Decision No. 650-R-1989

December 28, 1989

File No. D.2970-89/2

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BACKGROUND

On November 13, 1989, CSP Foods Ltd. (hereinafter CSP) filed an application with the National Transportation Agency (hereinafter the Agency) to have Competitive Line Rates (hereinafter CLRs) established for the movement of canola oil from Altona and Harrowby, Manitoba and Nipawin, Saskatchewan to Winnipeg, Manitoba. The traffic in question would move in tank cars on a continuous routing selected by CSP pursuant to subsection 134(4) of the National Transportation Act, 1987 (hereinafter the NTA, 1987), via Canadian Pacific Limited (hereinafter CP) from Altona, Harrowby and Nipawin to Winnipeg for interchange with the Burlington Northern Railroad Co. (hereinafter BN) and then via BN to Warren, Minnesota.

On November 27, 1989, CP submitted its answer to the CSP application and on December 1, 1989, CSP submitted its reply.

CSP APPLICATION

CSP has been unable to reach an agreement with CP for the establishment of the CLRs and therefore has requested that the Agency establish the CLRs pursuant to its powers under section 136 of the NTA, 1987. CSP has designated continuous routes from Altona and Harrowby, Manitoba and from Nipawin, Saskatchewan to Warren, Minnesota for the movement of its canola oil traffic to ultimate destinations in the U.S.A. CSP has requested that the Agency establish the amounts of the CLRs from Altona and Harrowby, Manitoba and Nipawin, Saskatchewan to the CP-BN interchange at Winnipeg, Manitoba. CSP provided the Agency with a copy of its agreement with BN for the transportation of its traffic in shipper-supplied tank cars (minimum weight - 75 tons) over the balance of the continuous route at a published rate of $0.19 US per cwt. This rate was published in BN's Tariff No. BN 4407-C, Item 309, effective November 2, 1989. CSP's agreement with BN indicates that the rate was agreed upon for the purpose of establishing the CLRs.

CSP has designated the continuous routes to be as follows:

1. Altona - CP - Winnipeg (CP-BN interchange) - BN - Warren, Minn.
2. Harrowby - CP - Winnipeg (CP-BN interchange) - BN - Warren, Minn.
3. Nipawin - CP - Winnipeg (CP-BN interchange) - BN - Warren, Minn.

CP's Answer

CP, in its answer to the CSP application, raised the following issues:

1. CSP and BN have not agreed upon a legal rate,
2. CSP has not reached agreement with all connecting carriers,
3. Warren, Minnesota is not the destination for the traffic in question,
4. the method of calculating the CLRs proposed by CSP is improper for a number of reasons, and
5. the proposed CLRs from Altona to Winnipeg as calculated by CSP would be non-compensatory to CP.

The first three issues deal with the matter of whether CSP is eligible to have a CLR established, while the remaining issues deal with the manner in which the CLRs are calculated. Each issue is discussed separately in the analysis.

INFORMATION REQUEST

Following the close of pleadings, the Agency concluded that in order to fulfil its obligation to conduct an appropriate investigation leading to a determination of the eligibility of CSP to have three CLRs established, as well as the calculation of those rates, it required additional information from the parties. Accordingly, on December 11, 1989, CSP was requested to provide responses to the following questions:

1. Will any of the traffic moving under the proposed CLRs ultimately move to a destination other than Warren, Minnesota?
2. Will the rate published in Item 309 of BN's Tariff No. BN 4407-C be used in conjunction with a confidential contract between CSP and BN?
3. If the published rate is used in conjunction with a confidential contract, CSP is requested to provide details of the terms of the contract(s).

CSP provided its response in a letter dated December 13, 1989. Following receipt of CSP's response, the Agency requested the following information of CP:

1. The total amount of revenue received by CP for all movements of canola oil in shipper-owned tank cars over all of its lines of railway for the most recent 12 month period for which CP has available data.
2. The total number of miles over which CP moved loaded shipper-owned tank cars on all of its lines of railway to obtain the aforementioned revenue.

CP provided the information requested by letter dated December 20, 1989.

ANALYSIS AND FINDINGS

In essence, the Agency has before it two issues; whether CSP is eligible to have the Agency establish the CLRs requested and the appropriate method of calculation of the CLRs. Each of these issues is discussed separately below.

CSP Eligibility for CLRs

CSP has access to the lines of one railway company, CP, at each of the three origins for which it seeks a CLR. In each case, it has designated a continuous route from the point of origin (Altona and Harrowby, Manitoba and Nipawin, Saskatchewan) to the point of destination (Warren, Minnesota). The nearest interchange to the origins along the continuous routes designated by CSP is the CP-BN interchange at Winnipeg. CP has raised no objection to any of these facts.

CP has raised two issues which call into question CSP's eligibility to have CLRs established on its behalf. First, CP alleges that CSP and BN have not agreed on a "legal" rate for the movement between Winnipeg and Warren and, second, CSP has not reached agreement with all connecting carriers on the continuous route.

CP submits that CSP and BN must agree upon a legal rate for the movement between Winnipeg and Warren. CP submits that the published tariff rate is not a legal rate because it is non-compensatory. In a separate application, CP has requested that the Agency investigate the rate pursuant to its powers under section 113 of the NTA, 1987. Notwithstanding that application, section 117 of the NTA, 1987 infers that rates set out in a tariff are deemed to be lawful until they are disallowed or varied by the Agency. Since the BN rate from Winnipeg to Warren has not been disallowed or varied by the Agency, the Agency will consider the rate as it stands. CSP has submitted, as a document in support of its application, a copy of an agreement, dated October 30, 1989, between CSP and BN which makes it clear that CSP and BN had reached an agreement on the rate which BN published on the following day.

CP also submits that CSP has not reached agreement with all connecting carriers between Winnipeg and Warren. CP submits that BN actually commences at Emerson, Manitoba/Noyes, Minnesota. Between Winnipeg and Emerson/Noyes the traffic is handled by Burlington Northern (Manitoba) Limited (hereinafter BNML) and the Canadian National Railway Company (hereinafter CN). Since CSP has not indicated that it has an agreement with either of these railway companies, CP submits that CSP has not complied with the requirements of the Agency.

By an agreement dated March 17, 1983 and filed with the Canadian Transport Commission, predecessor of the Agency, on March 22, 1983, BNML gave power of attorney to BN. After reviewing the terms of the power of attorney, the Agency finds that BN has full authority to enter into an agreement with CSP on behalf of BNML and itself for the movement of traffic between Winnipeg and Warren.

In respect of CP's suggestion that CSP has not reached agreement with CN, the Agency notes that CN does not handle the traffic and is not a party to the rate and, therefore, no agreement is necessary.

The final issue raised by CP, in respect of CSP's eligibility to have the Agency establish CLRs for it, relates to the designation of Warren, Minnesota as the destination of the traffic. CP submits that since it is obvious that Warren is not the true destination of the traffic, it is not possible to determine whether CSP has reached agreement with all connecting carriers.

In response, CSP submitted that the subject of destination was dealt with in Canadian Pacific Limited and National Transportation Agency (an unreported decision of the Federal Court of Appeal), A-1167-88. The Agency has reviewed the decision of the Federal Court, which dealt with the first CLRs established by the Agency, and finds the following statement by Mr. Justice MacGuigan to be relevant:

I must turn again to subsection 134(4) which allows the shipper to `designate the continuous movement of the traffic of the shipper from the point of origin to the point of destination.' That designation includes both the point of origin and the point of destination. In other words, the destination is the point the shipper designates as the destination. The only limitation in the legislation is that the designation in subsection (4) is subject to subsection (5), which requires a wholly Canadian route where the ultimate destination is within Canada. In all other circumstances, there is no limitation on the shipper's power of designation.

In the present application, CSP has indicated that none of the traffic which would move under the CLRs will have an ultimate destination in Canada. That being the case, the Agency finds that the designation of Warren as destination of the traffic is within CSP's power of designation under subsection 134(4) of the NTA, 1987. Even though the ultimate destination is beyond Warren, the only connecting carriers which are relevant in the present application are those which are parties to the rate between the named origins and Warren, Minnesota, the named destination.

After consideration of submissions by the parties, the Agency finds that CSP has established its eligibility to have the Agency establish the CLRs requested.

Method of Calculating CLRs

The NTA, 1987 sets out a number of alternative methods for the Agency to calculate the amount of a CLR. Section 137 of the NTA, 1987 envisages two specific types of situations, one where the connecting carrier charges a rate set out in a published tariff (subsection 137(3) of the NTA, 1987) and the other where the connecting carrier charges a rate set out in a confidential contract (subsections 137(4) and 137(5) of the NTA, 1987). In the first situation, the Agency bases the CLR on the connecting carrier's published rate. In the second situation, because the connecting carrier's rate is confidential, the Agency bases the CLR on the local carrier's revenue. It is important to note, however, that section 137 of the NTA, 1987 makes no provision for situations where the connecting carrier charges a rate which is a published tariff rate in conjunction with a confidential contract.

In the event that the Agency cannot determine the amount of the CLR using the methods set out in section 137 of the NTA, 1987, section 142 of the NTA, 1987 gives it authority to establish an alternative method. In previous CLR applications which involved movements of traffic to U.S. destinations and where a published tariff was presented to the Agency for use in the calculation of the CLR, the Agency determined that the method set out in subsection 137(3) of the NTA, 1987 could not be used to calculate the amount of the CLR and established an alternative method pursuant to section 142 of the NTA, 1987. The reason for this was that the connecting carrier would receive revenue in U.S. funds and subsection 137(3) of the NTA, 1987 makes no provision for converting that revenue into Canadian currency. The Agency therefore exercised its authority under section 142 of the NTA, 1987 to develop an alternative method for the calculation of the CLR. That methodology involved the conversion of the published tariff rate to Canadian funds and then calculating the amount of the CLR based on the converted rate.

CSP submits that the Agency should use the same methodology as it has in its previous CLR decisions since a BN published tariff rate in U.S. dollars is in effect between Winnipeg, Manitoba and Warren, Minnesota.

In respect of the application presently before it, the Agency finds that it cannot determine the amount of the CLRs in accordance with subsection 137(3) of the NTA, 1987, because the published tariff rate is set out in U.S. funds. Moreover, the Agency finds that it cannot establish the CLRs by simply using a Canadian dollar equivalent to the published rate.

Subsection 137(3) of the NTA, 1987 contemplates a situation where a rate is not only set out in a tariff but is also charged by the connecting carrier. This can only mean that the published tariff rate is not modified in some manner by a confidential contract which applies either to the movement of traffic over the continuous route designated by the shipper or to a subsequent movement of the traffic by the connecting carrier. In respect of traffic moving within Canada, the Agency can confirm that a rate has been published and, more importantly, whether or not a rate is modified by a confidential contract.

In situations where traffic will move into the United States, however, the Agency simply cannot be certain that a published rate is charged and not modified by a confidential contract.

There is no doubt that there is a BN published rate from Winnipeg to Warren. There is, however, in the Agency's opinion, more to the matter than the simple existence of a published tariff rate.

By letter dated December 13, 1989, in response to the Agency's request for additional information, CSP has confirmed that the traffic will move beyond Warren and that such movement will be under confidential contract. CSP declined to provide details of the confidential contract to the Agency, but stated that:

. . . if the rates contained in the confidential contracts had been published in open tariffs, the ton mile revenue would have been significantly lower than the ton mile revenue derived from the rate covering the movement between Winnipeg and Warren.

CSP submitted, however, that the movement beyond Warren was not relevant to its application. In support of its position, CSP referred to the Agency's Reasons for Order No. 1988-R-798, which was the first Agency Order establishing a CLR.

In those reasons, the Agency had concluded that a CP request for the shipper to provide information in respect of the movement of traffic beyond the destination designated by the shipper was not necessary to establish the CLR. In that particular case, the Agency's determination was made in the context of the designation of the destination of the traffic. In the present case, however, the Agency's interest lies in determining whether the BN published rate can be relied upon as the basis for calculating a CLR which will apply to the portion of the movement handled by CP. The Agency, therefore, finds that the information requested from CSP is relevant to the matter at hand. Because the Agency does not have access to the subject contracts, which have application in the United States, it is unable to confirm whether the published tariff rate from Winnipeg to Warren is modified by virtue of any of the terms of those confidential contracts, other than those relating to rates.

CSP, in its reply to CP's answer, commented on a number of CP and BN published rates which CP had suggested are evidence that the BN rate between Winnipeg and Warren is unreasonable. CSP stated:

. . . confidential contracts are available both in Canada and the United States and there is absolutely no basis for assuming that rates contained in published tariffs are the rates at which traffic moves.

The Agency agrees and finds that the statement applies equally to the published tariff rates cited in both CP's answer and to BN's published rate from Winnipeg to Warren. Furthermore, the Agency finds that where a portion of a movement takes place in the United States, it cannot conclusively determine whether a rate is modified in some manner by a contractual arrangement entered into by a shipper and a connecting carrier and having effect in the United States.

All of this leads the Agency to find that it cannot establish the CLRs requested by CSP using a methodology similar to that set out in subsection 137(3) of the NTA, 1987 based on the published BN tariff rate.

As noted above in this Decision, the Agency has exercised its authority under section 142 of the NTA, 1987 to develop an alternative method for the calculation of the CLRs because subsection 137(3) of the NTA, 1987 makes no provision for converting that revenue into Canadian currency. Also, the Agency finds that the absence in the NTA, 1987 of a provision contemplating the combination of a published tariff and a confidential contract does not allow the Agency to determine the rate in accordance with section 137 of the NTA, 1987.

Upon consideration, the Agency has determined that the following methodology will be used. This methodology will use the following inputs:

1. Distance

   Altona - Winnipeg 62.9 Miles

   Harrowby - Winnipeg 222.7 Miles

   Nipawin - Winnipeg 457.6 Miles

2. Car loading - 75 tons
3. The total amount of revenue received by CP for all movements of canola oil in shipper-owned tank cars over all of its lines of railway for the most recent 12 month period for which CP has data available - $13,382,772.
4. The total number of miles which CP moved loaded shipper-owned tank cars over all of its lines of railway to obtain the revenue in (3) - 5,268,255 miles.
5. Interswitching charge - $275 per car, effective January 1, 1990.

Mileages were extracted from CP Time Table No. 62, dated April 26, 1987. Inputs (3) and (4) were provided by CP at the direction of the Agency.

The methodology used by the Agency is as follows:

1. Divide total CP revenue for the movement of canola oil (input (3)) by the total number of miles which CP transported loaded cars of canola oil to obtain that revenue per loaded car mile (input (4)). This calculates the revenue per mile.
2. Subtract 25 miles, the distance for which the interswitching charge applies, from the mileage from each origin to Winnipeg. This calculates the distance to which the revenue per mile will apply.
3. Multiply the quotient obtained in (1) by the mileage calculated in (2).
4. Add the interswitching charge to the amount calculated in (3) to calculate CP's revenue per car for each CLR movement.
5. Divide the revenue per car by 75 to calculate the amount of the CLR in dollars per ton.

The foregoing methodology was used to calculate a CLR from each of the three origins designated by CSP. The calculations are as follows:

1. Calculate revenue per mile

   $13,382,772 = $2.54 per loaded car mile

   5,268,255

2. Calculate distance for which revenue per mile will apply.

   Altona - Winnipeg 62.9 - 25 = 37.9 miles

   Harrowby - Winnipeg 222.7 - 25 = 197.7 miles

   Nipawin - Winnipeg 457.6 - 25 = 432.6 miles

3. Multiply revenue per mile (1) by distance calculated in (2).

   Altona - Winnipeg $2.54 x 37.9 = $96.27

   Harrowby - Winnipeg $2.54 x 197.7 = $502.16

   Nipawin - Winnipeg $2.54 x 432.6 = $1,098.80

4. Add interswitching charge to amount calculated in (3) to determine revenue per car.

   Altona - Winnipeg $275 + $96.27 = $371.27

   Harrowby - Winnipeg $275 + $502.16 = $777.16

   Nipawin - Winnipeg $275 + $1,098.80 = $1,373.80

5. Calculate CLR in dollars per ton.

   Altona - Winnipeg $371.27 = $4.95/ton

   75

   Harrowby - Winnipeg $777.16 = $10.36/ton

   75

   Nipawin - Winnipeg $1,373.80 = $18.31/ton

   75

There remains, however, the issue of whether the CLRs calculated are compensatory. In its answer to CSP's application, CP expressed concern that if the CLRs were established at the level calculated by CSP in its application, at least one of the CLRs would be non-compensatory. Subsection 137(8) of the NTA, 1987 requires that the Agency increase to a compensatory level any CLR which is non-compensatory. CSP has submitted that should action under subsection 137(8) of the NTA, 1987 be necessary, the Agency's investigation should not interfere with the establishment of the CLRs, but should take place in accordance with the time limits set forth in subsection 113(5) of the NTA, 1987. CSP requested that the Agency order disclosure of CP's variable costs as necessary to enable CSP to make meaningful submissions on the matter.

A significant proportion of canola oil traffic moves both under rates established by the Agency at minimum compensatory levels and under the Western Grain Transportation Act, R.S.C., 1985, c. W-8. The Agency, therefore, has the ability to determine, using the accepted costing methodology used to establish minimum compensatory rates, whether the CLRs calculated in accordance with the methodology developed by the Agency are compensatory. This has been done and the Agency finds that the CLRs from Altona, calculated using the Agency-developed methodology is not compensatory. The reason for this is primarily because a significant component of variable costs for a short movement such as the 62.9 miles from Altona to Winnipeg are the costs incurred originating and terminating the traffic. The average length of haul for CP's canola oil traffic is 1,259 miles and consequently the costs of originating and terminating the traffic are distributed over a much greater distance and as such are a lower proportion of total costs. The use of the interswitching rate is intended to compensate the local carrier for this difference. In the case of the Altona - Winnipeg movement, however, this is not sufficient and the calculated CLR is non-compensatory. Therefore, in accordance with its powers under subsection 137(8) of the NTA, 1987, the Agency has determined that the CLR for the movement from Altona to Winnipeg, calculated in accordance with the Agency developed methodology set out in this Decision shall be increased to $6.93 per ton. With that action, the Agency is satisfied that all of the rates in this Decision are compensatory.

The CLRs established by the Agency will therefore be:

Altona, Man. - Winnipeg, Man. $6.93 per ton

Harrowby, Man. - Winnipeg, Man. $10.36 per ton

Nipawin, Sask. - Winnipeg, Man. $18.31 per ton

The CLRs will be established subject to the following conditions:

1. The traffic shall be billed to Warren, Minnesota.
2. No traffic moving at the level of rate established by the Agency shall have an ultimate destination in Canada or any other destination outside the continental United States.
3. CP will have no obligation to make mileage payments to the owner/lessee of railway tank cars used to transport canola oil for the distance travelled on the lines of CP.
4. The rate shall remain in force for a period of one year from the date on which the rate becomes effective or such other period as is agreed to by CSP and CP.

CP shall publish a tariff setting out the CLRs established in this Decision within fifteen (15) days of the date of this Decision.