purposes of rate regulation.

We regard section 112 as a comprehensive measure. It covers jurisdiction over all rates in Canada. And particularly, we rely on section 112(2) which provides that:

"Every rate shall be compensatory."

For BN to be successful it would have to argue that the rate in question is not a rate within the normal sense of the word. Division I of the NTA provides a comprehensive scheme for the regulation of freight rates. When viewing the scheme as a whole and when consideration is given to section 112 in particular, we cannot accept that the legislation intended that a rate such as the one in question was meant to escape the requirement of compensatoriness.

We therefore find that we have jurisdiction to look into this matter . . . (transcript pp. 78-79)

Then, following a request for clarification from counsel for BN, the Tribunal further advised:

It is our ruling that we have jurisdiction over that portion of the rate that is only in Canada. (transcript p. 80)

In light of this ruling, the Agency's investigation was focused on the movement of traffic from the CP-BNML interchange at Winnipeg to the international boundary. The investigation involved two elements:

  1. Determining the appropriate means of allocating to the movement from Winnipeg to the international boundary the appropriate portion of the rate of US$0.19 per hundred pounds.
  2. Determining the cost of the movement from Winnipeg to the international boundary.

APPORTIONMENT OF THE RATE TO THE PORTION OF MOVEMENT SUBJECT TO AGENCY JURISDICTION

BN's evidence, elicited through the testimony of its witness, Mr. Trotter, can be summarized briefly as follows:

  1. The rate between Winnipeg and Warren is a single line rate which cannot be divided or apportioned, except on some arbitrary basis;
  2. any apportionment of the rate would be arbitrary and apportionment on a mileage prorate basis is particularly unacceptable because it does not recognize mileage taper of rates; and
  3. since apportionment of the rate is not possible, the only comparison of costs and rates which can be made is to compare revenue from the entire Winnipeg-Warren movement to costs for that portion of the movement within Canada.

Following the public hearing, the Agency directed BN to furnish the Agency with an apportionment of the US$0.19 rate for that portion of the Winnipeg-Warren movement from the CP-BNML interchange in Winnipeg to the international boundary at Emerson, Manitoba-Noyes, Minnesota. On May 22, 1990, BN replied that it is content to let the record stand as is on the issue.

BN in its earlier submission of April 17, 1990, took the position that the rate cannot be split, however, if the rate was to be split, it should be done on a basis that 73 percent of the rate would be attributable to the Canadian portion. BN did not give any explanation how the 73 percent was calculated other than referring to the taper principle in " Canadian Transportation Economics by A.W. Currie.

CP's position is that the Winnipeg-Warren movement be apportioned on a mileage prorate basis. CP submits that a mileage prorate is logical and supported by practice. CP also submits that when joint-line rates are not mandated by legislation or order, divisions of the rates are negotiated between the carriers and that distance is the most important factor in determining divisions. In the matter before it, the Agency is in agreement with CP's position.

Given the Tribunal's decision regarding the extent of the Agency's jurisdiction to regulate rail movement from Canada to the U.S.A. as being confined to that portion of the route within Canada, and BN declining to provide specifics regarding revenue for that portion of the movement, the Agency believes the only rational means it has at its disposal to determine if the rate is compensatory, is to prorate the revenue from the published rate of US$0.19 on a mileage basis for that portion of the route within Canada and to analyze BN's costs for the movement within Canada.

Section 113 of the NTA, 1987 gives the Agency authority to make an Order disallowing a rate which is not compensatory and requiring a railway company to substitute a rate which is compensatory. Section 113 requires the Agency to conduct such investigation of the rate complained of as it considers warranted. In the present case, the Agency is investigating a rate which applies to a movement which is only partly under its jurisdiction. If the Agency is to investigate the rate, it must focus its investigation on that portion of the rate which is under its jurisdiction. To do that, the Agency considers it warranted to apportion the rate between that portion of the movement which is subject to its jurisdiction and that portion which is not.

The task before the Agency, therefore, is not to develop a rate from Winnipeg to the international boundary, but rather to allocate a portion of the revenue from an international rate to that portion of an international movement which is subject to the Agency's jurisdiction. The Agency has determined this to be a process which is in no way related to the establishment of a rate.

Similarly, the Agency must reject BN's submission that the rate cannot be apportioned and that it should compare the costs for the movement between Winnipeg and the international boundary with the US$0.19 rate for the entire movement between Winnipeg and Warren, Minnesota. If the Agency were to accept BN's argument, it would, in essence, be concluding that BN incurs no costs nor receives any revenues for the movement between the international boundary and Warren, Minnesota, a distance of 61 miles, representing almost half of the entire Winnipeg-Warren movement. It is obvious that BN incurs costs and receives revenue for moving the traffic from the international boundary to Warren and it would be illogical to assume that those costs and revenues do not exist.

Cost apportionment or allocation is a common and widespread practice in railway costing, where aggregate costs are known and it is necessary to make a determination of a specific element which forms part of the aggregate. In such situations, a cost for the specific element would normally be allocated on the basis of an assessment of the degree to which that element contributed to the aggregate cost. For example, if a segment of track has a maintenance cost of $1,000 and annual traffic of 100 cars, each carload of traffic would be allocated a track maintenance cost of $10 per car.

The principle of cost allocation is sound and the Agency finds that the same principle can be applied to the apportionment of revenue. Further, the Agency finds that the most reasonable manner of apportioning revenue in this case is on a mileage prorate basis. The Agency's rationale is that because the rate is dependent upon the movement of traffic over the entire distance between Winnipeg and Warren, each mile of the movement contributes equally to the aggregate rate of US$0.19.

Mr. Trotter gave the following evidence respecting rate taper in railway freight rate making:

I imagine if you had a movement that went from Winnipeg, Manitoba to somewhere in Florida that was 1,280 miles away, a total movement of 1,280 miles, we would end up giving 5 per cent of the revenue for the movement between Winnipeg and the border and 95 per cent of the revenue for the other 95 per cent of the movement.

. . . there is a rate taper and that that rate taper recognizes the fact that the originating carrier in the process incurs more costs, that that originating carrier has more responsibilities and that the rates recognize that.

I think a mileage pro-rate would not be a reasonable way to get at a part that you wanted to arbitrarily allocate to the Canadian portion of the move. (transcript p. 119)

The Agency disagrees with Mr. Trotter's conclusion that rate taper restricts its ability to allocate a portion of the rate to the Canadian portion of the movement. Unlike Mr. Trotter's example, the case at hand involves a rate for movement between two interchanges, CP/BNML at Winnipeg and CN/BN at Emerson, Manitoba/Noyes, Minnesota. The actual movement of traffic commences before the CP/BNML interchange and continues beyond the CN/BN interchange, therefore, BN is neither an originating nor a terminating carrier in the normal sense and accordingly does not incur the additional costs of originating (or terminating) the traffic referred to by Mr. Trotter. In any event, the degree of taper over the distances involved in this movement would be so small as to be inconsequential. The Agency believes, therefore, that it is not necessary to take into consideration rate taper to allow for the greater costs of originating or terminating traffic and that a mileage prorate is most appropriate. The Agency does not agree that this is an arbitrary or unreasonable way of allocating revenue. Since 53 percent of the movement is within Canada, the Agency has determined that 53 percent of the revenue from the US$0.19 rate can be attributed to the portion of the movement within Canada. Using an exchange rate of US$1.00 = C$1.1850, the exchange rate on the date of CP's application, the Agency has allocated C$0.12 per hundred pounds or C$180 per car, based on the 150,000 pound carload minimum specified in the BN tariff, to the movement of the traffic in question between Winnipeg and the international boundary.

The next step in the process is to determine BN's costs for the movement.

COSTING METHODOLOGY

Costing Principles

For costing the BN movement, the Agency incorporated accepted Canadian railway costing procedures as a guide to the treatment of costs. The Agency has followed the principle of utilizing "long run variable costs" as the basis for determining the cost of the movement.

In keeping with accepted cost determination principles, the Agency did not include in its cost determinations the fixed portion of costs. Costs are considered fixed if, in the long run, they do not vary with the level of traffic, or, if it is determined that such costs would be present in the absence of traffic volume.

The Agency lacked complete historical data with which to perform a statistical analysis of BN's cost functions, and therefore, used other Agency approval variabilities (the percentage of a cost which is "variable" as opposed to "fixed") to determine BN's variable costs. This is in accordance with and consistent with section 7 of the Railway Costing Regulations, SOR/80-940.

On April 9, 1990, the Agency ordered that current BNML costing data be submitted by April 20, 1990. BN replied on April 23, 1990, submitting additional statements on April 25, May 1 and May 8. Annual expense and financial information submitted to the Agency by BN in the past provided the balance of the necessary data.

Since the Tribunal made a ruling at the public hearing on March 26, 1990 that the Agency has jurisdiction over that portion of the rate that is only in Canada, no costs for BN's U.S. operations were included in the analysis.

The Agency has subdivided the Canadian portion of the movement into "switching" and "line-haul" cost segments.

For the traffic in question, cars are picked up at the CP-BNML Winnipeg interchange. BN incurs switching costs for three operations in Winnipeg:

  • the movement from the CP interchange to the BNML interchange
  • movements along BNML lines and within BNML yard
  • the movement from the BNML interchange to the CN interchange.

Line-haul costs are incurred along CN lines between Winnipeg (Portage Junction) and the Canada/U.S. border at Emerson, Manitoba in the form of payments to CN for the operation of pool trains and line operations and maintenance. Exhibit 1 illustrates the pattern of movement.

Exhibit 1

Cost Determination Procedures

The Agency's procedures in determining BN's costs consisted of three steps:

  • identification of cost elements and time frames
  • treatment of cost elements
  • allocation of total costs
Identification of Cost Elements and Time Frames

The Agency first categorized relevant BNML costs as "switching" or "line-haul". Switching cost calculations were based upon 5 years of data (1985-89). Limited availability of data did not allow for the same time frame for line-haul costs, which were calculated for 2 years of data (1988-89).

Treatment of Cost Elements

Data used in multi-year analysis were normalized using Agency-approved price indices and the resulting values combined to yield an average annual cost in 1989 dollars. Where costs are considered partially variable, the Agency approved variabilities were then applied to isolate variable portions of the costs.

In addition, specific costs outlined in the CN/BNML line-haul agreements were evaluated to determine the relevant variable portion for its inclusion in cost determinations.

Allocation of Total Costs

The Agency gathered carload statistics from BNML annual reports for the years 1985 to 1988. BN provided an estimate of carloads for the year 1989. These figures were combined to yield a 5-year average number of carloads. The result was divided into the total switching costs to give the average switching cost per carload.

Allocation of line-haul costs was performed on the basis of revenue ton miles (hereinafter RTM) in order to reflect the effect of mileage on the cost. The Agency converted the RTM figure to an equivalent carload estimate. The line-haul cost total was then divided by the average number of carloads to yield an average line-haul cost per carload. The Agency then combined the switching and line-haul cost per carload to obtain the total cost per carload.

POSITION OF BN

At the public hearing, BN's testimony in respect of methodology was largely restricted to the issue of whether certain of its costs were fixed or variable.

Switching

BN maintained that CP interchange maintenance costs were partly variable, while track rental charges were fixed as per its agreement with CP. BN submitted that CN interchange maintenance costs were variable but to a different degree than those incurred at the CP interchange. Track rental charges here are fixed as per BNML's agreement with CN.

Regarding BNML operations in Winnipeg, BN submitted that train crew and locomotive costs were fixed while fuel, track ownership costs and maintenance costs were variable to the extent they are caused by traffic. "Other" charges were felt to be fully variable.

Line-haul

BNML's agreement with CN for the pool train operation commits BNML to pay a set amount for each trip, plus an amount per car mile.

BN maintained that the per trip pool train operation payment was fully fixed and that only the per car mile amount was variable. CN interest and track rental charges were believed fixed while operations and maintenance payments made to CN were presented as partly variable.

POSITION OF CP

CP maintained through its witness, Mr. John Nash, Director of Grain and Business Analysis at CP, that the cost elements and methodology in determining the BN costs should be consistent with the cost elements and methodology used to determine the costs for CP and CN. CP further contended that costs incurred in the U.S. which pertain to the Canadian portion of the movement should be included as part of the variable costs.

Switching

Regarding BNML operations in Winnipeg, CP submitted that operating costs for crews, fuel, "other" and locomotive costs are fully variable and costs for maintenance and track ownership are partly variable. CP further submitted that 53 per cent of the switching costs should be attributed to the Canadian segment of the movement and that miscellaneous costs should receive a similar treatment.

Line-haul

CP submitted that the Agency should treat all pool train costs (per trip and per car mile) as fully variable as well as operations and maintenance costs.

AGENCY DETERMINATIONS

Switching

Interchange Switching

BN's interchange switching costs at Winnipeg are comprised of track rental charges paid to CP and CN, and track maintenance costs. The Agency considers track rental charges as fixed and therefore they were not included in the costing analysis. Miscellaneous costs, as described by CP, were included in the Agency's cost determination to the extent they were reported in BNML's Annual Report. No attempt was made to incorporate any U.S. costs as they are beyond the Agency's jurisdiction. The Agency, therefore, finds CP's position regarding the attribution of 53 per cent of the costs at Winnipeg to be inappropriate.

Contrary to BN's suggestion that interchange maintenance costs are not fully variable, the Agency has determined that such costs are directly related to the amount of traffic passing over the interchange. The costs, therefore, are 100 percent variable.

BNML Operations at Winnipeg

BN's position is that crew costs for BNML's yard and switching operations at Winnipeg are fixed. In essence, the BN argument is that there is a minimum sized operation and the costs would be incurred regardless of the canola traffic. Since there is no way to reduce the costs, the costs are fixed.

The Agency finds that the argument is contrary to accepted (Agency) costing procedures and that the argument is illogical. Normally all crew, engine and fuel costs are fully allocated regardless of the operational size of a yard. In addition, the yard operations can be demonstrated to be variable in the long run. If traffic disappears, operations will cease and so will costs, i.e. they are avoidable. Conversely, if traffic increases to the extent that an extra assignment is required, costs will increase. In other words, they are variable, a point which Mr. Trotter concedes in his testimony. The extra cost is not normally charged fully to the new traffic but would be allocated over all traffic in the yard.

Mr. Trotter was specifically asked and responded as follows:

Q. In the Agency costing formula we spoke of a minute ago, is switching treated generally as a variable cost?

A. It depends on the application. With respect to the Regina Railway Relocation project, for example, it was not. With respect to the movement of grain transportation in western Canada, it is,... (transcript p. 150)

This suggests that the Regina Rail Relocation (hereinafter RRR) cost methodology is a generally accepted costing practice by the Agency. In fact it is not. The RRR project involved an application by the City of Regina under the Railway Relocation and Crossing Act, R.S.C., 1985, c. R-4, for the relocation of facilities owned by CP and CN from downtown Regina. The RRR project was a unique situation where physical railway plant was being transferred. As a result, the RRR costing methodology involved incremental costing based on additional yard assignments rather than the traditional cost per yard switching minute multiplied by the number of minutes. Acceptance by the Agency's predecessor of that particular methodology for that particular circumstance does not suggest that the same methodology is to be used generally. Normally, the costing methodology employed involves an allocation of switching costs to a measure of yard activity such as yard switching minutes. The estimated time for the movement is then multiplied by the cost per minute. The Agency finds that costs developed on these principles are more appropriate for the determination the Agency must make.

Line-haul

Pursuant to its agreement with CN, BNML is required to pay a fixed charge for each of a minimum of five pool trains per week. Accordingly, BN argues that all pool train costs are fixed. The Agency finds, however, that only the minimum weekly amount will be considered fixed, allowing all sixth and subsequent trips in a week to be treated as a variable portion of the total cost.

The Agency agrees with BN's contention that all per car mile charges are fully variable. Similarly, the Agency agrees with BN's contention that the interest and rental charges paid to CN should be treated as fixed.

BN submitted that operations and maintenance line-haul costs for Winnipeg to Emerson are partially variable. CN is responsible for maintaining these tracks and all fixed costs are incurred by CN. The Agency therefore disagrees with BN's position and finds that the operations and maintenance costs paid by BN to CN are to be considered fully variable for BNML costing purposes.

Cost Determination

Using the foregoing methodology and assumptions, the Agency has determined the costs for transporting canola oil in shipper-supplied tank cars from the CP/BNML interchange point in Winnipeg to the Canada/U.S. border at Emerson according to Agency approved costing methodology appropriate for railways subject to its jurisdiction. BNML incurs costs totalling C$282 per carload or C$0.188 per hundred pounds, based on the 150,000 lbs. per carload minimum specified in the BN tariff.

It is to be noted that had the movement been costed using either CN or CP unit costs, the costs would have been significantly higher.

FINDING

It is clear that BN's cost for the movement of canola oil from Winnipeg to the international boundary substantially exceeds the revenue which the Agency has allocated to the movement.

In the Agency's view, the costs for the movement of traffic from the CP-BNML interchange in Winnipeg to the CN-BN interchange at Emerson, Manitoba/Noyes, Minnesota are so much greater than the revenue allocation from the mileage prorate test the Agency has used, or any other rational apportionment which might even remotely be considered, that the Agency has no doubt that the portion of the rate subject to the Agency's jurisdiction is not compensatory.

Paragraph 113(5)(b) of the NTA, 1987, requires the Agency to make an order disallowing the rate and requiring BN to substitute a rate which is compensatory, unless BN establishes to the Agency's satisfaction that the rate does not have the effect or tendency of substantially lessening competition or eliminating a competitor and was not designed to have that effect. Upon issuance of this Decision, therefore, the Agency will afford BN, CP and CSP Foods Limited the opportunity to make submissions restricted to the issue of whether the rate has the effect or tendency of substantially lessening competition or eliminating a competitor and whether it was designed to have that effect. Following consideration of those submissions the Agency will make a determination as to whether the rate will be disallowed and BN directed to substitute a rate which is compensatory.

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