Decision No. 67-R-2008

February 19, 2008

February 19, 2008

IN THE MATTER OF the determination by the Canadian Transportation Agency of the 2007-2008 volume-related composite price index required for Western Grain Revenue Caps established pursuant to Part III, Division VI of the Canada Transportation Act, S.C., 1996, c. 10, as amended, and

IN THE MATTER OF Bill C-11, an Act to amend the Canada Transportation Act and the Railway Safety Act and to make consequential amendments to other Acts, which received Royal Assent on June 22, 2007, and specifically, Clause 57 of Bill C-11 which allows for an adjustment to the volume-related composite price index for the maintenance of hopper cars used for the movement of grain, and

IN THE MATTER OF Canadian Transportation Agency Decision No. 388-R-2007 dated July 31, 2007, which established an interim 2007-2008 volume-related composite price index effective August 1, 2007.

File No. T6650-11-1


INTRODUCTION

This Decision

[1] In this Decision, the Canadian Transportation Agency (the Agency) establishes the final volume-related composite price index for the movement of regulated grain (grain) for crop year 2007-2008. The Agency, in its Decision No. 388-R-2007 dated July 31, 2007, set an interim index which accounted, in part, for the "actual" maintenance costs related to the hopper cars.

[2] On June 22, 2007, Bill C-11, An Act to amend the Canada Transportation Act and the Railway Safety Act and to make consequential amendments to other acts, received Royal Assent. Clause 57 of Bill C-11 (Clause 57) states:

Despite subsection 151(5) of the Canada Transportation Act, the Canadian Transportation Agency shall, once only, on request of the Minister of Transport and on the date set by the Agency, adjust the volume-related composite price index to reflect the costs incurred by the prescribed railway companies, as defined in section 147 of that Act, for the maintenance of hopper cars used for the movement of grain, as defined in section 147 of that Act.

[3] Clause 57 provides that the Agency must adjust the volume-related composite price index. The adjustment is not an adjustment at large. It is specifically the adjustment that is to reflect costs incurred by the Canadian National Railway Company (CN) and the Canadian Pacific Railway Company (CP) and only for the maintenance of hopper cars used for the movement of regulated grain.

[4] This new adjustment reflects Parliament's acceptance that since 1992, and largely due to improved railway company operating efficiencies, the railway companies' costs for moving statutory grains have decreased significantly. This downward trend was in fact first recognized in the year 2000 when the CTA was changed to reflect revenue regulation as opposed to direct rate regulation.

[5] The policy underpinning Clause 57 is that the railway companies' costs for the maintenance of hopper cars, which are a significant cost component in the movement of grain, have declined to the point that the overall integrity of the Revenue Cap Program is now in doubt. That is, as a regulatory system that is cost based, at least in part, there are historic operating costs in the system that the railway companies are no longer incurring. There is widespread recognition that these historic costs are significant and there is a broad-based view that they ought to be removed from the Revenue Cap formula to partly restore the balance between the interests of the railway companies, and shippers and producers.

[6] Re-balancing is a necessary corrective measure that will help restore the integrity of the Revenue Cap Program by ensuring, for each railway company, that the cap is in line with current railway operating expenditures. Since the Revenue Cap Program was established, railway company revenue caps have increased while many of the underlying costs that gave rise to the revenue caps have decreased. Grain producers have continued to pay average rates, to transport grain, that are based on railway costs that are no longer incurred. The Revenue Cap Program was established to provide a market-based pricing model which grants railway companies pricing freedom, while emulating competitive market outcomes, and at the same time providing a rate protection mechanism for grain producers and shippers.

[7] Clause 57 is restricted to an assessment of hopper car maintenance costs. This specificity arises from costing assessments that were undertaken in the years 2004-2005. At that time, the federal government intended to sell its grain hopper cars to a third party, the Farmers Rail Car Coalition (FRCC). This transaction did not take place and the cars are currently provided free of charge to CN and CP for statutory grain movement. During the negotiations, the FRCC had requested that the government provide an estimate of the maintenance costs that would be encountered in the event of a sale. Accordingly, Transport Canada asked the Agency to develop and provide such an assessment to the parties (CN, CP and the FRCC). Agency staff's calculations at that time indicated that the maintenance expenditures for each railway company were significantly below the maintenance cost levels that were embedded in the 1992 costs that formed part of the Revenue Cap formula under the law. Specifically, Agency staff estimated that the overall impact would be approximately $2.00 per tonne. This amount was made public at the time.

[8] Since then, the railway operating efficiencies have become well known in the industry. When amendments were being proposed to the CTA, provisions were added to ensure that all of those railway maintenance costs that were no longer being incurred could be taken out of the Revenue Caps. These provisions are not new and appeared in two previous proposed bills, by previous governments, to modernize the CTA.

[9] It is estimated that during the first seven years under the Revenue Cap Program (i.e., from crop year 2000-2001 to crop year 2006-2007) the railway companies received more than $550 million for hopper car maintenance costs while incurring less than $250 million for this maintenance. Thus, in the period, the railway companies have received at least $300 million more than they have spent on hopper car maintenance, and this has been paid by Prairie grain producers. Moreover, the difference between the amount the railway companies receive under the Revenue Cap Program and what they incur as hopper car maintenance costs has been growing at an increasing rate.

[10] The Agency notes that even after the Clause 57 adjustment is applied, the amounts the railway companies will receive for hopper car maintenance in future crop years will continue to be adjusted for inflation and will not capture any reductions in "actual" car maintenance costs achieved through future productivity gains which will accrue to the railway companies.

[11] The Clause 57 adjustment, a netting-out of the historical maintenance costs and replacing them with specific costs, reflects Parliament's awareness that the Revenue Cap Program is intended to be a rate protection mechanism for grain producers. Even though the federal government removed the railway subsidies for the transportation of grain in 1995 and there have been various deregulation initiatives over the intervening period, Parliament has retained grain shipper rate protection through the Revenue Cap Program. The railway companies now have pricing freedom but each railway company's average rate at the end of the crop year cannot exceed the average rate under the regulated Revenue Cap Program. The Revenue Cap Program dictates the maximum that shippers will pay. If the cap is higher than it should be, due to the overstated historical costs, Parliament has directed the Agency to reduce it to partly restore the integrity of the Revenue Cap Program. Simply put, if the historical maintenance costs are too high, producers are paying too much to shippers who are paying too much to the railway companies. Parliament has directed that this should not be the case for hopper car maintenance costs included, or embedded, in the Revenue Caps.

[12] While Parliament has declared that a re-balancing is necessary, it has instructed the Agency to determine what re-balancing is required and how and when it is to be done. The only limit is that the adjustment must be undertaken "once only". This is to be achieved by adjusting the volume-related composite price index to better reflect costs for the maintenance of hopper cars used for the movement of grain. This determination is separate from the yearly Revenue Cap determination exercise which includes many costs, in addition to those related to hopper cars.

[13] Clause 57 became law on June 22, 2007. However, Agency staff started consulting with the railway companies to develop an appropriate review methodology when Bill C-11 was first tabled in Parliament. Agency staff began consultations on methodology with the railway companies in the summer of 2006 and also alerted them to the Agency's intention to examine "actual" maintenance costs as opposed to what is know in the industry as "system average" costs. By the time Clause 57 came into effect, Agency staff had already undertaken considerable work with the railway companies on possible approaches to adjusting the index based on "actual" cost data to be provided.

Letter to the Agency from the Minister of Transport: June 26, 2007

[14] Clause 57 directed that the Agency could formally begin its assessment once it was requested to do so by the Minister of Transport. In June 2007, the Minister of Transport, Infrastructure and Communities requested that the Agency make the necessary adjustments to the index. In his letter, the Minister stated, in part, that "... given the importance of this matter to the grain transportation sector, the Canadian Transportation Agency's expeditious determination of these adjustments would be most appreciated, especially if they could become effective for the new 2007-2008 crop year. I appreciate your cooperation on this matter". This letter makes it very clear that the object of the exercise was to benefit producers as soon as possible, by way of lowered average freight rates for their western grain movements.

Advisory letter from the Chairman of the Agency to CN and CP

[15] Subsequent to the receipt of the Minister of Transport's letter, and upon due reflection, the Chairman of the Agency, Geoffrey Hare, concluded that the Agency would start its assessment as quickly as possible so that shippers and producers might benefit from reduced Revenue Caps for the then imminent new crop year (2007-2008). The alternative would have been to deny shippers and producers the relief ordered by Parliament for at least a full crop year and the law provided no alternative means of recouping the excess payments that would otherwise be lost for that crop year.

[16] The Chairman of the Agency also recognized that the time required for the final assessment would critically depend on the railway companies providing verifiable "actual"Note 1 cost data, in a timely manner. He issued an advisory to the railway companies in a letter dated June 28, 2007, which provided notice that the likely reduction to the Revenue Caps could be in the range of $60 to $75 million, thereby reducing the price index to about 1.07 for the new crop year. The Chairman also indicated that the time required to audit the costing information and to consult meant that the determination of the Clause 57 adjustment would be issued on or before January 31, 2008.

[17] The purpose of this advisory was twofold. First, it might foster a timely reduction in freight rates. Second, it would allow the railway companies to anticipate a change in the 2007-2008 volume-related composite price index for the purposes of planning their commercial operations. This gave them the earliest opportunity to understand the nature and magnitude of changes that could be forthcoming from the review. The advisory was designed to avoid a regulatory surprise that could place either company in a position late in the crop year where they would have limited ability to keep their revenues within their respective "adjusted" caps for the year - and thereby avoid payment of a penalty.

[18] In response to the advisory and to a subsequent Agency letter, the railway companies provided a number of reasons why they objected to the advisory. In addition, CP maintained that the advisory has no legal effect. CN asserted that the index established on April 27, 2007 remains the only legally applicable index for the upcoming crop year until such time as the Clause 57 adjustment has been made.

July 31, 2007 Agency Interim Index

[19] The Agency contacted the railway companies by letter dated July 26, 2007 indicating that it would commence its review immediately and that this review could envision an interim finding as well as a final determination that would issue later in the 2007-2008 crop year. The need for this approach within the one process arose from the acceptance that the task would take many months to complete and again, it was imperative that the railway companies know for commercial purposes, what the impact may be for the upcoming crop year. Marketing and pricing strategies for the crop year would be critically based upon the railway companies' respective Revenue Cap estimates. It was also imperative that shippers and producers benefit from any lowered average freight rates as soon as possible as it was clear to all parties, and Parliament, that shippers and farmers were being overcharged. The Agency also advised that the final determination would issue later in the crop year and would apply to the entire crop year, replacing the interim index.

[20] Both railway companies immediately replied stating that an interim/final index approach offended the "once only" requirement under clause 57 and that the proposed approach was unfair in any event as the Agency appeared to have made up its mind on the matter by quoting a rough estimate of what the impact eventually might prove to beNote 2.

[21] Further to its review of the railway companies' responses, the Agency concluded that an interim index should be developed as quickly as possible to ensure that the industry, railway companies, shippers and producers and other affected persons, understand for their own commercial planning what the magnitude of the Revenue Cap adjustment might be for the crop year. As there would be one assessment process, the Agency concluded that as a question of policy, Clause 57 and the timing of the passage of Bill C-11 mandated an interim/final index approach. Discussions with the railway companies leading up to this interim ruling included assessment of an option that allowed the Agency to issue a final index early in the fall. However, the railway companies could not agree on a common approach because of data collection and analysis concerns.

[22] The Agency found that the delays involved in waiting for the railway companies to supply the necessary costing data and the resultant analysis by the Agency meant that the index could only be issued very late in the crop year. The lateness mandated the use of the interim/final ruling approach.

Interim ruling

[23] Pursuant to subsection 28(2) of the CTA, the Agency may, instead of making an order final in the first instance, make an interim order and reserve further directions either for an adjourned hearing of the matter or for further application.

[24] In Decision No. 388-R-2007 and relative to the conditions offered by the railway companies for index development, the Agency concluded:

The Agency finds that these railway submissions regard the index development and ultimate determination by the Agency as being akin to a commercial negotiation. This is not a commercial negotiation. It is a statutory mandate given to the Agency which the Agency intends to carry out fairly, conscientiously and in an expert fashion. The railway companies' position is that an October 1 index is only achievable through the Agency agreeing to previously filed railway submissions on methodology is unacceptable. The methodology, data collection, assessment and the ultimate determination are within the domain of the Agency once due process has been met. Due process will be followed and in light of the railway companies' inability to agree to a process that would permit an Agency decision on an October1 index, the Agency shall proceed to a determination of an interim index followed by a final index.

Retroactivity of final ruling

[25] In its interim Order, the Agency indicated that a final order would issue likely before January 31, 2008 and that the order would apply to the entire 2007-2008 crop year. The rationale for this is set out above.

[26] The jurisdiction to issue a retroactive final order arises from the inherent nature of interim orders, as established by the courts in Canada. Specifically, the Supreme Court of Canada, in CRTC v. Bell Canada et al, 1989 1 S.C.R. 1722, has established that depending on the statutory context the power for a tribunal to make interim orders necessarily implies the power to revisit the period during which interim rates were in force. The context examined by the Court in that case was the then Railway Act and the National Transportation Act, 1987. While these two statutes have been repealed, the operative tribunal powers have been carried through into section 28 of the existing CTA. The interim ruling indicated that the January 31, 2008 date for a final ruling was selected to allow sufficient time to further audit, assess and consult on the hopper car maintenance costs while ensuring that sufficient time remained in the crop year for railway companies to adjust rates in line with the final index. The Agency has audited and assessed CN's and CP's submissions of hopper car maintenance costs and the Agency's findings are presented and discussed in this Decision.

BACKGROUND

[27] The following historical background is critical to an understanding of the determination that the Agency is required to make under Clause 57.

[28] Under the CTA, the Agency determines the maximum revenue entitlement (Revenue Cap) for CP and CN for their movement of what is known as western grainNote 3. The Revenue Cap is established for each railway company and is undertaken by the Agency on an annual basis, for each crop year ending July 31 further to the Agency's assessment of detailed information provided to it by the railway companies.

[29] This maximum revenue entitlement is developed pursuant to a formula set out in the CTA. If a railway company's revenues for the movement of western grain for the crop year exceed the company's Revenue Cap, or limit for that year, the company is required to pay out the excess together with applicable penalties pursuant to the Railway Company Pay Out of Excess Revenue for the Movement of Grain Regulations, SOR/2001-207.

[30] This regulatory mandate given to the Agency under the CTA represents a further step in Canada's evolving system of freight rate regulation. Overall, this system has developed since 1897 with An Act to Authorize a Subsidy for a Railway through the Crows Nest Pass, 60 & 61 Vict, c. 5. The prevalence of federal subsidy grants to railway companies for the movement of statutory grain in Canada subsisted for many years since that time, and only culminated in 1995 with the repeal of the then Western Grain Transportation Act (WGTA).

[31] The subsidy system was replaced at that time with a rate protection mechanism under the then CTA (maximum rate regulation) which existed for five years. In the year 2000, it was replaced with the current form of maximum revenue regulation (the Revenue Cap Program).

[32] The underlying premise to this new regulation is that railway companies have rate-making freedom, however, total revenue in the crop year is constrained by the Revenue Cap. As long as the railway companies do not exceed their respective caps by year end, there is no penalty. Some individual grain producers may pay more than others during the year for the movement of their grain, however, on a system basis, farmers pay an average rate that is derived from the overall revenue maximum divided by the amount of statutory grain moved in a particular crop year.

[33] To determine if a railway company's revenues exceed its Revenue Cap, the Agency applies a formula set out under the CTA which requires an array of inputs that are set out under the law. These inputs include pre-determined values for the railway companies' revenues for the movement of grain, the number of tonnes involved in the railway companies' movement of grain; and the number of miles of the railway companies' average length of haul for the movement of grain. All of these values are fixed at what is referred to as the "base year" level. While "base year" is not defined under the legislation, it is accepted in the industry that these levels were developed having regard to 1992 levels, which coincides with the last costing assessment undertaken by the National Transportation Agency under the Western Grain Transportation Act.

[34] The formula in the CTA also requires that the Agency develop and apply a volume-related composite price index that serves to adjust the revenue amounts year to year. Presently, the base year for this price index is identified in the CTA as crop year 2000-2001, for which, the index is set at 1.0.

[35] The Revenue Cap Program regulates railway statutory grain revenues, and is premised, in part, upon historical data. While the existing regulation governs maximum revenues, it is nonetheless cost based where the costs are historical railway costs.

[36] The existing law, as the current version of regulation in this industry, relies to a great extent upon earlier regulatory work undertaken by the Agency or its predecessors.

Consultation

[37] The Agency consulted on the Clause 57 hopper car maintenance adjustment with approximately 30 organizations interested in western grain matters. It began on October, 15, 2007 with the issuance of a working document (the Consultation Document).

[38] The Consultation Document described three major tasks involved in the hopper car maintenance adjustment:

  1. The determination of a "price index adjustment methodology",
  2. The determination of the amount of hopper car maintenance costs that are "embedded" within the Revenue Caps for crop year 2007-2008, and
  3. The determination of the amount of "actual" hopper car maintenance costs for crop year 2007-2008.

[39] Within those three major tasks, seven issues were identified for discussion:

  • Issue No. 1: The determination of a price index adjustment methodology
  • Issue No. 2: The inclusion of Uniform Classification of Account 517 as car maintenance
  • Issue No. 3: The level of contribution to constant costs applicable to 1992
  • Issue No. 4: The use of a system-wide or specific measure of inflation
  • Issue No. 5: The use of a system-wide or specific measure of productivity to determine crop year 2007-2008 "embedded" hopper car maintenance costs
  • Issue No. 6: Issues related to the determination of "actual" hopper car maintenance costs for crop year 2007-2008
  • Issue No. 7: The level of contribution to constant costs applicable to "actual" crop year 2007-2008 hopper car maintenance costs

[40] The Agency's analysis and findings for these seven issues are presented below. In each case, a brief description of the issue is provided. Summaries of the feedback on each issue, received from participants during the consultation, are presented in Appendices 1-7, and form part of this Decision.

[41] Summaries of technical information also appear in Appendices 8 and 9.

ANALYSIS AND FINDINGS BY ISSUE

Issue No. 1: The determination of a price index adjustment methodology

[42] A "price index adjustment methodology" must be determined to adjust the 2007-2008 VRCPI - originally determined on April 27, 2007 to be 1.1611 - so that estimated 2007-2008 Revenue Caps are revised by an amount equal to the difference between embedded and "actual" hopper car maintenance amounts for crop year 2007-2008.

[43] The Agency's Consultation Document provides a description of a proposed price index adjustment methodology, including two illustrations showing how an adjusted VRCPI would be derived. A copy of the full Consultation Document may be found on the Agency's Web Site at: http://www.cta-otc.gc.ca.

Analysis and Findings

[44] The feedback from the consultation centred on four aspects of the price index methodology. Each aspect is discussed separately below.

Tonnage forecast

[45] There was general acceptance of a projection of 28.0 million tonnes for the 2007-2008 and subsequent crop years - with the exception of CN. CN proposed that the tonnage estimate should be based on no more than the past 10 years which would result in a maximum forecast of 25.8 million tonnes - when the recently-determined 2006-2007 tonnage of 28.6 million tonnes is added to the historical summary. Similarly, if only the last five years were used to project the tonnage forecast, only 24.4 million tonnes would be projected for future years.

[46] The problem with using a shorter time frame is that the low-tonnage drought years (which impacted the volumes for crop years 2001-2002, 2002-2003 and 2003-2004) would have a disproportionate impact upon the average. CN suggests that regulatory tonnages have declined because of a shift from wheat to lighter-density crops, and an increase in non-regulated value added products over shipments of regulated unprocessed grains. An Agency staff review of CN's data fails to support this assertion. CN's average carload weight in government hopper cars has remained relatively constant since the inception of the Revenue Cap Program, with its highest average load weight occurring in the most recent crop year, 2006-2007.

[47] During the last two crop years, 28.4 and 28.6 million tonnes of grain moved, respectively. These volumes and the clear support in the industry for a longer study period have led the Agency to find that the tonnage forecast should be based on the 15-year historical tonnage average between 1992 and crop year 2006-2007, that is, 27.85 million tonnes.

Length of haul forecast

[48] Several respondents accepted the Agency's length of haul projection of 950 miles for the 2007-2008 and subsequent crop years. CN asserts that the value should be lower while Alberta Agriculture and Food (AF) asserts that the value should be higher.

[49] According to CN, the Agency's historical haul length average is an inappropriate measure as it includes the six longest lengths of haul in the first six years of data, from 1992 to 1997. The Agency staff acknowledged these high-mileage years in the Consultation Document where it is noted that the decline in the average length of haul during this interval was primarily due to lower volumes being shipped to Prince Rupert (which is 186 miles farther from Edmonton than Vancouver), and the increased use of short line railways (which mileage does not contribute to the statutory length of haul). However, AF states that the opposite is now occurring, as CN is increasing its volume shipped to Prince Rupert and has re-acquired several Alberta short lines.

[50] AF states that the 950-mile average length of haul projection is too low based on Canadian Grain Commission records for the first 15 weeks of the 2007-2008 crop year. The Agency compared its historical Revenue Cap statistics (by corridor and percentage distribution) to that provided by AF from the Canadian Grain Commission for crop year 2006-2007 and found the data to be closely aligned. The Canadian Grain Commission's information for the first 15 weeks of the 2007-2008 crop year supports AF's call for a longer length of haul than the proposed 950 miles. However, while 15 weeks of data may be the start of a new trend in traffic flows, it is too short an interval to support a substantive revision to a long-term based projection.

[51] The Agency's 950-mile projection (for consultation purposes) was based on the 14-year average of data from 1992 to crop year 2005-2006 indicating an average length of haul of 953 miles, which was rounded to 950 miles. The recently-determined length of haul for crop year 2006-2007 is 945 miles, which is four miles higher than for the previous crop year. While deriving a projected length of haul based on an average of all years from and including 1992 includes relatively long lengths of haul from the early years, recent trends show increasing lengths of haul (from the historical low in crop year 2002-2003) that will likely continue.

[52] For the purposes of a price index adjustment methodology, the length of haul forecast will be the 15-year historical average of lengths of haul between 1992 and crop year 2006-2007, which incorporates the most recent data. This is 953 miles.

Indexation of 8th and 9th components for future years inflation

[53] CN and CP assert that the hopper car maintenance adjustment is a "once only" adjustment and consequently, can not take place again when future crop year VRCPIs are developed. These statements were directed at the methodology's proposed addition of 8th and 9th weights (to the price index basket) where, for the 2007-2008 crop year, the price indices for the 8th and 9th components would assume a value of unity and be adjusted for inflation in future years.

[54] CP makes it clear that it is not objecting to the Agency updating the 8th and 9th components for inflation in future years. It states that "what CP is saying is that the resultant residual hopper car maintenance costs left in the Revenue Cap after the once-only adjustment is completed is to be indexed for inflation through future VRCPI. The procedure that the Agency eventually selects must ensure that." [emphasis added]

[55] CN states that "... when the Agency makes its subsequent determinations under subsection 151(1) of the CTA, it should only take into consideration the same factors that it has since the coming into force of the Revenue Cap provisions ". CN adds that to develop and apply further indices that will in following years specifically adjust the "once only" adjustment clearly contradicts the wording in the CTA.

[56] The Agency's proposed price index adjustment methodology requires inflationary adjustments to the 8th and 9th components, as CP notes, to correctly inflate the resultant residual hopper car maintenance costs left in the Revenue Caps after the once-only adjustment. The Agency's proposed methodology leaves the "embedded" hopper car maintenance amount within the original basket of seven components. It then adds an 8th component and weight to completely offset the "embedded" costs, and adds a 9th component and weight to reflect the current "actual" costs. To illustrate further, using total "embedded"maintenance costs of $105.1 million and total "actual" costs of $32.9 million, the proposed price index adjustment methodology leaves the $105.1 million of embedded costs in the original VRCPI basket - where it will be inflated under the future annual VRCPI determination process. It then adds an 8th component reflecting a negative amount of $105.1 million - which is to be inflated under future years' annual VRCPI determination process to continue to completely offset the [$105.1 million] embedded figure. A 9th component and weight is added to reflect the "actual" costs of $32.9 million which will also be inflated annually.

[57] In essence, under the proposed price index adjustment methodology it is only the impact of "actual" costs (of $32.9 million) that carries forward, and is adjusted for inflation using the VRCPI inflationary adjustment in future years. This is subject to the 8th component being inflated to offset the embedded amount remaining in the basket, and the 9th component being allowed to inflate. Under CN's assertion that further indices can not be applied in future years, the $105.1 million embedded within the original basket would continue to be inflated in future VRCPI determinations, while the "offsetting" 8th component would be frozen at $105.1 million, and the 9th component at $32.9 million. In other words, instead of the $32.9 million of "actual" costs being inflated in future years which is what should occur, the CN restriction would inflate the $105.1 million of embedded costs in future years while freezing the $105.1 million offset, as well as the $32.9 million of new "actual" costs. The benefit of this proposed restriction to CN is clear.

[58] The application of future years price indices to the 8th and 9th components of its price index methodology does not violate the "once only" adjustment called for by Clause 57. The Agency's price index adjustment methodology reflects a "once only" adjustment and consistent with ongoing provisions contained within the CTA, applies price changes to determine the VRCPI for future years.

Definition of hopper cars

[59] There are two issues concerning the definition of hopper cars under Clause 57. The first issue relates to whether all hopper cars used in the movement of statutory grain should be considered while the second issue relates to an inconsistency in the reporting of car maintenance amounts and related Revenue Tonne Miles (RTMs).

[60] In the Consultation Document, the hopper car maintenance costs shown for 1992 reflect the costs for maintenance performed only by the prescribed railway companies. For cars other than those maintained by the railway companies, any maintenance costs they incur as a component of the car-hire or lease payment for the use of the cars is not included in the 1992 car maintenance amounts.

[61] The wording of Clause 57 indicates that the adjustment relates to all hopper cars that are used for the movement of statutory grain. Consequently, it should include maintenance that is performed by other companies and is embedded within car-hire or lease payments for use of such cars. These maintenance costs are "incurred by the prescribed railway companies", albeit indirectly through payments for maintenance work done by other companies.

[62] Determining the embedded costs for these cars would require specific information relating to 1992 which no longer exists. Furthermore, the impact of including these cars in the Clause 57 adjustment would likely be minor as they comprise a relatively small portion of the overall fleet of cars used for statutory grain (about 5 percent). The cars maintained by lease car companies also have lower maintenance costs than those maintained by the prescribed railway companies, which would result in a smaller difference between their current and 1992 costs.

[63] The Agency finds that hopper car maintenance costs should be limited to cars that are maintained by the prescribed railway companies.

[64] CN and CP assert that the definition of hopper cars should not include hopper cars obtained by them from their respective subsidiaries that also haul statutory grain. The Agency finds that the costs for these cars are incurred by CN and CP so these cars should also be included.

[65] Regarding hopper car RTMs, the Consultation Document shows RTMs for hopper cars that relate to all hopper cars. To be consistent with the reporting of hopper car maintenance costs, and the above Agency ruling, the RTM reconciliation exercise should use RTMs related to hopper cars maintained by the railway companies. The Agency finds that this lowers the 1992 ratio of "hopper car" RTMs to total grain RTMs from 95.73 percent to 88.77 percent. This latter ratio should be used in the reconciliation process to derive embedded crop year 2007-2008 hopper car maintenance costs because the embedded costs are a projection of 1992 costing information and car type distributions.

[66] With respect to the determination of "actual" crop year 2007-2008 hopper car maintenance costs, the Agency finds it appropriate to use the most-recent RTM information for railway-maintained cars, and that the resulting ratio is 90.73 percent.

Issue No. 2: The inclusion of Uniform Classification of Account 517 as car maintenance

[67] The railway companies accept that Account 511 (Freight car main shop maintenance) expenses, Account 513 (Freight car line point maintenance) expenses and Account 515 (Freight car repairs performed by others) expenses can reasonably be attributed to the maintenance of hopper cars in the meaning of Clause 57. However, the question arises as to whether Account 517 (Lubrication, inspection and coupling hose - freight) expenses should be included in full or in part, or not at all.

Analysis and Findings

[68] The feedback from consultation on this topic centred on inferences and conclusions drawn from three different areas. Each are discussed below.

Inferences from earlier workload and correspondence

[69] The Agency will first address the railway companies' arguments for the exclusion of Account 517 related to Agency workload, and certain correspondence and reports - between June 2003 and June 2005 - where the referenced correspondence and reports all failed to include Account 517 in the definition of car maintenance. The railway companies submit that this is evidence that Account 517 does not relate to maintenance.

[70] It is difficult to attach weight to the arguments of the railway companies due to the fact that, during the June 2003 to June 2005 interval, hopper car maintenance was reviewed only in the context of the maintenance functions that could be transferred to a third party. As the Account 517 functions were non-transferable, they were excluded from the referenced correspondence, analysis and reports. Account 517 functions are non-transferable to a third party because they take place within a railway company's yards, where union agreements and security provisions do not allow third-party employees to conduct Account 517 activities onsite. Furthermore, grain cars comprise only a small portion of the total cars that receive Account 517 functions, and it would be financially and operationally impractical to have a third-party team waiting to conduct maintenance activities related only to grain cars.

[71] During the 2005 consultation on hopper car maintenance, Agency staff consultation documents made no mention of Account 517. This occurred because the exclusion of Account 517 - as a non-transferable function - was so well acknowledged that staff considered it unnecessary to state it. Agency staff did note the necessity to exclude Account 517, for the given circumstances, during a roundtable industry consultation on hopper car maintenance held in Winnipeg in September 2005.

[72] Both CN and CP wrote to Transport Canada (in December 2004) concerning the FRCC's $1,500 per car "actual" cost estimate for hopper car maintenance. The railway companies stated that the $1,500 maintenance figure was too low because it excluded a number of items, including "inspections" and "yard servicing". In an earlier November 16, 2004 appearance before the House of Commons' Standing Committee on Agriculture and Agri-Food, CP officials had also stated: "We do regular in-shop repair, the offline billings, the yard servicing. That is the most efficient and economical way to maintain these cars..." The Agency finds that, in the context of the FRCC-related car maintenance discussion, both CN and CP suggested that the majority of items included in Account 517 constitute car maintenance.

Inferences from Uniform Classification of Account phrases, and other definitions

[73] The Agency will next address the railway companies' second argument, consisting of three conclusions drawn from Uniform Classification of Account (UCA) phrases. The railway companies conclude that: (i) there is a clear and intentional distinction between "maintaining" and "lubricating" cars, and between "maintaining" and "lubricating and inspecting" cars; (ii) references in Account 517 to incoming and outgoing trains, lubricating cars, coupling or uncoupling brake hoses and brake testing all refer to functions associated with train operations on a day-to-day basis (and hence, are not car maintenance activities); and (iii) Accounts 511, 513 and 515 relate to repairs, performed in shops, at line points or by other railway companies and are not associated with train operations on a day-to-day basis. Hence, they argue that Account 517 - which relates to day-to-day train operations - can not be deemed to be a car maintenance account.

[74] With respect to the definition of maintenance, CN and CP point to UCA definitions, where maintaining cars is synonymous with car "repairs", and as such, excludes other activities, such as lubricating and inspecting cars.

[75] The Agency accepts that inspection and lubrication are necessary parts of maintenance because inspection identifies work to be done while lubrication allows the cars to operate satisfactorily. To exclude this type of preventive maintenance is too narrow a definition of what constitutes maintenance. This conclusion is strongly supported by the various definitions of maintenance submitted by various parties, which establishes that all action taken to retain material in a serviceable condition, such as inspection, testing, servicing (including lubrication) etc., qualify as maintenance. The results of repairs as well as lubrication and inspection maintenance activities are the same, to maintain the railway cars in an acceptable state for use.

[76] The definition of maintenance has been discussed in documents as well. For example, Chapter 11 - Section 11.5 of the Canadian Transport Commission's [October, 1979] Railway Costing Study - Report on Phase II - Volume 5, refers to five main sub-groups of items that generate freight car repair expenditures. They include: superstructure (car body); coupling system and cushioning devices; trucks; wheels, bearings and axles; and brake system. The study examines each individual sub-group and attempts to define what maintenance-related activities are included in each. The maintenance costs associated with the wheels, bearings and axles category include costs associated with the following four maintenance activities: wheels, bearings and axle maintenance; lubrication of roller bearings; lubrication of journal bearings; and inbound inspection. The breakdown provided suggests that lubrication and inspection are activities that contribute to freight car maintenance costs.

[77] Another example exists in the Canadian Transport Commission Staff Report entitled Preliminary Determinations of the Variable Costs and Revenues of the Railway Companies for the Movement of Grain in 1984, Report No: REA-CR84-30 dated February1986 (where Tables 8 & 9 list volume-related variable costs by cost element). The costs for the "freight car maintenance" element stems mostly from "car repair and servicing", indicating that the servicing functions (lubrication, inspection, etc.) were considered to be a component of freight car maintenance.

[78] The Agency will next address the railway companies' second conclusion that references in Account 517 to incoming and outgoing trains, lubricating cars, coupling or uncoupling brake hoses and brake testing all refer to functions associated with train operations on a day-to-day basis and therefore, are not car maintenance activities.

[79] If Account 517 expenses are primarily train related, they should have been listed in the "train-related expense" accounts of the UCA, that is, under the 600 Series of Accounts. This is not the case. Rather, they are contained within the 500 Series of UCA Accounts that relate to "freight cars".

[80] The Agency notes that if the Account 517 costs were all train related, the related unit costs and assignment of Account 517 costs would be driven by train-related variables. However, the Regulatory Costing Systems which develop Account 517 unit costs, and which allocate Account 517 costs to movements, do so on the basis of "car miles" being the independent variable. This supports the conclusion that the Account 517 costs are car and not train-related.

[81] While CP asks the Agency to not include Account 517 costs as car maintenance, Agency staff, following visits to CP yards and offices, indicated that a significant portion of CP's submitted costs contain costs which in CP's internal reporting systems are recorded under Account 517. In fact, for the three years of information provided by CP (2004 to 2006), about 50 percent of the total labour hours within its hopper car maintenance cost submission related to Account 517 activities. Subsequently, CP acknowledges that it has included Account 517 costs for the closing of gates as well as the maintenance of damaged gates and that Account 517 expenses are car related. Nevertheless, CP claims that the question is whether the activity performed which leads to these expenses is part of the freight car maintenance function. This question was basically addressed above.

[82] The railway companies also point out that the Account 517 activities are performed primarily for the purpose of ensuring safe train operations. The Agency acknowledges that a train is composed of both cars and locomotives, and that mandatory car-related activities, such as air brake testing must be performed prior to train departure. Accordingly, a portion of the Account 517 activities are train related.

[83] The third overall area of concern to CN and CP with respect to appropriate accounting methods advocates that Account 517 not be regarded as maintenance in this proceeding because the true maintenance Accounts 511, 513 and 515 all relate to repairs performed in shops, at line points or by other railway companies. This conclusion assumes that only repairs (corrective maintenance) qualify as maintenance.

[84] Whether preventative maintenance such as lubrication and inspection qualifies as maintenance has already been addressed above. Further, as was shown in Appendix 1 of the Consultation Document, one of the activities included in the Account 517 description, "Minor repairs associated with yard inspection and servicing, such as changing brake shoes, air hoses" clearly includes repairs, and repairs that are done within yard limits.

Inferences from Commercial Lease Arrangements

[85] Under full-service commercial lease arrangements, the car owner or lessor retains liability for the expenses of maintaining the cars. The railway companies state that this is consistent with Account 517 not being a maintenance account, as the lessor does not provide any Account 517 functions. Furthermore, they state that Account 517 costs under full-service leases are not billed to the lessor, but are covered by the lessee.

[86] This argument fails to acknowledge that the lessor is unable to perform the Account 517 functions because they essentially take place within railway companies' yards, where only unionized railway company employees are permitted. As a consequence, a lease agreement has to be structured so that the Account 517 functions are conducted by the railway companies. Regarding the related billings or charges not being forwarded to the lessor, this occurs for all types of maintenance under a "Triple-Net" lease arrangement (where the railway company pays for all maintenance for a leased car, in addition to other costs). One can not conclude that the Account 511, 513 and 515 items are not maintenance simply because in a lease arrangement the parties agree that the lessor is not responsible for, and consequently, is not billed for such repairs.

[87] The Agency finds that Account 517 includes activities related to car maintenance functions and train-related functions. The Agency reviewed detailed record keeping for Account 517 to estimate the proportion of expenses that relate to each category. However, this was not possible from the available information.

[88] The Agency estimates, however, that at least 50 percent of the expenses in Account 517 relate to car maintenance functions. For this reason, the Agency determines that 50 percent of Account 517 costs related to the movement of statutory grain are properly assessed as car maintenance costs for the purpose of the Clause 57 adjustment.

Issue No. 3: The level of contribution to constant costs applicable to 1992

[89] The last time that hopper car maintenance costs were determined was under the WGTA, for 1992. These costs were embedded within total estimated eligible costs which, following certain adjustments, were used to derive rates and/or revenue for the years that followed. Hence, to determine the amount of hopper car maintenance costs "embedded" within the 2007-2008 Revenue Caps, the Agency must first determine the amount of hopper car maintenance costs that were derived for 1992, and that raises the question of the appropriate level of contribution to constant costs for that year.

Analysis and Findings

[90] Clause 57 calls for the Agency to adjust the VRCPI "to reflect the costs incurred ... for the maintenance of hopper cars... ." To do this, the Agency must quantify the hopper car maintenance costs that are currently "embedded" within the Revenue Caps. It can then remove the embedded costs and replace them with the costs currently incurred for hopper car maintenance, referred to as "actual" costs in this Decision. Alternatively, it can offset or eliminate the "embedded" costs using the means proposed in the price index adjustment methodology (which incorporates the use of an 8th component with a negative weight) and then, add in the "actual" costs. Either approach achieves the objective of Clause 57 and these approaches, as well as any other approach, require a quantification of the hopper car maintenance "embedded" within the Revenue Caps.

[91] Quantifying the "embedded" costs within the Revenue Caps first requires the Agency to review how these costs were originally derived during the 1992 WGTA Costing Review. Importantly, in addressing what level of contribution to constant costs is applicable to 1992, the wording of the WGTA, the legislation that was in effect at that time, is critical.

[92] CP submits that Clause 57 refers to "costs" and not "compensation" or "contribution" so that amounts related to "contribution to constant costs" are to be excluded from the hopper car maintenance adjustment. Accordingly, CP argues that only variable costs are to be considered. CN agrees and adds that constant costs have no relation to hopper car maintenance. Accordingly, no adjustment to the index should be made for constant costs.

[93] The Agency finds that if the intent of Clause 57 is to restrict the hopper car maintenance adjustment to variable costs, this would have been done simply by inserting the word "variable" before the word "costs". In this case the relevant phrase would read "...to reflect the variable costs incurred by the prescribed railway companies..." The distinction between the two approaches is borne out elsewhere in the CTA. For example, in respect of regulated interswitching rates, subsection 128(3) states that "variable costs" are the relevant costing standard. Conversely, costs, or total costs, are the relevant standard in paragraph 128(1)(b) (interswitch zone costs). However, Clause 57 only refers to "costs" so one can not assume that the intent is to deal only with variable costs.

[94] Generally, the use of the definite article in the phrase "the costs" would suggest that all of the costs are being referred to, and not simply a portion thereof. As this particular issue (the relevant level of contribution to constant costs in respect of 1992) relates to a time when the WGTA was in effect, it is mandatory to review the wording contained in the WGTA. Under the WGTA, the railway company revenues were derived based on "estimated eligible costs". The WGTA defined "estimated eligible costs" to be the sum of volume-related variable costs, line-related variable costs for grain-dependent branch lines, and contribution to constant costs. The "estimated eligible costs" included amounts for "contribution to constant costs". It is clear that amounts related to "contribution to constant costs" constituted eligible "costs" under the WGTA, and these "costs" are the underlying basis for the maximum revenue entitlements under the Revenue Cap Program.

[95] Under the WGTA, the level of contribution to constant costs was determined simply by multiplying the variable costs by a legislated ratio and for years beginning with crop year 1986-1987, this ratio was 20 percent. It was simply a matter of arithmetic. The determination of contribution to constant costs was a calculation that was established by, and performed in accordance with, legislation. The statutory level of contribution to constant costs applied to the composite amount of variable costs and was not specific to any cost component. For crop year 1986-1987 onward, every dollar of variable costs was assigned 20 cents of constant costs regardless of its source. There was no specific ratio that applied to car maintenance expenses, with other ratios applying to other functions. Each and every dollar, regardless of the amount or category of expense, was assigned 20 cents of constant costs.

[96] The Revenue Caps are derived from the total revenue entitlement calculated in 1992 which incorporated a 20-percent contribution to constant costs intended to provide sufficient revenue for the railway companies to cover their constant costs. As hopper car maintenance costs were a part of those total volume-related variable costs, the portion of the revenue entitlement resulting from the hopper car maintenance costs equals the variable hopper car maintenance costs plus 20 percent of that amount.

[97] The railway companies assert that constant costs do not vary for changes in traffic volumes and that only a minor amount, if any, is related to hopper car maintenance costs. They conclude that very little, if any amount, should be attributed to hopper car maintenance.

[98] The Agency concludes that whether constant costs are forever fixed and thus, never vary with changes in traffic, and whether a precise constant cost figure can be assigned to hopper car maintenance costs, are not relevant to the determination of "embedded" hopper car maintenance costs. The fact is, as noted above, the WGTA assigned a contribution to constant costs (for hopper car maintenance and all other variable cost components) equal to 20 percent of its variable costs. Under the WGTA when variable costs were reduced by virtue of productivity gains as measured by the quadrennial costing reviews, subsequent contributions were reduced in proportion, even though there was no demonstrated constant cost reduction. The FRCC points to a second example under the WGTA where variable costs were reduced to capture the savings from the substitution of government hopper cars for box cars, where the contribution to constant costs was reduced in proportion, even though there was no demonstrated constant cost reduction.

[99] Consequently, the Agency finds that there is no validity to the railway companies' argument that no contribution to constant costs should be included because constant costs do not change. Under the WGTA, for the purposes of establishing statutory rates and revenue for the movement of grain, constant costs did vary, and they varied in proportion to changes in variable costs.

[100] Both railway companies refer to Agency staff recommendations for a 3 percent contribution to constant costs (for 1992) stemming from an October 28, 2005 staff report. This report was prepared by staff following a 2005 consultation on hopper car maintenance costs related to the possibility of the federal government transferring its hopper car fleet to the FRCC. The consultation was requested by Transport Canada and it was agreed that, as this was a theoretical exercise (as the legislative provision calling for such a determination had not yet been enacted), it would involve Agency staff only - and not the Agency (i.e., the Members of the Agency). The October 28, 2005 report was therefore issued by staff without any review or approval by the Agency.

[101] Despite the fact that most non-railway participants in the 2005 consultation recommended a 1992 level of contribution to constant costs of either 20 or 27 percent, Agency staff recommended at the time a level of 3 percent. The main reason for this was that staff could not envision constant cost reductions of 20 percent of hopper car maintenance occurring for the railway companies should the government cars (and related maintenance) be transferred to the FRCC. From that narrow, economic perspective, Agency staff had a valid point. However, staff overlooked the fact that, under the WGTA, the constant costs attributable to car maintenance were legislated to be 20 percent of their variable costs, and not 3 percent. In other words, to use an example, $90 million of hopper car maintenance variable costs generated $18 million of constant costs under the WGTA. Hence, the task of removing the total costs related to hopper car maintenance would require the removal of $108 million in costs. The fact that an economic analysis may suggest that the constant costs for hopper car maintenance were only about $3 million is irrelevant, because under the WGTA, an amount of $18 million was legislated to be the contribution to constant costs.

[102] Continuing with the above example, under the WGTA $90 million in hopper car maintenance variable costs generated $18 million in constant costs. Given that the current, "actual" amount of variable hopper car maintenance costs has fallen to about one third of its 1992 level, to about $32 million, if one were to accept the railway companies' position that only the variable costs are to be adjusted under Clause 57, variable costs would decline from $90 million to $32 million, while the $18 million that the WGTA generated towards constant costs would remain unchanged, even though the WGTA - if in effect at this time - would generate only about $7 million in constant costs. The result would be an $11-million windfall for the railway companies. Furthermore, to assign $18 million of constant costs to only $32 million of hopper car maintenance variable costs would be unreasonable.

[103] CP contends that if the Agency were to use a 20-percent level of contribution to constant costs, it would remove a large portion of the contribution from the Revenue Caps which is needed to pay for constant costs of other cost components such as track and roadway maintenance. The AF submission on this point suggests that the current contribution to railway constant costs from grain is 56.6 percent. AF states that even if the Agency makes a $3.00/tonne adjustment under Clause 57, the level of contribution to constant costs would still exceed 40 percent. This analysis produces results similar to those set out in the Consultation Document which suggest that the current level of contribution to constant costs for grain exceeds 60 percent.

[104] Given these contribution levels, the adoption of a 20-percent level of contribution to constant costs in respect of 1992 will not result in CN and CP receiving inadequate revenue to cover their constant costs because they will still be receiving an amount far in excess of what is required.

[105] In conclusion, the Agency finds that for the purposes of determining the amount of "embedded" hopper car maintenance costs, amounts related to the "contribution to constant costs" do constitute eligible "costs" and their amount for 1992 is to be derived as the WGTA-legislated amount of 20 percent of the variable costs related to hopper car maintenance.

Issue No. 4: The use of a system-wide or specific measure of inflation

[106] As was noted under Issue No. 3, to determine the amount of hopper car maintenance costs "embedded" within the 2007-2008 Revenue Caps, the Agency must first determine the amount of hopper car maintenance costs that were determined for 1992. The next major step is to adjust the maintenance costs for inflation from 1992 to crop year 2007-2008, to reflect the legislated inflationary allowances that occurred during this interval. This raises the question as to whether the inflationary allowances should be derived using the system-wide price index (i.e., the VRCPI), or a price index specific to car maintenance.

Analysis and Findings

[107] The use of a system-wide or specific measure of inflation is different from Issue No. 3 (the contribution to constant costs applicable to 1992) as there is no legislation that provides clear direction here. That is, while the Revenue Cap provisions in the CTA direct that the VRCPI is to be developed and applied annually, Clause 57 provides no specific direction concerning the technical calculations that are required for the hopper car maintenance adjustment.

[108] It is appropriate to use specific measures of inflation in the determination of both "embedded" and "actual" hopper car maintenance costs. This is consistent with Clause 57 which calls for an adjustment to reflect costs relating to hopper car maintenance, and is consistent with section 8 of the Railway Costing Regulations which supports the use of specific information when such information is known or can be readily determined.

Issue No. 5: The use of a system-wide or specific measure of productivity to determine crop year 2007-2008 embedded hopper car maintenance costs

[109] It was noted above under Issue Nos. 3 and 4, that to determine the amount of hopper car maintenance costs "embedded" within the 2007-2008 Revenue Caps, the Agency has to first determine the amount of hopper car maintenance costs that were determined for 1992. The next major step is to adjust the maintenance costs for inflation from 1992 to crop year 2007-2008, to reflect the legislated inflationary allowances that occurred during this interval. The final major step is to apply the productivity-related adjustment, which reduced grain revenue by 18 percent at the beginning of the Revenue Cap Program, and this is discussed next.

[110] The 18-percent productivity-related adjustment was based on an Agency study of railway company productivity and grain costs completed in July 1999.The Agency study was conducted at the request of Arthur Kroeger, hired by Transport Canada to recommend legislative changes that would result in an improved grain handling and transportation system. As the new Revenue Cap Program incorporated a portion of the productivity-related costs savings as recommended by Mr. Kroeger, this adjustment became known as the "Kroeger" adjustment.

[111] The development of the CTA's base year revenues (which determine Revenue Caps) included an 18-percent cost reduction related to system-wide productivity gains achieved between 1992 and 1998. The 18-percent cost reduction reflected a return of approximately 4/5 of the total 22-percent cost savings due to productivity gains to provide the railway companies with an amount of revenue that provided a level of contribution to constant costs of approximately 27 percent. The question is whether to apply this 18-percent system-wide adjustment to hopper car maintenance in the development of embedded 2007-2008 hopper car maintenance costs, or to develop a productivity measure (and derive the related cost savings) based on information that is specific to hopper car maintenance. The specific measure would return only 4/5 of the related savings, the same as for the Kroeger adjustment. The Consultation Document described certain difficulties in developing such a measure.

Analysis and Findings

[112] The railway companies, and many non-railway-company respondents, support the use of a specific measure of productivity. The support by the non-railway-company respondents was often dependent upon the reliability of such a measure, given data limitations.

[113] There are compelling reasons to use a specific measure of productivity. First, Clause 57 calls for an adjustment only to hopper car maintenance costs and this specificity is better achieved through the use of a specific measure of productivity related only to car maintenance. Second, section 8 of the Railway Costing Regulations calls for the use of specific cost information, whenever specific costs are known or can be readily determined from company records, in lieu of averaged or allocated costs. Third, the policy underlying the Clause 57 adjustment is based on the fact that hopper car maintenance costs have fallen more than average rail costs over the past number of years.

[114] Several non-railway-company respondents state that while it is preferable to use specific measures of productivity, it may be better to use the system-wide measure given certain data limitations and inconsistencies within the various options for a specific productivity measure. The Agency finds that a reasonably-suitable measure of specific productivity can be derived for this exercise. The strengths and weaknesses of the various specific productivity measures follow.

[115] The system-wide measure of productivity that resulted in the 18-percent Kroeger adjustment reflected "total factor" productivity. It measured the change in the quantity of output relative to the change in the quantity of input, over time. The input measure captured the combined effect of quantities of labour, fuel, material and capital components, while the measure of output was based on RTMs. One characteristic of the Kroeger measure is that the input measurement captures inputs for all car types (i.e., hopper cars, gondola cars, box cars, flat cars, etc.) and includes foreign cars and short-term full-service leased cars, but not private cars. However, the RTM output measurement captures RTMs for all cars, including foreign cars, short-term full-service leased cars, and private cars.

[116] The Agency consulted on two specific measures of productivity. Other measures were mentioned in the Consultation Document, but they were put aside due to data limitations. For the two measures under consideration, the inputs relate to car maintenance for all car types (i.e., hopper cars, gondola cars, box cars, flat cars etc.) and for use in all commodities, because a breakdown for hopper cars only is not possible from existing information. The productivity measures relate therefore to the maintenance for all cars, and not only for hopper cars used for the movement of grain. Nevertheless, this is more acceptable than the alternative of using a system-wide measure of productivity.

[117] The first specific productivity measure, method No. 1, compares the change in output (RTMs for all car types) to changes in input for maintenance activities for all car types. The second specific productivity measure, method No. 2, compares the change in output, as measured by car miles for all car types, to changes in input for maintenance activities for all car types. Method No. 2 differs from the first method in that it proposes the use of car miles as an output measurement because car maintenance costs are determined, for the most part, based on car miles and they are a reasonable measure of output for the hopper car fleet.

[118] The Agency finds that method No. 1 is more consistent with the Kroeger adjustment and the purpose of the productivity adjustment is to determine the level of hopper car productivity that is embedded in the Revenue Caps. This requires the determination of the portion of the Kroeger productivity adjustment that relates to hopper car maintenance. Consistency with the Kroeger adjustment is a primary objective. In other words, method No. 2 is less appropriate than method No. 1, as it uses car miles instead of RTMs for the output measurement.

[119] The FRCC indicates that method No. 1 is not completely consistent with the Kroeger productivity measure because its input does not capture any car maintenance workloads for cars not maintained by the railway companies. It is true that inputs for foreign cars and short-term full-service leased cars are not captured in the car maintenance category as they are fully reflected in the capital categories. Thus, there is an understatement of car maintenance inputs that may overstate a maintenance-specific productivity. As for private cars, they are missing from the inputs for both the Kroeger and the (method No. 1) specific measure, so there is consistency in that respect.

[120] The Agency addressed the absence of inputs for foreign cars and short-term full-service cars by incorporating inputs based on a trend analysis of the use of such cars. While the adjustment is not precise, it improves the integrity of method No. 1.

[121] The Agency made one further revision to method No. 1 so that it generates results based on five-year moving averages, consistent with the development of the Kroeger productivity measurement. Following this revision, method No. 1 generates car-maintenance cost savings of 25.7 percent, significantly higher than the 18-percent system-wide Kroeger savings.

[122] The Agency finds that despite its weaknesses, it is more appropriate to use method No. 1 which is specific to car maintenance, compared to the alternative of using an overall system-wide productivity measure. Hopper car maintenance costs fell much more (proportionately) than system-wide average costs between 1992 and 1998 and the productivity measure for car maintenance used to determine the "embedded" car maintenance amounts must reflect greater gains than for the whole system.

Issue No. 6: Issues related to the determination of "actual" hopper car maintenance costs for crop year 2007-2008

[123] As was noted in the Introduction section of this Decision, the Clause 57 adjustment requires two determinations; one to determine the amount of hopper car maintenance costs that are "embedded" within the crop year 2007-2008 Revenue Caps, and another to determine the amount of "actual" costs the railway companies will be incurring for crop year 2007?. This latter determination is discussed next.

Analysis and Findings

[124] Although Bill C-11 only received Royal Assent on June 22, 2007, Agency staff began discussions concerning "actual" maintenance hopper car costs with CN and CP a year earlier when the Bill was first introduced into Parliament. At that time, Agency staff had arranged for both CN and CP to submit preliminary data in advance of the legislation. Both CN and CP co-operated. CN submitted preliminary data on October 2, 2006 while CP provided preliminary data to Agency staff at a meeting on January 8, 2007. During that meeting and in the weeks following, Agency staff requested further information and clarification from CP. Answers to these questions were provided by CP in a letter dated March 22, 2007. Subsequent questions were asked and in most cases were responded to by CP, although in some cases CP declined to respond due to the uncertainty surrounding the passage of Bill C-11. However, dialogue on the data did continue.

[125] On July 4, 2007, after the legislation was passed and the Agency received direction from the Honourable Lawrence Cannon, Minister of Transport, Infrastructure and Communities, the Agency directed CN and CP to submit their expenses incurred during the years 2004, 2005 and 2006 for the maintenance of all hopper cars; railway-owned, leased, foreign, Government of Canada, Canadian Wheat Board, Provinces of Alberta and Saskatchewan which were used in regulated grain movements during each of the above periods. The request was to provide maintenance expenses of hopper cars by ownership, and should include the costs charged to the following Uniform Classification of Accounts:

  • 511- Freight car main shop maintenance
  • 513- Freight car line point maintenance
    • 513.1 Major Components; and,
    • 513.2 Other
  • 515- Freight car repairs performed
    • 515.1 Railway's cars; and,
    • 515.2 Foreign cars damaged on railway's lines; and,
  • 517- Lubrication, inspection and coupling hose-freight

[126] The Agency also alerted the railway companies to Account 575 - the allocation of shop overhead expenses, whereby they had to submit a method of distribution to be approved by the Agency. CN and CP were directed to provide the details of shop expenses and method of distribution for all shops where hopper car maintenance was performed.

[127] In a letter dated July 30, 2007, CP indicates that "If the Agency commits appropriate resources to the [Clause 57] determination, there is no reason why the Agency's determination cannot be completed by September..." In a letter received on July 31, 2007 CP counsel advises Agency counsel that the requested data could be provided by August 8, 2007 rather than the originally agreed upon August 15, 2007 date to meet the September completion date. In this letter, CP insisted on a number of conditions the Agency had to meet and that the Agency must "commit sufficient experienced staff who are themselves committed to dealing with the railways in a fair manner" to meet the October 1 date for a determination. However, the Agency ruled that this time frame would not provide sufficient time for proper consultation with third parties which was an integral part of the process leading to any Agency decision on the VRCPI. More importantly, the Agency found it inappropriate for CP to attempt to impose conditions on the Agency in the implementation of its regulatory mandate, and more specifically, in the performance of a duty it was called upon to perform by Parliament under Bill C-11. As a result, the original filing date of August 15, 2007 was maintained.

[128] Agency staff invested a significant amount of time and effort to assist CP and CN in validating their data related to "actual" costs. CN provided the Agency with data in excess of what was requested. However, at the end of the day, CP failed to provide the specific information requested, that is "actual costs" related to the maintenance of hopper cars. Further details on the validation and the Agency's determination are provided below and in Appendix 6.

CN

[129] CN filed its submission on August 15, 2007 and provided detailed "actual" information for Accounts 511, 513 and 515 expenses. It also provided system-average expenses for Account 517 as specific data do not exist for this account. CN summarizes the maintenance expenses for its grain hopper car fleet into three groups: CN-owned hopper cars, Government of Canada and Canadian Wheat Board hopper cars, and Provinces of Alberta and Saskatchewan hopper cars.

[130] Agency staff found that the average maintenance expense per CN-owned hopper car was considerably higher than that for a government hopper car. As CN-owned hopper cars were used less frequently in regulated grain service than the government hopper cars, the Agency weighted the "actual" maintenance costs by the proportion of time each group spent in moving regulated grain to better reflect the maintenance costs of hopper cars used in regulated grain service movements. The weighting used by the Agency was based on RTMs.

[131] As stated previously, the Agency's letter of July 4, 2007 requested maintenance expenses exclusively for hopper cars "which were used in regulated grain movements during each of the above time periods" (i.e., 2004, 2005 and 2006). However, CN included the maintenance costs for its entire grain hopper fleet during the three-year study period, even those cars that did not move any regulated grain in any of the three years under review. This represented several hundred hopper cars. The Agency removed the maintenance expenses and operating statistics for hopper cars that were not used in the movement of regulated grain in any of the three years.

[132] The adjustments were made to CN's August 15, 2007 submission for Accounts 511, 513 and 515 expenses related to:

  1. Shop expenses;
  2. Allocation of shop expenses;
  3. Overheads applied to direct expenses; and,
  4. Removal of hopper car data not used in the movement of grain during the study period.

[133] With respect to Account 517 expenses, as determined in Issue No. 2 of this Decision, the Agency has determined that 50 percent of Account 517 costs related to the movement of statutory grain is deemed to be car maintenance costs for the purpose of the Clause 57 adjustment.

CP

[134] CP's data was received on August 15, 2007 and CP advised that this data superseded the preliminary data that it provided to Agency staff on January 8, 2007.

[135] CP's submission contained detailed data for hopper car maintenance expenses for Accounts 511, 513 and 515. However, the data was structured in a format consistent with the Association of American Railroads reporting requirements, not in accordance with the UCA. CP was also unable to provide expense data by car number as CN had done and CP provided expense data only for Government of Canada hopper cars. CP states that it does not make any distinction between its hopper cars and the ones supplied by the governments. It adds that this submission on government hopper car maintenance expenses will be used as the basis for extrapolating maintenance costs to CP-owned hopper cars.

[136] For Account 517 expenses, CP provided system level expenses for all freight cars and used this data to estimate Account 517 expenses for government hopper cars.

[137] While CP staff were very co-operative and answered a number of questions, CP was encountering difficulties in providing the sample data extracts as requested by Agency staff. Nevertheless, CP indicated that the requested sample data would be provided by the final target date of November 9, 2007. During the week of November 5, Agency staff received confirmation that all additional data and samples would be submitted by November 9, 2007. However, on November 8, 2007, CP staff stated that it could not replicate its original submission and therefore could not meet its commitment. In a subsequent letter on November 13, 2007, CP counsel confirms this:

Subsequently during the audit process, it has come to our attention that some of the data retrieval processes used in this case produced inconsistent extraction of data. As a result CP was not able to reply to the Agency's various audit requests or replicate its submitted data. Therefore CP cannot in good conscience affirm its confidence in the results presented in that [August 15, 2007] submission.

[138] Consequently, Agency staff could not validate the data contained in CP's submission and any analysis or observations made by Agency staff, including those in the Consultation Document, are no longer valid.

[139] CP filed an alternate submission on November 13, 2007 but it does not contain any "actual" costs and is based on system maintenance costs that include costs for flat cars, box cars, coal hopper cars, tri-levels and other freight cars as well as that for grain hopper cars.

[140] In response to CP's alternate submission, the Agency sent a letter to CP on November 26, 2007 wherein the Agency states:

In considering this matter, it is difficult to understand why this request has been filed at such a late date given that CP's original car maintenance data on this file was provided to the Agency in January 2007. Further, and as of July 2007, CP advised the Agency that an appropriate date for the Agency's determination of the new index (clause 57, Bill C-11 in an Act to Amend the Canada Transportation Act and other Acts) would be September 30, 2007. On this point, CP assured the Agency that all of the railway company's necessary, accurate and verifiable actual cost information would be available in order to assist the Agency in its issuance of the new index. Notwithstanding, CP now seeks to file an alternative methodology and calculation which, rather than being based upon the Agency-requested costs, is based upon system average costs. [emphasis added]

[141] The Agency expressed the concern that "[this] proposed new approach produces a costing estimate that entails a margin of error that is too significant". Further, the Agency stated that "Clause 57 in Bill C-11 requires an adjustment based on the costs of maintaining grain hopper cars [to] be used in the development of the new index". The Agency concluded:

In an effort to ensure the integrity of the new statutory index and that it is issued in a timely manner, the Agency may have no choice but to use the CN [actual] maintenance costs under UCA Accounts 511, 513 and 515 for both railways, unless CP can provide the Agency with verifiable actual cost data by December 10, 2007. The data that has been provided by CN is actual costs by individual car and UCA account, as requested by the Agency. The CN data has been audited and is verifiable. As both CN and CP operate under similar economic, environmental, product and geographic conditions in western Canada, the Agency considers that the actual costs incurred by CN could provide the best available representative measure of the maintenance costs for railcars used in regulated grain rail service in western Canada.

[142] Following receipt of CP's alternative submission, Agency staff began to review the cost submission pending a decision on this matter. Agency staff worked closely with CP to develop unit costs, as part of the Agency's normal annual workload to determine Agency-approved unit costs. Also, Agency staff wanted to ensure that the Agency had the most up-to-date costing data available before making its final determination on "actual" maintenance costs. Some of these unit costs were used in the Agency's final determination.

[143] In response to the Agency's November 26, 2007 letter, CP submitted two additional letters to the Agency, dated December 5, 2007 and January 11, 2008. The Agency responded in a letter dated January 18, 2008, where it found that CP has continually failed to comply with the Agency's direction and that in the circumstances the Agency would use the CN actual costs for its assessment of relevant hopper car maintenance costs.

[144] CP raised a concern that the use of CN's data will understate CP's "actual" costs as CP is not as an efficient railway operator as CN. CP states in its January 23, 2008 letter that:

It is a known fact in the North American railway industry that CN's operations reflect the lowest costs and thus using CN's actual costs to assess CP's costs will certainly understate the actual costs incurred by CP in maintaining its covered hopper cars.

[145] The Agency notes that CN is clearly a leader among North American railway companies as evidenced by its operating ratio which is the lowest in North America. However, this metric is based on entire railway company operations and is not necessarily indicative of freight car maintenance efficiency. To better assess CN's and CP's operations, the Agency examined the expenses as reported by CN and CP for their freight car maintenance expenses, i.e., as reported in Accounts 511, 513 and 515, for the years under review. For comparability, the Agency normalized these expenses and calculated an average cost per gross ton mile of freight moved and per revenue tonne mile. In both cases, the Agency found that CP had a lower cost than CN. Even though CN is generally the more efficient railway operator of the two, when it comes to freight car maintenance, CP appears to be more efficient.

[146] To illustrate to CP how the CN data would be used, the Agency provided CP, in its letter of January 31, 2008, abridged "actual" CN cost information. This disclosure maintained for the Agency the necessary balance between disclosure to CP of relevant Decision inputs on the one hand and the commercial sensitivity of CN's internal costing information on the other. The Agency also cautioned in that letter that any comments must be restricted to the use of CN's numbers as proxy and the Agency would not consider any further arguments about the process per se. The Agency took this approach to ensure the fairness of the process even though it resulted in a delay of the planned issuance date of January 31, 2008.

[147] In response to that letter, CP requests the Agency to set aside its demands for "actual" costs and to use CP's system average data. CP states that "the detailed calculation of hopper car maintenance costs submitted by CP on December 5, 2007 and updated on January 11, 2008, reflecting further work done by the Agency staff on the determination of year 2004 to 2006 unit costs is significantly more meaningful than cost information from a different railway operating under different conditions."

[148] The Agency made it clear in its ruling dated January 18, 2008 that given the lateness of its finding out that CP was unable to provide the requested "actual" cost data, it had no choice but to use the CN data. This had to be a final ruling, otherwise it would jeopardize the issuance of the determination of the final index by the publically announced target of January 31, 2008. While Agency staff continued to work with CP staff, this work related to the process of updating system-wide unit costs, which began in the summer of 2007, not "actual" costs for the hopper car maintenance.

[149] In that same letter, the Agency advised CP that it will develop CP's costs based on those submitted by CN. In other words, CN's costs will be used as approximations of CP's so that the costs of the two prescribed railway companies are factored into the index. The Agency was left with no alternative because of CP's ongoing failure to file any kind of meaningful information.

[150] The Agency acknowledges CP's concern with the use of CN's data as a proxy for its "actual" maintenance costs. However, the Agency has greater concerns with the use of CP's system data as a proxy. Both approaches have their shortcomings and the Agency must determine which is the better proxy of the two. As the Agency previously stated, CN and CP operate under similar economic, environmental, product and geographic conditions. Other similarities include the average age of the fleets (made up of predominantly government hopper cars), the level of maintenance, and the work force represented by the same union. Further, Transport Canada imposes the same operating conditions on the government fleet of hopper cars and the safety conditions on the entire fleet. The Agency finds that there are more similarities to support the use of CN data and as such, it is the better estimate.

[151] CN objects to the use of its data as the once only adjustment is to reflect maintenance costs "incurred by the prescribed railway companies" and the use of CN's data for CP does not meet this test. However, the use of CN's data is limited to "actual" maintenance expenses related to Accounts 511, 513 and 515 but not to 517 as the Agency used CP's costs. Furthermore, the Agency used CP's costs for CP's embedded costs. To the extent possible and reasonable, the Agency used CP's data for CP. Therefore, the Agency concludes that the use of CN's data provides the better estimate of CP's "actual" maintenance costs for Accounts 511, 513 and 515.

[152] With respect to Account 517 costs, the Consultation Document raised three issues related to CP. While these issues are discussed more fully in Appendix 6, they relate to: i) the closing of hopper car gates; ii) the replacement cycle of CP wheel sets; and iii) the use of AAR rates for labour and material workloads and material prices. As CN's costs for Accounts 511, 513 and 515 are being used for CP, the last two issues no longer require consideration.

[153] As for the closing of hopper car gates, the withdrawal by CP of its August 15, 2007 submission and a subsequent refiling based on system average costs for maintenance, including that for Account 517, reduces CP's originally-developed gate closure costs significantly. Some respondents assert that gate closures are an operational issue, and provided as evidence railway company tariffs that charge shippers for failing to close gates. They also assert that the inclusion of gate closure costs would lead to a double benefit for the railway companies as they also receive revenue from the gate closure tariffs. However, both railway companies indicate to the Agency that they have not collected any money under such tariffs for the 2006-2007 crop year, and that less than $4,000 have been collected in crop year 2005-2006. Hence, it appears that the railway companies are not enforcing tariffs relating to gate closures. Finally, while some of the gate closures may be operational in nature, it is reasonable to conclude that the difficult gate closures, which result in significant workload, are maintenance related.

[154] The Agency finds that, similar to CN, CP's Account 517 costs should be determined by using a unit cost approach. As was determined for Issue No. 2 of this Decision, the Agency has determined that 50 percent of Account 517 costs related to the movement of statutory grain is deemed to be car maintenance costs for the purpose of the Clause 57 adjustment.

Issue No. 7: The level of contribution to constant costs applicable to "actual" crop year 2007-2008 hopper car maintenance costs

[155] While this issue is similar in some ways to Issue No. 3 (the appropriate level of contribution for 1992 when determining "embedded" hopper car maintenance costs), the circumstances relating to the Clause 57 determination of "actual" maintenance costs for crop year 2007-2008 are different for three reasons. First, there is currently no legislation that defines the level of contribution to constant costs, as was the case in 1992. Second, under the 1992 WGTA Costing Review, the 20-percent level of contribution to constant costs was applied to the amount of total volume-related variable costs whereas the exercise under Clause 57 involves only one cost component (hopper car maintenance). Third, under the 1992 WGTA Costing Review, the 20-percent level of contribution was required to ensure that statutory grain revenue would reflect 100 percent of the total economic costs related to the movement of western grain.

Analysis and Findings

[156] The railway companies indicate that their position on this issue is the same as expressed under Issue No. 3. Under Issue No. 3, the railway companies assert that constant costs have nothing to do with hopper car maintenance costs and should not be considered under the Clause 57 adjustment. They also assert that "contribution to constant costs" are not "costs" and therefore should be excluded from this exercise. Given the Agency's ruling on these issues (under Issue No. 3) that the constant costs are relevant and are to be considered under the Clause 57 adjustment, the question now becomes: what level of contribution to constant costs should apply to "actual" crop year 2007-2008 hopper car maintenance?

[157] The railway companies and some of the non-railway-company party respondents submit that the level of contribution used to determine the "actual" crop year 2007-2008 hopper car maintenance costs should be the same as the level of contribution used for 1992 to determine the "embedded" crop year 2007-2008 hopper car maintenance costs. Thus, given that the Agency has ruled that the latter level should be 20 percent, these respondents would support a contribution level of 20 percent to determine the "actual" crop year 2007-2008 hopper car maintenance costs. The reason for the same level applicable to both determinations appears to be a matter of consistency, without taking into account the issue of statutory considerations.

[158] AF, KAP and Manitoba submit that a 0-percent contribution to constant costs should be assigned in the "actual" cost determination. AF notes that in contrast to the determination of "embedded" amounts (which are still based on costs determined under the WGTA), the determination of "actual" costs for crop year 2007-2008 is independent of the former WGTA provisions. AF asserts that Clause 57 calls for the Agency to "reflect the costs incurred" which means that the Agency should consider this to be an exercise of determining the current costs associated specifically with hopper car maintenance.

[159] AF, KAP and Manitoba support a 0-percent contribution level because even after the Clause 57 adjustment with no contribution, the overall level of contribution to constant costs for statutory grain would be significantly higher than the 20 percent deemed appropriate under the WGTA, and the 27 percent that was deemed to be appropriate at the beginning of the Revenue Cap Program.

[160] The Agency does not agree with the assignment of an average 20-percent level of contribution (for "actual" cost determination) for the following reasons. First, simply determining the constant costs to be 20 percent of their variable costs, for hopper car maintenance, is an arithmetic determination that would generate constant costs that far exceed their true levels. It also contradicts section 8 of the Railway Costing Regulations which calls for the use of specific cost information, whenever specific costs are known or can be readily determined from company records, in lieu of averaged or allocated costs.

[161] Second, such costs would fail to comply with Clause 57 to reflect the "costs incurred... for hopper car maintenance". The Clause 57 adjustment requires the removal (or cancellation) of the hopper car maintenance costs that are currently embedded within the Revenue Caps and their replacement with current, "actual" hopper car maintenance costs, which requires the use of current and "actual" contribution levels (and not the use of an average contribution level from over 15 years ago). In other words, Clause 57 calls for an adjustment only to hopper car maintenance costs and this specific task is better achieved by determining constant costs associated specifically with car maintenance.

[162] Third, applying the same 20-percent level to the determination of "embedded" and "actual" cost determinations would not ensure consistency as some respondents suggest. Consistency with legislation is paramount here. Consistency supports the use of a 20-percent level of contribution when determining the "embedded" maintenance costs because they are still based on costs determined under the WGTA. Nevertheless, consistency with Clause 57 supports a determination of constant costs that are specific to hopper car maintenance, and at current levels.

[163] Fourth, the WGTA, which was repealed over 12 years ago, should have no bearing upon current cost determinations. To do so would incorrectly imply that the WGTA is still in force or that its provisions are highly relevant to today's cost determinations. The Agency has already set a precedent in this respect, that the 20-percent level of contribution no longer applies to current cost determinations relating to the development of the VRCPI. In Decision No. 253-R-2006 dated April 28, 2006, the Agency dealt with the matter of the CWB purchasing cars and subsequently leasing them back to the railway companies. Paragraph 151(4)(c) of the CTA was thus triggered, requiring the Agency to adjust the VRCPI to reflect the increased costs. In that determination, the Agency assigned a level of contribution to constant costs that was specifically related to the leasing costs.

[164] With respect to the appropriate level of contribution to constant costs for current, "actual" hopper car maintenance, the Agency does not find that the level should be 0 percent. Various respondents point out that even after the Clause 57 adjustment with a 0-percent level of contribution to hopper car maintenance constant costs, the overall contribution levels for crop year 2007-2008 would exceed 40 percent and be considerably higher than the 27-percent overall level of contribution deemed appropriate by Parliament at the beginning of the Revenue Cap Program. These statistics may be relevant if one is assessing the need for a grain costing review, but this has no bearing on the current issue.

[165] The railway companies provided some indication as to the level of contribution to constant cost specific to hopper car maintenance. During the consultation, CN referred to data from the Agency's 1992 Constant Cost study suggesting an average (CN and CP) level of 3.6 percent. CP, in its August 15, 2007 submission of "actual" costs, provided an assessment based on 2004 to 2006 data. CP's assessment showed that its contribution to constant costs specific to car maintenance was about 5 percent.

[166] The Agency conducted its own assessment of the level of contribution to constant costs specific to car maintenance. It applied a methodology similar to CP's, for the three years 2004-2006. The Agency found that the average CN and CP contribution to constant costs for car maintenance was 3.45 percent. The Agency thus finds it appropriate to use this value of 3.45 percent when determining the "actual" hopper car maintenance costs required for the Clause 57 adjustment.

Other issues, including analysis and findings

[167] While the Consultation Document highlighted seven major issues for discussion, there were a number of other issues related to the Clause 57 adjustment and they are discussed below.

1992 WGTA Costing Review statistics

[168] Appendix 8 provides revised statistics to those originally presented in paragraphs 13-16 of the Consultation Document. The original hopper car RTM paragraph 13 statistics were revised to reflect the narrower definition of hopper cars. The original paragraph 14 statistics were revised to correct a small error in CP's 1992 hopper car maintenance costs (which revises the combined railway costs). The above changes also caused revisions to total car maintenance costs which include the contribution to constant costs, as well as the reconciled car maintenance amounts which adjust amounts downward to reflect the tonnage reduction from 35.15 million tonnes in 1992 to the current forecasted tonnage of 27.85 million tonnes.

Productivity adjustment

[169] As was noted under Issue No. 5 (use of a system-wide or specific measure of productivity), the development of the CTA's base year revenues (which determine Revenue Caps) included an 18-percent cost reduction related to system-wide productivity gains achieved between 1992 and 1998. The 18-percent cost reduction reflected an adjustment of about 4/5 of the total 22-percent cost savings due to productivity gains to provide the railway companies with revenue that effectively returned their level of contribution to constant costs to about 27 percent.

[170] CN contends that the adjustment was an explicit decision to leave the railway companies' contribution to constant costs at the same level as they existed prior to the productivity adjustment. It claims that the productivity adjustment was applied only to the variable costs embedded in the revenues. CN adds that the 22-percent productivity adjustment (representing an 18-percent cost reduction) should follow the same process as for the Kroeger adjustment, and apply the productivity ratio in its entirety to the variable hopper car maintenance costs with a 0-percent adjustment to the constant costs attributable to hopper car maintenance.

[171] The FRCC responds by noting that the 18-percent cost reduction implicit in the Revenue Cap formula was motivated by the fact that since the 1992 WGTA Costing Review, the railway companies had, by virtue of productivity gains, increased their statutory grain contributions to a level of some 45 to 50 percent, far in excess of the 27-percent return that they averaged under the WGTA. It adds that the 18-percent reduction was designed to return contribution levels to that 27-percent level, and was entirely a consequence of the productivity gains.

[172] The Agency finds CN's description of the application of the productivity gains inaccurate. It was the Agency that, upon the request of Transport Canada, developed the Kroeger productivity statistics, and the Base Year revenue statistics that appear in the CTA. The 18-percent cost reductions were applied to total 1998 revenue which was originally based, in 1992, upon variable costs plus a 20-percent level of contribution to constant costs. There was no differentiation between variable costs and the contribution to constant costs as CN suggests and this same application should apply in the determination of total hopper car (variable and constant) maintenance costs that are embedded within the 2007-2008 Revenue Caps.

Other adjustments

[173] The "actual" crop year 2007-2008 hopper car maintenance costs are derived based on 2004, 2005 and 2006 cost data. Hence, the 2004, 2005 and 2006 data must be projected to 2007 and 2008 levels to derive "actual" crop year 2007-2008 costs and this requires the use of estimates for inflation and productivity. The Consultation Document proposed that changes in productivity be derived based on five-year moving averages of most-recently-available historical data. The use of five-year moving average data for productivity is recommended primarily because it is consistent with the methodology used for the Kroeger productivity adjustment.

[174] CN submits that the railway companies should be requested to submit productivity estimates based on estimates of their future costs and workload levels which the Agency could then validate using similar techniques to those applied under the annual determination of the VRCPI. However, these productivity adjustments pertain only to the Clause 57 determination and do not continue beyond that determination. Hence, there is no requirement for railway company submissions.

[175] The Agency finds that the 2004, 2005 and 2006 "actual" cost data should be projected to 2007 and 2008 levels to derive "actual" crop year 2007-2008 costs using current estimates for inflation and estimates for productivity based on five-year moving averages.

THE DETERMINATION OF THE VRCPI REFLECTING THE CLAUSE 57 ADJUSTMENT

[176] The calculations relating to the determination of the amount of hopper car maintenance costs that are "embedded" within the 2007-2008 Revenue Caps and that reflect the above Agency findings are illustrated in Appendix 9. The amount is determined to be $105.1 million.

[177] The amount of "actual" hopper car maintenance costs relating to crop year 2007-2008 and reflecting the above Agency findings, totals $32.9 million. It follows that the difference between the amount of "embedded" and "actual" hopper car maintenance costs for crop year 2007-2008 is $72.2 million.

[178] The $72.2 million reduction falls within the $60-75 million range set out in the Chairman's advisory letter of June 28, 2007. It translates to a reduction of $2.59 per tonne for crop year 2007-2008 based on the overall statutory tonnage forecast of 27.85 million tonnes.

[179] The Clause 57 determination has been limited to hopper cars that are maintained by the prescribed railway companies. Such cars comprise a total fleet of about 24,000 hopper cars that are used approximately 75 percent of the time in statutory grain service. The average amount of hopper car maintenance costs that would have been embedded within the 2007-2008 revenue caps without the Clause 57 adjustment, and based on a 75-percent level of usage, is $4,379 per car. Following the Clause 57 adjustment, the amount of hopper car maintenance embedded within the 2007-2008 Revenue Caps, based on a 75-percent level of usage, is $1,371 per car.

[180] The volume-related composite price index set out herein, in accordance with Clause 57, is 1.0639. This index shall apply to the entire 2007-2008 crop year, from August 1, 2007 until July 31, 2008 and it replaces the interim price index that was established by the Agency in Decision No. 388-R-2007 dated July 31, 2007.

Member(s)

  • Geoffrey C. Hare
  • Beaton Tulk
  • Raymon J. Kaduck

APPENDIX 1

Issue No. 1: The determination of a price index adjustment methodology

Railway companies' comments

CN

[1] CN proposes that the tonnage and length of haul estimates be based on no more than the past 10 years rather than the past 14 years as proposed by the Agency. It notes that the six longest lengths of haul occurred in the first six years of data (from 1992 to 1997) when network rationalization was taking place. CN claims that regulated tonnages have declined because of a shift from wheat to lighter crops, and an increase in non-regulated value added products over shipments of regulated unprocessed grains.

[2] The price index adjustment methodology proposes adding an 8th and 9th weight (to the price index basket), respectively, to offset the car maintenance costs "embedded" within the Revenue Caps and to add in the newly-determined "actual" car maintenance costs. For the 2007-2008 crop year, the price indices for the 8th and 9th components would assume a value of unity and they would be adjusted for inflation in future years. CN fails to see how Clause 57 allows for such adjustments to future years given the "once only" wording of Clause 57 which confirms that once the adjustment has been made, this provision will be spent. CN submits that when the Agency makes its subsequent determinations under subsection 151(5) of the CTA, it should only consider the same factors it has since the coming into force of the Revenue Cap provisions.

[3] CN notes that the Consultation Document uses Revenue Tonne Miles (RTMs) for all hopper cars in its reconciliation between current and 1992 base year hopper car maintenance costs. It asserts that the RTMs should not include RTMs for movements in foreign and private cars not maintained by the railway companies. It notes that the Consultation Document states that in 1992 the percentage of tonnes moved in hoppers was 95.73 percent and that this percentage was applied to 2007-2008 forecasted tonnages as well.

[4] CN suggests that based on the 1992 Technical Appendices (prepared by the Agency in respect of the 1992 WGTA Costing Review), the percentage of tonnes moved in "railway maintained" hopper cars was only 84.55 percent. It notes that for crop year 2006-2007, the percentage of regulated grain moving in CN-maintained hopper cars fell to about 72 percent. In post-consultation correspondence with the Agency, CN revised this figure to 77 percent.

[5] CN concludes that to properly determine the RTM reconciliation factor for hopper car maintenance costs, only the RTMs for railway company-maintained cars must be reflected. CN adds that the current percentage should not be assumed to be the same as in 1992, but should reflect the actual percentage of the current fleet.

CP

[6] CP points out that the price indices applicable to the 8th and 9th components and the overall labour and other price indices applicable to the 1st to 6th components must be compatible.

[7] CP asserts that the "once only" adjustment means that the Agency is not permitted to implement procedures that would have the effect of having this "once only" adjustment take place for each crop year when future crop year VRCPIs are determined. CP acknowledges that the adjusted hopper car maintenance reflected in future Revenue Caps will need to be adjusted for inflationary factors, but no other factors can be taken into account that may affect the level of actual maintenance performed by the railway companies on these hopper cars.

[8] CP adds that the Clause 57 adjustment is only for the maintenance of hopper cars used for the movement of grain as defined in section 147 of the CTA and after this "once only" adjustment is completed, the Agency's powers and jurisdiction under Clause 57 will be exhausted. It adds that after this "once only" adjustment, the resultant component in the 2007-2008 Revenue Cap for hopper car maintenance would be reflective of the current cost and this is the cost that would be indexed in future VRCPI changes. Finally, CP indicates that it is unable to comment on the methodology for determining price changes for the 8th and 9th components until the Agency provides an illustrative example.

Non-railway-company party comments

Alberta Agriculture and Food (AF)

[9] AF provided evidence suggesting that the proposed 950-mile length of haul may be too low. It provided statistics from the Canadian Grain Commission for the first 15 weeks of crop year 2007-2008 which showed a significant increase in the proportion of grain moving to west coast ports. As westbound movements have a considerably longer length of haul than eastbound movements, the consequence is to boost the average length of haul by as much as 40 miles, according to the AF estimates. It adds that the effect of short line railways upon the average length of haul no longer appears to be a factor because of CN's recent purchases of several Alberta rail lines.

[10] AF notes that "CP has argued in its submission that the Agency is not permitted to implement procedures that would have the effect of having any adjustment take place for each crop year when future VRCPIs are calculated. In the next sentence it states that the index will have to be adjusted for inflation in future years. It is unclear how it could do both." AF adds that the use of the words "once only" means that the Agency is to adjust car maintenance costs to remove productivity gains for the period from the last adjustment to the current crop year and that the railway companies are to benefit from productivity gains achieved thereafter.

[11] AF also suggests that the Agency consider an alternative price index adjustment methodology where there is no requirement for 8th and 9th basket components as the weights for several of the existing seven basket components could be adjusted, to achieve the same results.

[12] AF disagrees with CN's views that the RTM reconciliation factor should be based on only RTMs for railway company-maintained cars. AF submits that this contradicts the wording of Clause 57 which refers to the "maintenance of hopper cars" and not the maintenance of a railway company's cars.

Alberta Soft Wheat Producers Commission (ASWPC)

[13] ASWPC agrees with the position of the Farmer Rail Car Coalition (the FRCC) that the costs of maintenance should apply to all hopper cars used for the movement of grain and not just for cars that are railway maintained.

Canadian Wheat Board (the CWB)

[14] The CWB agrees with the Agency's proposal to use 28.0 million tonnes and an average length of haul of 950 miles as assumed values in its price index adjustment methodology. It states that it is in favour of using the historical trend, which lessens year to year variations, as the most appropriate method of determining these projections for future years.

FRCC

[15] The FRCC provides general comments in a covering letter in addition to a full submission prepared with the assistance of John Edsforth, President, Travacon Research Limited.

[16] The FRCC states that the Agency's proposal would result in a one-time change in the VRCPI to reflect the measured difference in hopper car maintenance costs as the subsequent escalation of the new (8th and 9th) components would reflect only price changes, without further adjustments for changes other than in price levels. Thus, the adjustment for considerations other than price changes would occur only at the time of initial implementation, and would be "once only". The FRCC concludes that the Agency's proposal complies with the wording of Clause 57.

[17] The FRCC disagrees with CN's assertion that the scope of the hopper car maintenance adjustment should be limited to railway company-maintained hoppers in the current fleet. It notes that, in contrast, Clause 57 defines the adjustment scope to cover costs incurred for "maintenance of hopper cars used for the movement of grain" and that this definition includes all hopper cars whether maintained by the railway companies or others. The FRCC notes that for cars other than those maintained by the railway companies, a maintenance cost is incurred by the railway companies as a component of the payment made by the railway companies for the use of the cars, and must be estimated as a component of the adjustment.

Keystone Agricultural Producers (KAP)

[18] KAP does not have any issue with the Agency's projected tonnage and length of haul statistics that are used to generate RTMs. KAP supports the Agency's proposed price indexation adjustment methodology.

Province of Manitoba (Manitoba)

[19] Manitoba indicates that using a historical average to project annual tonnages and the average length of haul is reasonable.

Saskatchewan Association of Rural Municipalities (SARM)

[20] SARM is a member of the FRCC which had compiled a submission with the assistance of John Edsforth. SARM has reviewed and supports the FRCC submission. SARM adds that it submits this same paper as background for SARM's submission for consideration by the Agency in the matter of Clause 57. SARM agrees with the Agency's approach, in general.

Western Grain Elevator Association (the WGEA)

[21] The WGEA will not be commenting on the precise methodology for the Clause 57 adjustment. It notes that it supports the adjustment to the VRCPI to reflect the costs incurred by the prescribed railway companies for the maintenance of hopper cars used in the movement of grain.

[22] The WGEA indicates that it will rely on the knowledge and expertise of the Agency in the various details of the calculation, and will support the outcome of the Agency.

Railway companies' rebuttal comments

CN

[23] CN reiterates its earlier position on the "once only" adjustment versus the Agency's proposed application of future price changes to the new 8th and 9th components. It maintains that Clause 57 is spent once this "once only" adjustment has been made and that the Agency is to revert to the annual adjustments as were made by the Agency prior to Bill C-11. CN adds that to develop and apply further indices that will in following years specifically adjust the "once only" adjustment clearly contradicts the wording in Bill C-11. CN purports that it would in effect be denying that Clause 57 is spent and would be giving continuing application to the provisions of what is a transitional section of Bill C-11.

[24] CN rebuts the views of some respondents that all hopper cars should be included in the Clause 57 determination, including those maintained by parties other than prescribed railway companies. CN asserts that, considering that the Revenue Cap Program governs revenue for prescribed railway companies, it is clear that the intent of Clause 57 is to adjust the Revenue Caps for the hopper car maintenance expenses "incurred by the prescribed railway companies", and not for maintenance costs incurred by the non-railway companies but deemed to be paid by the railway companies as a portion of car hire or leasing costs.

CP

[25] CP responds to AF's comments relating to the seemingly conflicting statements made by CP relating to the "once only" adjustment versus the Agency's proposed application of future price changes to the new 8th and 9th components. CP clarifies that "what CP is saying is that the resultant residual hopper car maintenance costs left in the Revenue Cap after the "once only" adjustment is completed is to be indexed for inflation through future VRCPI. The procedure that the Agency eventually selects must ensure that."

[26] CP rebuts the views of some respondents that all hopper cars should be included in the Clause 57 of Bill C-11 determination, including those maintained by parties other than prescribed railway companies. CP states that the compensation for maintenance of hopper cars used for the transportation of regulated grain owned by other railway companies and occasionally maintained by CP, is received by CP through direct Association of American Railroads (AAR) billing to those railway companies. Consequently, these costs are neither embedded in the Revenue Cap nor should they be added.

[27] CP points out that for hopper cars that are generally used by CP in the transportation of regulated grain, which on occasion are maintained by other railway companies or private shops, CP receives a bill under AAR rules. The cost resulting from payment of those bills is recorded under Account 517 and is part of the cost of maintenance of hopper cars under the current deliberations.


APPENDIX 2

Issue No. 2: The inclusion of Uniform Classification of Account 517

Railway companies' comments

CN and CP

[1] CN and CP submitted views on this issue prior to consultation, in letters to Agency staff dated May 18 and January 8, 2007 respectively. These views, along with the initial views of CN and CP during the consultation process, are provided below. Due to the similarity of the CN and CP views, they are presented only once, as "railway companies'" views.

[2] The railway companies provided three main arguments for the exclusion of Account 517. Each are discussed below.

[3] The first argument relates to Agency workload, and certain correspondence and reports - between June 2003 and June 2005 - where the referenced correspondence and reports all failed to include Account 517 in the definition of car maintenance. The railway companies submit that this is evidence that Account 517 does not relate to maintenance.

[4] The second argument relates to wording in the UCA. On page 1705.513, the wording which prefaces Accounts 511, 513, 515 and 517 states:

The accounts in this group are designed to record the costs of maintaining and lubricating freight cars.

[5] On page reference 1705.523, the wording which prefaces Passenger Car Accounts 521 to 525 states:

The accounts in this group are designed to record the costs of maintaining, lubricating and inspecting passenger cars.

[6] On page reference 1705.515, the UCA describes Account 517 as follows:

517 Lubrication, Inspection and Coupling Hose - Freight

Include the cost of inspection of incoming and outgoing trains to determine if any freight cars should be set off as bad order, the cost of lubricating freight cars and of inspection to determine whether lubrication is necessary. Include the cost of coupling and uncoupling hose on freight trains and air brake testing.

[7] The railway companies drew three conclusions from the above phrases: (i) that there is a clear and intentional distinction between "maintaining" and "lubricating" cars, and between "maintaining" and "lubricating and inspecting" cars; (ii) that references in Account 517 to incoming and outgoing trains, lubricating cars, coupling or uncoupling brake hoses and brake testing all refer to functions associated with train operations on a day-to-day basis and are not car maintenance activities; and (iii) that Accounts 511, 513 and 515 relate to repairs, performed in shops, at line points or by other railway companies and are not associated with train operations on a day-to-day basis. Therefore, Account 517, which relates to day-to-day train operations, can not be deemed to be a car maintenance account.

[8] As to these latter two conclusions, CP acknowledges in its November 1, 2007 submission that the car maintenance functions and Account 517 activities are performed by tradesmen belonging to the same group of employees. It notes that, over the years, the employees conducting the Account 517 inspection activities have also come to perform in-train maintenance activities such as closing hopper car gates and maintenance of damaged gates. CP asserts that these gate-related activities are truly maintenance activities but they were incorrectly recorded under Account 517.

[9] The third argument submitted by the railway companies is that under full-service commercial lease arrangements, the car owner or lessor retains liability for the expenses of maintaining the cars and, consistent with the railway companies' view that Account 517 is not a maintenance account, the lessor does not provide any Account 517 functions. Furthermore, Account 517 costs under full-service leases are not billed to the lessor, but are covered by the lessee. The railway companies provided "standard wording" of this type of full-service clause as follows: "Maintenance By Lessor: Lessor shall, at its expense, maintain each car, including gates and hatches, in accordance with the standards set by the Interchange Rules and by the rules of any other applicable regulatory body".

Non-railway-company party comments

AF

[10] AF refers to the following statement from CN's May 18, 2007 letter: "References in Account 517 to incoming and outgoing trains, lubricating cars, coupling or uncoupling brake hoses, and brake testing all refer to functions associated with train operations on a day-to-day basis." AF states that this is clearly not the case because if Account 517 is train related, there would be one unit cost for each train. Inspection of a train with five cars would cost the same as inspection of a train with 100 cars and this is unreasonable. Consequently, there is no doubt that inspections must be car related.

[11] To determine the meaning of the word "maintenance", AF provided the definition below from the SAE [engineering] Advanced Traveller Information System dictionary:

maintenance: 1. Any activity, such as tests, measurements, replacements, adjustments and repairs intended to restore or retain a functional unit in a specified state in which the unit can perform or perform its required function. 2. [For material], All action taken to retain material in a serviceable condition or to restore it to serviceability. It includes inspection, testing, servicing, classification as to serviceability, repair, rebuilding and reclamation....

[12] AF points out that from the above definition, maintenance includes inspection and it is an integral part of maintenance. AF adds that the purpose of maintenance is to restore or retain function and that air brake testing, coupling hoses and lubricating journals clearly falls within this purpose, and therefore this definition.

[13] AF also provides the following definition of "maintenance" from the Dictionary of Accounting Terms:

maintenance: periodic expenditures undertaken to preserve or retain an asset's operational status for its originally intended use...

[14] AF points out that the above definition focuses on putting material in operational status and keeping it that way, as is done when hoses are coupled, journals lubricated and brakes tested.

[15] AF also notes that the definition of "maintenance" in the Chartered Management Institute Dictionary of Business and Management is similar to that in the Dictionary of Accounting Terms but identifies several approaches to maintenance including preventative maintenance, and predictive maintenance which uses "techniques of surveillance, diagnosis and remedy to manage the maintenance..."

[16] AF concludes that from the above definitions, it is clear from the description of Account 517 activities in the UCA that those activities relate to maintenance.

[17] AF also notes that the Agency's Consultation Document showed amounts relating to UCA Accounts 511, 513, 515 and 517, but that maintenance costs should also include amounts for administration, equipment repair shops maintenance, shop machinery maintenance, etc. (i.e., UCA Accounts 500, 437, 537, etc.).

[18] The amounts shown in the Consultation Document related to Accounts 511, 513, 515 and 517 also included amounts for all of the related overhead accounts, some of which were listed by AF.

ASWPC

[19] ASWPC submits that Account 517, lubrication, inspection and coupling hose activities should qualify as car maintenance costs for the Clause 57 adjustment. However, it notes that the closing of gates should not contribute to the determination of actual car maintenance costs because the railway companies charge terminals $305 for each gate they have to close. To allow this as a cost component when the railway companies are compensated by terminal operators would provide a double benefit to the railway companies.

[20] ASWPC also refers to the gate replacement program announced by the federal government in October 2007 related to the signing of a new lease agreement with CP. Under the terms of this agreement, the federal government has obtained a commitment from CP that it will undertake a gate replacement program. ASWPC notes that the railway companies have been well compensated over the years for car maintenance, including gate replacement costs, even though the maintenance may not have occurred.

CWB

[21] CWB submits that Account 517 costs should be included as maintenance cost items. It notes that the UCA description of this account shows that it includes car maintenance activities to determine if any cars should be set out as "bad order" cars. Such cars would require further maintenance and/or repair. A part of the process of setting off as "bad order" cars would include the coupling and uncoupling of air hoses. Thus, all of these costs are a part of the process of maintaining the hopper cars.

FRCC/SARM

[22] The FRCC notes that it seems logical that inspection is a necessary component of maintenance, as it identifies work to be done. Lubrication is an essential component of allowing the car to operate satisfactorily while inspection and lubrication are a fundamental part of the overall maintenance process in any industry. The FRCC asserts that to argue that seeking out potential maintenance problems through inspections or preventative maintenance such as lubrication is outside the realm of physically maintaining a car is far too narrow a definition of what constitutes maintenance.

KAP

[23] KAP indicates that some of the tasks in UCA Account 517 should be classified as maintenance while other tasks should not, but a significant portion should be considered maintenance work. KAP adds that the railway companies are trying to have maintenance paid for twice, as they were compensated in past years for work that has not been done, and that is not acceptable.

Manitoba

[24] Manitoba indicates that it would like the Agency to include Account 517 expenditures as part of hopper car maintenance as maintenance is the act of keeping an object in its existing state of repair or preserving the object from failure or decline. It adds that the activities expressed in Account 517 do precisely that: inspection involves identifying rail cars in need of repair while lubrication prevents deterioration of rail car parts, and these are acts of maintenance activities and the related expenditures are maintenance expenditures.

[25] Manitoba then comments on the railway companies' claims that the wording of the UCA suggests that "maintenance" and "repair" are synonymous (i.e., only repairs qualify as "maintenance"). Manitoba notes that its dictionary definitions differ. Repair means restoration of an object to its original or at least pre-existing state by replacing a part or putting together what is torn or broken. The result of both activities [i.e., repair and maintenance related to inspection and lubrication] is the same, that is to keep the rail car in an acceptable state for use, and Manitoba concludes that this is why the 517 Account appears in the "500 Account Series", along with the other maintenance accounts, Accounts 511, 513 and 515.

[26] Manitoba notes that the practice of treating [inspection and lubrication] maintenance and repair as synonymous in the railway industry and the railway accounting rules is a longstanding one. One can infer that the use of the word "maintenance" in Clause 57 does cover both [inspection and lubrication] maintenance and repair activities. Manitoba adds that the Consultation Document identifies the former as "preventative maintenance" and the latter as "corrective maintenance", which is one way of distinguishing the two maintenance activities. It concludes that the railway companies' request to exclude Account 517 activities from maintenance does not make sense because many of these activities do fall into the category of maintenance, as the word is commonly defined.

Wild Rose Agricultural Producers (WRAP)

[27] WRAP submits that Account 517 activities, which relate to lubrication, inspection and coupling of hoses, should be included in the calculation of hopper car maintenance costs.

Railway companies' rebuttal comments

CN

[28] CN reiterates its earlier views that the UCA definition of Account 517 clearly identifies it as being separate and distinct from maintenance. It adds that this is consistent with commercial lease arrangements for both leased and foreign owned cars where the car owner is not billed for costs reported under Account 517.

[29] CN notes that some respondents have suggested that as inspection is a precursor to actual repairs, it should also be included as maintenance. CN asserts that the question is what is intended by Clause 57. The activities related to train inspection are performed primarily for the purpose of ensuring safe train operation. As a train is composed of locomotives and freight cars, car related activities must be performed. CN states that it is difficult to understand what the activities involving the coupling of air hoses and the performance of mandatory air brake testing prior to train departure have to do with car maintenance.

[30] CN points out that previous Agency staff reports did not merely exclude reference to Account 517, as the Consultation Document indicated, but explicitly commented that "Car Inspection (Account 517) is a train function or activity which is widely recognized as such throughout the industry." CN adds that to now suggest that these activities are car maintenance would be a complete reversal of position without any factual change.

[31] CN asserts that of the various expenses reported to Account 517, the majority are comprised of air brake testing and coupling. Lubrication expenses are negligible and inspection expenses represent less than half of total Account 517 expenses. Thus, Account 517 clearly includes significant expenses that are not maintenance and therefore, cannot be included as "costs incurred... for the maintenance of hopper cars..."

CP

[32] CP responds to a question posed by AF, as to whether Account 517 costs are car related, by saying: "CP

is not disputing that the Account 517 expenses are car related, the question is whether the activity performed which leads to these expenses is part of the freight car maintenance function. CP's position is that it does not."

[33] CP then addresses AF's question as to whether costs for administration, equipment repair shops maintenance, etc. have been overlooked when determining car maintenance costs. CP responds that its submission of actual costs did include these additional costs.


APPENDIX 3

Issue No. 3: The level of contribution to constant costs applicable to 1992

Railway companies' comments

CN

[1] CN notes that Clause 57 directs the Agency to make an adjustment to the index for the costs incurred for the maintenance of hopper cars. It makes reference to the Consultation Document where it states that constant costs as "unexplained costs, or system residual costs". CN then provides some examples of constant costs (the maintenance and ownership of bridges, tunnels, culverts and marine terminals) and concludes that such costs have no relation to hopper car maintenance and accordingly, no adjustment to the index for these items should be made.

[2] CN refers to a 2005 Agency staff Consultation Report where Agency staff attempted to derive a contribution to constant costs specific to hopper car maintenance and found that such a value would be approximately 3 percent. CN also suggests that data from the Agency's 1992 Constant Cost study shows that for all mechanical costs, car and locomotive, the ratio of constant costs to variable is about 3.6 percent. CN asserts that assuming a contribution level greater than 3 to 4 percent would overstate the contribution to constant costs by taking into consideration cost items unrelated to car maintenance, such as roadway ownership and snow clearing.

[3] CN concludes that if the Agency is confident that the 2005 Agency staff recommendation of 3 percent can be attributed to hopper car maintenance with certainty, then CN has no objection to its inclusion. However, CN asserts that if the Agency is unable to reliably determine constant costs related to the maintenance of hopper cars, the constant costs should be excluded entirely.

CP

[4] CP disagrees with the recommendation in paragraph 15 of the Consultation Document set out below:

Under the WGTA, the amount of contribution to constant costs, for 1992 and subsequent costing review years, was determined by multiplying the total amount of volume-related variable costs by 20%, a system average level of contribution to constant costs. Given that the 20% level of contribution to constant costs was a legislated value and that it applied to each and every dollar of variable cost, regardless of its cost category, the Agency recommends that the 20% level of contribution apply to hopper car maintenance costs, when determining the total (variable plus constant) 1992 hopper car maintenance costs. [emphasis added]

[5] CP states that the recommendation differs from that in an earlier October 28, 2005 [Agency staff] Consultation Report. In that report, Agency staff found that their analysis of specific accounts related to car maintenance showed that they contributed only 3 percent to constant costs. Furthermore, the same staff report concluded that if a 27-percent level is determined to be the appropriate contribution to constant costs (as recommended by several participants during a 2005 consultation), it would be unreasonable to expect that the railway companies could shed any level of constant costs even close to this level.

[6] CP asserts that Clause 57 authorizes the Agency to adjust the VRCPI "to reflect the costs incurred by the prescribed railway companies... for the maintenance of hopper cars used for the movement of grain..." and because of this wording, the adjustment to the index is limited to only those costs associated with the maintenance of hopper cars. It notes that Clause 57 refers specifically to "costs" and not "compensation". Hence, it does not extend to "compensation" that may be received, either directly or indirectly, in connection with this activity. CP concludes that the addition of a 20-percent contribution to constant costs to hopper car maintenance costs would be contrary to the legislated intent of Clause 57 because the adjustment would not strictly reflect "the costs incurred by the prescribed railway companies... for the maintenance of hopper cars used for the movement of grain" but would include provisions for costs that are unrelated to the maintenance of hopper cars. CP adds that such an adjustment would remove constant costs that the railway companies would continue to incur.

[7] CP submits that constant costs are calculated by subtracting total variable costs from total costs, and that constant costs represent those costs that are not causally related to changes in the volume of traffic or to the provision of a homogeneous service. It adds that constant costs represent the fixed costs of the railway company, or the costs incurred to own, maintain and administer the basic railway network. It indicates that although the constant costs are not causally related to variable costs, they can, to a certain extent, be identified and disaggregated by functional activity. CP indicates that the vast majority of constant costs are associated with the general administration of the railway and the provision of the way and structures, and that only a small minority of the constant costs relate to the maintenance of hopper cars. CP asserts that the language of Clause 57 limits the inclusion of constant costs to those associated with hopper car maintenance, and proscribes the inclusion of constant costs that are associated with other unrelated activities.

[8] CP notes that under the WGTA, the rates were derived by converting the annual "estimated eligible costs" into a distance-related rate scale, and that the estimated eligible costs included an amount equal to 20 percent of the total volume-related variable costs as a contribution to constant costs, of which only a small minority is related to the maintenance of hopper cars. CP acknowledges that every dollar of variable costs generated 20 cents towards constant costs, and that changes in the annual variable costs caused corresponding changes to the amount of contribution to constant costs. CP concludes, however, that this does not mean that constant costs varied as they are, by definition, constant and "no act of parliament can overturn this immutable economic fact."

[9] CP asserts, concerning the WGTA's term "contribution to constant costs", that "contribution" itself is not a cost but is an amount that the railway companies earn above their variable costs to help them defray their constant costs. It claims that direct hopper car maintenance is 100 percent variable with traffic and hence, by itself, does not require a contribution to defray its constant costs because there are no costs to defray. CP adds that there are, however, overhead costs that vary with the hopper car maintenance and these variable costs are less than 100 percent variable and thus require a contribution to defray their constant costs. CP contends that the Agency's recommendation to use a 20-percent level of contribution to constant costs would "lead to the removal of a large portion of the contribution from the Revenue Cap which is needed by the railway companies to defray the constant costs of other cost components such as track and roadway maintenance and other costs."

Non-railway-company party comments

AF

[10] AF asserts that the contribution to constant costs in the 1992 base year should be 20 percent. This follows from the definition of "estimated eligible costs" found in section 34 of the WGTA, which was in force at that time.

[11] AF references CP's comments in its November 1, 2007 submission where CP states:

...the Agency's recommendation to use the 20% contribution level to assess the contribution to constant costs associated with hopper car maintenance, if adopted, will lead to removal of a large portion of the contribution from the Revenue Cap which is needed by the railways to defray the constant costs of other cost components such as track and roadway maintenance and capital costs.

[12] AF then refers to an analysis that it conducted and provided as an appendix to its submission, which shows that the current railway contribution to constant costs from grain is 56.6 percent. AF adds that even if the Agency were to make a $3.00/tonne adjustment under Clause 57 (equivalent to a $84 million reduction based on a movement of 28.0 million tonnes), the level of contribution to constant costs from grain will still exceed 40 percent. Hence, in contrast to what CP claims, the adoption of a 20-percent base year level of contribution is not needed to defray CP's constant costs, because it will still be receiving an amount well in excess of what is required.

[13] AF notes that Carl Snavely, in his 1980 report entitled "1980 Costs and Revenue incurred by the railways in the Transportation of Grain under Statutory Rates" concluded that the contribution to constant costs should be no less than 17.5 percent and no more than 25 percent of variable costs. AF also notes Dr. Clay Gilson's support for a 20-percent level of contribution to constant costs and indicates that his views formed the basis for the 20-percent contribution contained in section 34 of the WGTA.

ASWPC

[14] The ASWPC indicates that the hopper car maintenance adjustment should include constant costs (in addition to variable costs). The ASWPC adds that the Agency's proposed 20-percent contribution to constant costs is fair, and that the railway companies' contention that the Revenue Cap generates three percent or less to constant costs, is not substantiated.

CWB

[15] CWB notes that the WGTA incorporated a contribution to constant costs of 20 percent of variable costs in the 1992 Costing Review and in light of the WGTA's prescribed level of contribution margin, the CWB is of the view that 20 percent is the appropriate contribution rate.

FRCC/SARM

[16] The FRCC indicates that the railway companies' position (calling for a contribution to constant cost of 0 percent to 3 percent) would make sense if the Revenue Cap were set such that the railway companies are compensated only for variable costs incurred, with no contribution to constant costs. It points out, however, that the Revenue Cap formulas were derived based on a 27-percent contribution to constant costs, continuing a principle of compensation that had existed since the enactment of the WGTA. It notes that contribution is directly linked to variable costs and that relationship must be continued in the adjustment under consideration.

[17] The FRCC notes that under the WGTA, the annual calculation of eligible costs required downward variable cost reductions when government hopper cars were substituted for railway box cars. It notes that the contribution to constant costs was reduced in proportion to these variable cost reductions, even though there was no demonstrated constant cost reduction associated with these substitutions.

[18] The FRCC notes that, similarly, when variable costs were reduced by virtue of productivity improvements as measured by the quadrennial costing reviews, subsequent contributions were reduced in proportion, even though there was no demonstrated constant cost reduction in that situation.

[19] The FRCC concludes that, even though, the linkage between variable costs and contribution to constant costs for regulated grain is well established and is not dependent on demonstrated changes in constant costs, there is no validity to the railway companies' argument that no contribution should be included because there is no constant cost change.

[20] The FRCC adds that the VRCPI is, in the final analysis, about revenue, and the Clause 57 adjustment must give full effect to the linkage between revenues and variable costs. The FRCC submits that the calculation of embedded hopper car maintenance costs related to 1992 costs should include a 27 percent contribution to constant costs.

KAP

[21] KAP notes that the 20-percent contribution to constant costs (applicable to costing review years under the WGTA) was increased to 27 percent at the commencement of the Revenue Cap Program. It notes that the 27-percent level reflected an average contribution to constant cost level under the WGTA. KAP proposes that the appropriate level of contribution to constant costs be 27 percent.

Manitoba

[22] Manitoba states that the variable costs for hopper car maintenance must be increased by 20 percent to correctly reflect the revenues embedded in the Revenue Caps.

[23] Manitoba submits that this is not a matter of attributing a level of constant costs to the maintenance costs because by definition, the constant costs can not be attributed to any specific cost item.

[24] Manitoba notes that the Revenue Caps were derived from the total revenue entitlement calculated in 1992 which incorporated a 20-percent mark-up of total volume-related variable costs intended to provide sufficient revenue for the railway companies to cover their constant costs. As hopper car maintenance costs were a part of those total volume-related variable costs, the portion of the revenue entitlement resulting from the hopper car maintenance costs equals the variable hopper car maintenance costs plus 20 percent. Manitoba adds that this is simply a matter of arithmetic and does not imply a relationship between maintenance and constant costs.

[25] Manitoba notes that the VRCPI is one variable in the CTA's section 151 Revenue Cap formula and that Clause 57 can not be read - as CN and CP would like the Agency to do - independently of the CTA's section 151. Manitoba notes that the link is clear given the opening phrase of Clause 57 which states that: "Despite section 151(5) of the Canada Transportation Act..." Manitoba asserts that Clause 57 directs the Agency to adjust the VRCPI so that the maximum revenue entitlement better reflects incurred maintenance costs, and that adjustment cannot be restricted to variable maintenance costs only, as CN and CP suggest.

WRAP

[26] WRAP believes that the level of contribution to constant costs should be higher than the suggested 20 percent and in fact should be closer to 27 percent.

Railway companies' rebuttal comments

CN

[27] CN notes that while many respondents have provided opinions on how the Agency should treat contribution and what levels are appropriate, Clause 57 does not give the Agency a mandate to review contribution levels or determine the appropriate levels. The various contribution levels quoted, 20 percent, 27 percent, 56.6 percent etc. are simply arithmetic and not some cost incurred for hopper car maintenance. CN adds that Clause 57 restricts the Agency to the "costs incurred ... for the maintenance of hopper cars..."

[28] CN adds that hopper car maintenance costs incurred are composed of the variable costs currently being studied by the Agency, and arguably some non-variable costs related to car maintenance, which in an October 2005 Agency staff report were estimated to be about 3 percent of the variable costs. This estimate is consistent with data used in the "1992 NTA Staff Report Regarding the Appropriateness of the Level of Contribution to Constant Costs", which is the latest Agency Report on this issue.

CP

[29] CP notes that almost all of the respondents recommend that the Agency use a system average contribution level of 20 percent or higher, and reiterates its position expressed in its first submission that a plain reading of Clause 57 clearly states that the adjustment is to reflect the costs incurred by the prescribed railway companies, as defined in section 147 of the CTA, for the maintenance of hopper cars used for the movement of grain, as defined in section 147 of the CTA. There should therefore be no adjustment in relation to the contribution itself, as it is not a cost but a contribution towards a cost. CP adds that even under a more liberal reading of Clause 57, any adjustment in relation to the contribution must be limited to reflect the hopper-car maintenance-related contribution.


APPENDIX 4

Issue No. 4: The use of a system-wide or specific measure of inflation

Railway companies' comments

CN

[1] CN notes that specific measures should be used if possible and that no measure of inflation is ever truly specific to the activity to which it is applied. CN notes that the [component] price indices developed for grain each year are not specific to grain only, and the VRCPI is "specific" to grain only in the sense that it uses weights specific to grain costs. For the Clause 57 adjustment, component weights specific to hopper car maintenance should be used to derive a specific hopper car maintenance price index.

CP

[2] CP indicates that as the Clause 57 adjustment requires that the adjustment is only for the maintenance of hopper cars, all adjustment factors such as the productivity adjustments and inflationary adjustments must reflect specific characteristics of the hopper car maintenance costs.

[3] CP refers to section 8 of the Railway Costing Regulations, which states that: "Whenever specific costs are known or can be readily determined from company records, such costs shall be used in lieu of averaged or allocated costs."

Non-railway-company party comments

AF

[4] AF notes that the inflation measures for specific components (labour, fuel, material, etc.) are system-wide and not specific to grain. It indicates that for the purposes of the Clause 57 adjustment, the inflation adjustments should follow the price indexing methodology used in the annual determination of the freight rates and the Revenue Cap. The weights should be grain specific and based on the 1992 Costing Review and the recently-added lease car costs.

CWB

[5] The CWB indicates that during the 2005 hopper car consultation, Agency staff developed a price index specific to hopper car maintenance, using three factors. It notes that, although the component price indices used in this methodology are not specific to grain, the methodology should be used to adjust car maintenance costs.

FRCC/SARM

[6] The FRCC indicates that the use of a specific measure of inflation is preferable.

KAP

[7] KAP notes that during the 2005 Agency staff consultation, there appeared to be a consensus among all participants and that it continues to accept that view. (The consensus was to use the specific measure of inflation.)

Manitoba

[8] Manitoba maintains that the goal of Clause 57 is to make an adjustment related to hopper car maintenance, hence, the inflationary adjustment should be specific to car maintenance. It notes that such an index is only specific because of the weights that are used, but nevertheless, it will yield a better measure of the amount of embedded hopper car maintenance costs.

Railway companies' rebuttal comments

CP

[9] CP notes that it appears that all non-railway participants are recommending the use of a measure of inflation that is specific to hopper car maintenance and this is consistent with the language of Clause 57, and its position.


APPENDIX 5

Issue No. 5: The use of a system-wide or specific measure of productivity to determine crop year 2007-2008 embedded hopper car maintenance costs

Railway companies' comments

CN

[1] CN claims that the purpose of the productivity adjustment is to establish the level of hopper car maintenance productivity embedded in the Revenue Cap. In other words, the issue is to determine the portion of the Kroeger productivity adjustment that relates to hopper car maintenance.

[2] CN notes that the Kroeger productivity study used RTMs (as an output measurement) to derive its system-wide level of productivity, therefore, any productivity embedded in the Revenue Caps is based on RTMs. Hence, RTMs must be the basis for calculating the hopper car maintenance productivity embedded in the Revenue Caps as any other method, such as using car miles as an output measure, would be inconsistent with the method used to produce the amount embedded within the Revenue Caps.

[3] CN indicates that the Kroeger study determined the productivity adjustment by taking the rate of change in total expenses per RTM between 1992 and 1998, and that such expenses can easily be broken down into car maintenance components to produce a car maintenance specific measure of productivity. [Note: For the most part, the Kroeger productivity study was based on the change of output (RTMs) relative to the composite change of various inputs, and most of the inputs used actual quantities (as hours of labour, litres of fuel, etc.) for those years. The remaining inputs also reflected quantities, but were derived from expense data, using price indices.]

[4] CN notes that the Consultation Document makes reference to potential issues related to the mix of railway company maintained versus private hopper cars and inconsistencies between various input and output measures, but these issues are all irrelevant as they existed in 2000 when the Kroeger adjustment was applied and were nevertheless not taken into consideration. CN asserts that the task is not to measure car maintenance productivity, but rather to estimate the portion of the 18-percent Kroeger adjustment that relates to car maintenance.

[5] CN supports the use of a specific productivity measure, developed in a consistent manner to the Kroeger productivity measure. Hence, there should be no adjustments for the mix of leased, private and foreign cars, as proposed in the Consultation Document.

CP

[6] CP indicates that as the Clause 57 adjustment requires that the adjustment is only for the maintenance of hopper cars, all adjustment factors such as the productivity adjustments and inflationary adjustments must reflect specific characteristics of the hopper car maintenance costs.

[7] CP refers to section 8 of the Railway Costing Regulations, which states that: "Whenever specific costs are known or can be readily determined from company records, such costs shall be used in lieu of averaged or allocated costs."

Non-railway-company party comments

AF

[8] AF indicates that the productivity adjustment for hopper car maintenance should follow the Kroeger procedure and use RTMs as the output measure.

CWB

[9] The CWB submits that the system-wide (Kroeger) measure of productivity should be used to determine embedded hopper car costs because this would be consistent with the WGTA's 20-percent contribution to constant costs which was a system-wide measure applied to all costs, including hopper car maintenance costs.

[10] The CWB asserts that a system-wide measure should be used because data limitations prevent the development of a specific measure based only on hopper car data. A specific measure would have to incorporate data for all types of rail cars and consequently may not be representative of hopper cars use for the movement of grain.

[11] The CWB concludes that it appears that the use of the system-wide measure is the better choice of the two alternatives. However, it adds that should hopper car specific data required to generate a specific measure be available, then a specific measure for productivity may be preferable to the system-wide measure.

FRCC/SARM

[12] The FRCC agrees with the concept of a specific measure, if one can be reliably developed. However, the FRCC asserts that there is a serious lack of data that would be needed to develop a specific measure, as it indicated during the 2005 consultation.

[13] The FRCC submits that CN attempts to dismiss the FRCC concern related to car mix by saying that the same inconsistencies were present in the 18-percent Kroeger adjustment so that they do not create a bias when it comes to the specific maintenance measure. The FRCC asserts that this is not the case. It indicates that in the original specific measures developed for consultation in 2005, there was a bias related to the increase in the use of cars not maintained by the railway companies relative to the use of cars maintained by the railway companies (which would overstate hopper car maintenance specific productivity). It concludes that the Kroeger 18-percent productivity measure fully allowed for the impact of this substitution, whereas the specific measure did not. Hence, the specific productivity measure was not consistent with the Kroeger measure. The FRCC indicates that it believes that the information deficiencies discussed in 2005 still exist and, for that reason, the system-wide measure of productivity gain should be used.

KAP

[14] KAP recommends that the system-wide productivity measure be used to determine the embedded hopper car maintenance costs because, although there are advantages to using a specific measure, it questions whether there is sufficient, accurate data to derive a specific measure.

[15] KAP notes that there appeared to be a consensus among non-railway parties during the 2005 consultation for use of a system-wide productivity measure and that it currently accepts this recommendation.

Manitoba

[16] Manitoba claims that the choice between system-wide or specific measures of productivity gain should be consistent with the decision of the choice of measures of inflation. Hence, either system-wide or specific measures should be used for both. [Manitoba recommended the use of specific measures for inflation.]

[17] Manitoba adds that the Agency should reconsider the development of a specific hopper car productivity measure using car miles as the output measure and determine if the resulting productivity measure is reliable enough to use.

WRAP

[18] WRAP supports the use of a system-wide measure of productivity until a reliable method can be established to determine a specific measure for hopper car maintenance.

Railway companies' rebuttal comments

CN

[19] CN asserts that implicit in the whole review of hopper car maintenance over the past few years is that productivity improvements in car maintenance have exceeded the average and there is much evidence to support this contention. The use of a system-wide measure rather than a specific measure would ignore this reality and therefore produce less accurate results.

[20] CN reiterates that the task at hand is not to determine the true level of productivity related to car maintenance, but rather to determine the amount of the overall Kroeger adjustment for productivity that related to car maintenance. CN notes again that the Railway Costing Regulations call for the use of specific costs that are known or can be readily determined from company records, in lieu of averaged or allocated costs.

CP

[21] CP notes that, as in the case of inflation factors, it appears that all non-railway company participants are recommending the use of measures of productivity that are specific to the car maintenance function. CP asserts that this is consistent with the language of Clause 57 and its position.


APPENDIX 6

Issue No. 6: Issues on related to the determination of "actual" hopper car maintenance costs for crop year 2007-2008

Railway companies' comments

CN

[1] CN notes that the three issues all relate to CP's submission and it is not in a position to comment on CP's data sources or cost estimates. However, CN did question why the Agency would choose to normalize wheel replacements and costs related to glider gates, and not any other costs. It adds that it is fairly well known that both railway companies plan to make significant investments in main shop repairs over the next three to five years and have given Transport Canada written confirmation to that effect, yet that is not mentioned in the Consultation Document.

[2] CN does not object to normalization per se, but acknowledges the technical difficulty in doing so. CN indicates that if the Agency intends to make adjustments to actual measured costs, there should be an adjustment for the pending investment in main shop costs which is known with a high degree of certainty.

CP

[3] CP asserts that the cost of gate closure including all associated repair activity costs are part of the car maintenance costs specific to hopper cars used in the transportation of grain. It notes that the gate replacement program underway at CP will span several years and if the Agency is contemplating an adjustment to the current cost of maintenance of the hopper cars reflecting anticipated reduced frequency of gate closure problems, such adjustment must be limited to crop year 2007-2008 only to respect the "once only" tenet of Clause 57. CP adds that if the Agency decides to reduce gate closure costs for crop year 2007-2008, it must also include the cost of achieving that cost reduction in its total cost determination.

[4] CP points to the AAR report cited in the Agency's Consultation Document showing a 12.4-year average wheel life for hopper cars and states, the report was not an AAR report; it was not funded, reviewed or prepared by AAR. CP adds that the report was an independent analysis using only foreign car data provided by AAR. It refers to a statement by one of the authors of the report indicating that with today's larger railway companies, more wheel repairs are done as system repairs, and more wheel repairs are being done at private shops, and these removals are not included in the source data. CP concludes that this study's 12.4-year average wheel life is therefore not supported by complete wheel consumption data.

[5] CP adds that it is not appropriate to compare United States' wheel consumption to Canadian wheel consumption because: the car mile usage may differ between Canada and the United States; Canadian wheels are subject to extreme cold weather conditions - a cause for wheel integrity failure; and a significant proportion of wheels are replaced because of wheel defects and not because of wear-related consumption of the flanges.

[6] As for its use of AAR rates for labour and material workloads, CP indicates that because it is unable to derive expenses at the maintenance level for each car, it needed to use its Car Information Management (CIM) database to determine the quantities of labour hours and material consumed in the repair activities of a car. This database records the number of repair events related to a car by a set of job codes and each job code has an associated standard time, quantifying the standard labour hours required to perform the activity, and a standard material price. For all job codes billable under AAR rules, the time standards and the material prices are developed by AAR. Once CP develops the base labour hours using the standard times, it then adjusts them to take into account its own actual labour hours incurred in the maintenance of cars in any given year. According to CP, this is the only procedure available to it to specifically develop the actual hopper car maintenance costs.

[7] CP asserts that AAR material prices are reasonable and it is one railway company that provides input to AAR. It adds that AAR material costs are similar, and possibly conservative, compared to those generated from its own internal SAP/UCA system. CP adds that it is working with Agency staff to determine foreign exchange impacts upon material costs, if any.

Non-railway-company party comments

AF

[8] AF points out that the railway companies are in the middle of a program to replace gates and hatches. It submits that the "once only" provision of Clause 57 means that the Agency can adjust for this workload to the extent that it is complete by January 31, 2008. Even though no costs will be incurred subsequently, the railway companies will be paid for this activity.

[9] AF submits that Item 2080 of CP Tariff 6666 "Supplementary Services and Charges" applies a charge of $305 to shippers who do not close gates and hatches. AF asserts that; to the extent that this is caused by poorly maintained equipment, this charge should reduce hopper car maintenance costs.

[10] AF indicates that there has always been a practice to normalize costs over several years, to provide a better annual cost estimate, especially when work has been "bunched up" for efficiency purposes. It asserts that if there is evidence that the level of maintenance is not representative for a variety of reasons, normalization would be a correct procedure to adjust this.

[11] AF asserts that CP's use of AAR rates is quite problematic and the Agency correctly notes the exchange rate issue. AF submits that there is also a question as to the amount of contribution built into AAR prices. It asserts that the inclusion of any contribution is incorrect and should be removed, but it acknowledges the difficulty in quantifying the amount.

ASWPC

[12] ASWPC submits that the closing of gates should not contribute to the determination of actual car maintenance costs because the railway companies charge terminals $305 for each gate they have to close. To allow this as a cost component when the railway companies are compensated by terminal operators would provide a double benefit to the railway companies.

[13] ASWPC also refers to the gate replacement program announced by the federal government in October 2007 related to the signing of a new lease agreement with CP. Under the terms of this agreement, the federal government has obtained a commitment from CP that it will undertake a gate replacement program. ASWPC notes that the railway companies have been well compensated over the years for car maintenance, including gate replacement costs, even though the maintenance may not have occurred.

CWB

[14] The CWB notes that the recent agreement between CP and the federal government contains a provision to refurbish the federal hopper cars which will result in the replacement of the problem-prone slider gates, which will lessen the problem in the future. The CWB notes CP's Item 2080 of Tariff 6666 where shippers who fail to close gates are charged $305 for each occurrence. The CWB is of the view that it is unreasonable for CP to have costs related to the closing of gates included within hopper car maintenance costs while also assessing a charge against shippers for closing gates and hatches.

[15] The CWB can not understand why CN's cost data reflects a 10-year life cycle for wheel sets while CP's cost submission reflects a 5-year life cycle. It does not understand the disparity given that the cars are mechanically similar and likely experience reasonably similar operating practices.

[16] The CWB asserts that AAR rates for labour and material should not be used in the determination of actual hopper car maintenance costs. It notes that AAR rates are maximum rates that may be charged for maintenance work performed by other railway companies on behalf of car owners. In addition, AAR rates implicitly contain a contribution to fixed or overhead costs. Given that the Revenue Cap incorporates a contribution to the railway companies' constant costs, the use of AAR rates would result in a double benefit for the railway companies and this would be unfair to shippers.

FRCC/SARM

[17] The FRCC notes that CP's submitted costs, which include annual workload activities related to approximately 180,000 gate closures, imply the need to close, on average, at least one of four gates for each loaded movement. It refers to CP's gate replacement program announced in an October 12, 2007 News Release.

[18] The FRCC asserts that the closure of gates is an operational issue because under current operating rules, all hopper car gates are to be closed by the facility operator prior to a car leaving an unload facility. As evidence, the FRCC refers to Item 2080 of CP Tariff 6666, announced on April 26, 2007, which indicates than if an unloader of a covered hopper car releases a car with an open gate or hatch, it will be charged $305 per occurrence.

[19] The FRCC asserts that it would be inappropriate for the Agency to permanently embed in the Revenue Cap the cost of closing 180,000 gates per year, when it is an operational issue and action has been taken to address the problem.

[20] On the subject of wheel replacement, the FRCC notes that the average change out for CP is 5 years, while CN's is 10 years and the industry average is 12.4 years. The FRCC indicates that implementation of an AAR program introduced in late 2004 to utilize a predictive, condition-based approach to specific aspects of car maintenance caused a significant increase in the rate of wheel replacements, resulting in increased wheel demand from suppliers. It concludes that the implementation of this program during the 3-year period being reviewed for actual costs has temporarily increased the costs of wheel replacements. The FRCC adds that once all of the wheels that had previously been undetected as being faulty are changed, the number of wheel replacements required on a yearly basis will decline to near normal levels.

[21] The FRCC notes that a complicating factor in the use of the 3-year window is the fact that both CN and CP haul the products over similar terrain, in the same climate, with the same or similar equipment and one has to conclude that a problem exists with the data set being used to collect the information. It notes that the CP data encompasses only the government-owned hopper cars which were delivered in three large blocks in 1972-74, 1976-77 and 1981-86 and the inordinate number of wheel replacements may mean that one of these blocks of cars has reached the point in its cycle where wheel wear requires the replacement of a large proportion of the wheels within a specific block.

[22] The FRCC recommends that the time for examining the costs associated with wheel replacements be expanded to the previous 10 years so that a better picture of the average wheel replacement per year can be ascertained. It also recommends that CP's data be expanded to include its own hopper cars used in grain service as well as leased hopper cars.

[23] With respect to the use of AAR labour and material workloads and material prices, the FRCC asserts that it will result in inflated hopper car maintenance costs. It adds that to use external billing amounts as a proxy for internal costs ignores the fact that a level of profit is built into the external billing.

[24] The FRCC submits that AAR time and material rates are maximum rates that a railway company can bill another railway company. It adds that the rates include, on both the labour and material portions, a contribution to constant costs of the maintenance supplier and should therefore not include a further adjustment for constant costs by the prescribed railway companies as that would result in constant costs being factored in twice.

[25] The FRCC notes that within the rail industry, maintenance costs are lower than AAR-stated rates. It cites an example from the Saskatchewan Government Car Corporation (the SGCC) related to the upgrading and repair of its hopper car fleet. The SGCC was able to negotiate an hourly rate with two maintenance firms to do the maintenance work in the 2005-2006 fiscal year for almost 30 percent less than the established AAR hourly rate of U.S.$82 (or CAD$94.80). The FRCC adds that for this project, the SGCC directly supplied all of the materials related to the upgrade and consequently, the maintenance companies had no opportunity to mark up the costs of materials. Yet, even at the reduced hourly rate, and without any profit associated with materials, the companies conducting the work made a profit on the contracts.

[26] The FRCC notes that material components used in the repair of hopper cars are purchased by the railway companies in the market for less than AAR rates. In some circumstances, such as for wheel purchases, Class 1 railway companies purchase such large quantities, and receive such volume discounts, that they become sales outlets for smaller firms purchases, because these smaller firms can buy them at a lower cost from the Class 1 railway companies than they do when buying directly.

KAP

[27] KAP submits that the hopper cars need to be maintained and repaired to an acceptable standard for loading, including gates and hatches. It adds that inefficiencies are created in the system when cars leak, or are bad-ordered, or when they have to be repaired in the country by elevator staff. These inefficiencies lead to increased costs that are borne by producers and result in higher basis levels, lost sales opportunities, and cause damage to Canada's reputation as a reliable grain exporter.

[28] KAP asserts that if the railway companies' hopper car maintenance costs exceed the industry average, Transport Canada should contract the hopper car maintenance for its cars to third-party maintenance shops. It adds that it is inappropriate for farmers to pay for car maintenance costs in excess of the industry norm.

[29] KAP submits that the 2004-2006 time frame for evaluating hopper car maintenance, such as wheel sets replacements, is too short. It notes that in recent years, the wheel sets are beginning to be replaced at an accelerated rate because of the age of the cars. Because a short time frame may not accurately reflect actual long-term maintenance costs, it suggests that a longer, 10-year interval be used for assessment.

[30] KAP notes that while AAR rates may seem to reflect industry standards, they include amounts for profit as well as a contribution to constant costs and this allows the railway companies to "double dip" as it believes that maintenance could be completed at lower costs than at published AAR rates.

WRAP

[31] WRAP asserts that the cost of the closing of gates is an operational issue and should not be included in the determination of actual costs.

[32] WRAP indicates that the proposal by CP to use AAR rates as a proxy for its maintenance costs should not be considered by the Agency. It adds that CN's approach of determining costs based on its own data is a far more appropriate method of determining actual costs.

[33] WRAP asserts that CN's 10-year wheel replacement cycle is also appropriate for CP because the 10-year cycle is more in line with the industry average.

Agency activities outside of the consultation process - Review of railway companies' submissions on "actual" costs

[34] Agency staff undertook a comprehensive review of CN's and CP's submissions on "actual" maintenance costs which they filed on August 15, 2007. As part of this review, Agency staff met with railway company personnel in Headquarters and made visits to yards and car shops where they observed the maintenance activities related to hopper cars in the shops, on the repair tracks and on the inspection tracks.

CN

[35] Staff arranged visits to CN headquarters in Montréal, Quebec as well as Regional Headquarters in Edmonton, Alberta where CN's mechanical department is located. Site visits were also arranged to visit the CN car shops at the Walker Yard in Edmonton and the Thornton Yard in Vancouver.

[36] In addition to meeting with headquarters staff, Agency staff met with car shop managers, car repair crew and train servicing crew. Agency staff reviewed maintenance policies as well as CN's reporting systems, Systems, Applications, and Products (SAP) and Plant Management (PM). Agency staff were able to trace maintenance charges for a sample of hopper cars back to the original data entry.

[37] Staff were not able to validate CN's shop allocation expenses and as a result, CN provided an updated submission with auditable data on November 7, 2007. With the new submission, Agency staff were able to validate the shop expenses but it was necessary to revise the allocation of shop expenses to the hopper car fleet.

[38] During a review of the line point expenses reported in Account 513, Agency staff noted that there were high levels of recoveries reported in this account. These recoveries were the result of maintenance performed by CN on foreign cars. Agency staff determined that the inclusion of these recoveries, while they did not impact on the actual hopper maintenance expenses, would negatively impact on the overheads applied to these maintenance expenses. Similarly, the overheads for Account 515 were overstated. CN and Agency staff developed a revised methodology for overheads for the years 2004, 2005 and 2006 which resulted in new overheads. This methodology will be used for the Agency approved unit costs for those years.

[39] Agency staff found that the average maintenance expense per CN-owned hopper car was considerably higher than that for a government hopper car. As CN-owned hopper cars were used less frequently in regulated grain service than the government hopper cars, the Agency weighted the "actual" maintenance costs by the proportion of time each group spent in moving regulated grain to better reflect the maintenance costs of hopper cars used in regulated grain service movements. The weighting used by the Agency was based on RTMs.

[40] As stated previously, the Agency's letter of July 4, 2007 requested maintenance expenses exclusively for hopper cars "which were used in regulated grain movements during each of the above time periods" (i.e., 2004, 2005 and 2006). However, CN included the maintenance costs for its entire grain hopper fleet during the three-year study period, even those cars that did not move any regulated grain. This represented several hundred hopper cars. The Agency removed the maintenance expenses and operating statistics for hopper cars that were not used in the movement of regulated grain in any of the three years.

[41] Adjustments were made to CN's August 15, 2007 submission for Accounts 511, 513 and 515 expenses related to:

  1. Shop expenses;
  2. Allocation of shop expenses;
  3. Overheads applied to direct expenses; and,
  4. Removal of hopper car data not used in the movement of grain during the study period.

[42] With respect to Account 517 expenses, as determined in Issue No. 2 of the Decision, the Agency has determined that 50 percent of Account 517 costs related to the movement of statutory grain is deemed to be car maintenance costs for the purposes of the Clause 57 adjustment.

CP

[43] Agency staff prepared a number of questions and submitted them to CP. In addition, Agency staff arranged visits to CP headquarters in Calgary, Alberta as well as site visits to CP car shops at its Coquitlam Yard in Vancouver, British Columbia and in Moose Jaw, Saskatchewan.

[44] Agency staff compared the data provided by CP and CN and noted that the average maintenance expense per CP government hopper cars was significantly higher than the average maintenance expense for CN's fleet of hopper cars, i.e., CN-owned and government. In fact, CP's average was higher than that for CN-owned hopper cars.

[45] One of the maintenance expense items that was considerably higher was the expenses for replacement of wheel sets. While wheel set replacement is an expected maintenance expense, CP's submission contained a much higher frequency of wheel set replacements than that submitted by CN.

[46] Another expense item that was significantly different for CP was the closing of the hopper car gates. From the data supplied by CP, Agency staff determined that approximately 50 percent of the maintenance events related to the closing of gates. CP explains that a significant portion of the fleet of hopper cars provided by the Government of Canada has gates that are known as glider gates, unlike CN which received hopper cars with a different (and reportedly better) designed gate (predominantly toggle gates).

[47] CP explains that the glider gates are not designed to withstand the forces exerted by the pneumatic gate openers used by most grain elevator companies and consequently, the opening and closing mechanisms on these glider gates became twisted and out of alignment, making their closing difficult. While the closing of the gates, after the grain has been emptied from the hopper cars, is the primary responsibility of the grain elevator companies, in many cases they are not able to close the gates due to malfunctioning of the opening and closing mechanisms. Therefore, it becomes CP's responsibility to ensure that the gates are closed. CP identifies, as part of its actual costs, maintenance activities relating to gate openings and closures. Each activity requires a different level of effort and CP developed standard times for each activity. CP explains that the more difficult the closing of the gate, the more time required to properly close the gate.

[48] While in the field, Agency staff were provided with the opportunity to monitor maintenance activity in the car repair shops performed by the car repair crew, both inside the shops and outside on the repair track. Further, Agency staff monitored inspections performed by crews on grain trains in Moose Jaw.

[49] As part of the site visits, Agency staff also reviewed the reporting of hopper car maintenance activities by the car repair crew and by crews servicing trains. At that time, Agency staff discovered that while CP submitted the closing of hopper gates as part of actual expense data for Accounts 511 and 513, in its management information systems, CP reported the closing of gates performed by crews servicing trains in Account 517. CP later asserted that this was an error in reporting and would be corrected in the future. Nevertheless, the inclusion of closing of gates as an actual expense for Accounts 511 and 513 and a system expense in Account 517 in the August 15 submission results in a double-count of gate closing expenses.

[50] Another issue arose as a result of the problems encountered with the glider gates on the government hopper cars. While it was apparent that the glider gates generated a high level of maintenance activity, Agency staff noted that this was restricted to primarily government hopper cars so they questioned CP as to what type of gates were on CP-owned hopper cars. In response, CP supplied data that revealed that only seven per cent of its fleet had glider gates. In its August 15 submission, CP states that:

A study based on maintenance records of the government covered hopper car fleet fairly represents the maintenance expenses of all covered hopper cars used in the carriage of regulated grain because:

  1. A significant portion of the regulated grain is carried by the government covered hopper car fleet;
  2. The same maintenance standards apply to all cars, irrespective of ownership;
  3. The average build date of non-government covered hopper cars within CPR's fleet is 1980 to 1981, which is essentially the same for the Government Covered Hoppers fleet.

[51] As CP's fleet of hopper cars only has 7 percent with glider gates, and approximately 50 percent of the events for hopper car maintenance is for closing of gates, the above statement made by CP that the maintenance expenses of government hopper cars are representative of the maintenance expenses for CP-owned hopper cars is not valid. CP staff and Agency staff attempted to adjust the maintenance data to reflect the expected lower maintenance cost for CP hopper cars.

[52] During this time, Agency staff acquired a better understanding of the maintenance activity of the hopper cars. However, the frequency of wheel replacements and the closing of gates still remained a concern of Agency staff, so more questions were submitted to CP for follow-up.

[53] To identify whether the high level of wheel replacements was part of a trend or part of a cycle, Agency staff requested ten years of wheel replacement data. CP undertook to provide a study on wheel set replacements. In addition, new data on gate closings were provided to Agency staff and they found an unusually high level of gate closures taking place at CP's yard in Thunder Bay, Ontario when considering the level of grain unloadings taking place in this location. As a result, another site visit to a CP rail yard was arranged in Thunder Bay for the end of October. In addition, a visit was arranged with a grain elevator company in Thunder Bay to monitor the unloading of CP grain hopper cars and the problems encountered with the closing of the gates.

[54] The trip to Thunder Bay was very informative as Agency staff witnessed first hand the equipment used to open and to close the gates and the problems encountered by the elevator company in closing these gates. At the CP yard, Agency staff also monitored the inspection of two grain trains and witnessed the closing of several gates by CP's crew. As indicated by the various activities related to gate closing listed above, the closings ranged from an easy close to a closing that required the opening and closing mechanism to be heated with acetylene torches to a high temperature before the mechanism could be properly aligned and the gate closed. Agency staff recorded the work performed by the train servicing crew.

[55] As a result of this visit, Agency staff requested detailed extracts from CP's car management reporting system on the maintenance activities on specific hopper cars that Agency staff saw at the grain elevator and in CP's yard. CP acknowledged that the data extracts for these hopper cars could be provided and undertook to provide them.

[56] During the site visits and ongoing discussions during the months of August, September and October, Agency staff raised a number of questions and requested a number of samples to validate the data presented in CP's study on maintenance costs. While CP staff were very co-operative and answered a number of questions, CP was encountering difficulties in providing the sample data extracts as requested by Agency staff. Nevertheless, CP indicated that the requested sample data would be provided by the final target date of November 9, 2007. During the week of November 5, Agency staff received confirmation that all additional data and samples would be submitted by November 9, 2007.

[57] However, on November 8, 2007, CP staff stated that it could not provide the sample data or replicate its original submission and therefore could not meet its commitment. In a subsequent letter on November 13, 2007, CP counsel confirmed this:

Subsequently during the audit process, it has come to our attention that some of the data retrieval processes used in this case produced inconsistent extraction of data. As a result CP was not able to reply to the Agency's various audit requests or replicate its submitted data. Therefore CP cannot in good conscience affirm its confidence in the results presented in that [August 15, 2007] submission.

[58] Consequently, Agency staff could not validate the data contained in CP's original submission and any analysis or observations of CP's original submission made by Agency staff, including those in the Consultation Document, are no longer valid.

[59] CP proposed an alternate submission based on system maintenance costs that include costs for flat cars, box cars, coal hopper cars, tri-levels and other freight cars as well as that for grain hopper cars. The Agency addresses this matter in the Decision.


APPENDIX 7

Issue No. 7: The level of contribution to constant costs applicable to "actual" crop year 2007-2008 hopper car maintenance costs

Railway companies' comments

CN

[1] CN's position is the same as that for Issue No. 3. It asserts that for the purposes of the Clause 57 adjustment, only those costs (constant or variable) that can be attributed to the maintenance of hopper cars should be included in the adjustment.

[2] CN adds that the methodology that is applied to estimate the level of constant costs attributed to hopper car maintenance embedded in the Revenue Caps should also be applied to estimate the level of constant costs attributed to car maintenance that the railway companies are currently incurring.

CP

[3] CP states that, "the Agency's view that the level of contribution required to defray the constant costs related to any given cost component is different for the crop year 2007-2008 than in 1992 and should be reflective of an asserted contribution level is incorrect and is based on a fundamental misunderstanding of the concept of ?contribution'. "

[4] CP does not understand the relevance of an "asserted contribution in excess of 60 percent for the crop year 2007-2008 to the operation of Clause 57, and particularly since the notion of a regulated contribution level has been expunged from the statute book since 1996." CP adds that the actual percentage contribution has no bearing on, or connection with, the costs incurred by the railway companies for the maintenance of hopper cars.

[5] CP asserts that for the Clause 57 adjustment, absent any specific studies for crop year 2007-2008, the same contribution level, of about 3 percent, should be used in the calculation of "actual" maintenance costs for 2007-2008 as in the calculation of the "embedded" costs.

[6] CP reiterates its earlier views that the contribution to constant costs is in itself not a cost item. It adds that the Agency's mandate is related specifically to maintenance of hopper cars and the Agency's estimates of what contribution levels will be left in the 2007-2008 Revenue Caps before and after this specific adjustment is not relevant.

[7] CP concludes that embarking on this erroneous contribution exercise is improper and unsupportable and is, in any case, beyond the task and power assigned to the Agency pursuant to Clause 57.

Non-railway-company party comments

AF

[8] AF notes that the Agency should act to keep the contribution at a level that is reasonable, equitable and sufficient. It notes that the wording of Clause 57, "The Canadian Transportation Agency shall.... adjust the volume-related composite price index..." clearly indicates that the Agency has broad powers to make this adjustment. AF adds that some respondents have argued that the Agency should be guided by certain sections of the WGTA or the CTA; however, there is no mention of that in the Clause 57 amendment. It is up to the Agency to determine whether previous legislation is relevant. Clause 57 is an amendment to the CTA which overrides the impact of previous legislation (i.e., the WGTA).

[9] AF notes that the wording of Clause 57 indicates that Parliament wants the adjustment to reflect the costs incurred, so Parliament expects any adjustment to the Revenue Caps to be based on a determination of railway company costs.

[10] AF notes that the 20-percent level of contribution to constant costs was reviewed under the 1984, 1988 and 1992 WGTA Costing Reviews, and found to be adequate. However, the level was increased to 27 percent by the Federal Government for 1998. AF adds that no meaningful studies have been undertaken since 1992 to assess the amount of constant costs the railway companies are incurring. It adds that the productivity and contribution gains have been unprecedented under the Revenue Cap Program.

[11] AF asserts that the Agency need not add any contribution to variable car maintenance costs when determining actual costs for crop year 2007-2008 because no allowance for contribution to constant costs would result in an adequate [overall] level of contribution. AF refers to its own analysis which showed that if the Agency made a hopper car maintenance adjustment of $2.00 per tonne, the contribution to constant costs would exceed 46 percent. The same analysis reveals that an adjustment of $3.00 per tonne would result in a contribution to constant costs of over 40 percent.

[12] AF asserts that the current Revenue Cap Program, left to its own devices, is not sustainable in the long run because productivity is growing at compound rates which means that shippers will be forever paying for increased levels of contribution, unless the federal government takes action.

[13] AF concludes that the current Revenue Cap Program encourages productivity gains for the railway companies and low service levels and high costs for shippers. It is unfair to shippers if they continually have to pay more for falling service levels. AF adds that even with a zero contribution on hopper car maintenance, the railway companies' total contribution will still remain well above that recommended by previous studies and sufficient for grain to remain an attractive commodity for the railway companies to haul.

ASWPC

[14] ASWPC indicates that railway contributions in excess of 60 percent (as estimated by the Agency) allow the railway companies to be overcompensated for "costs" that are not subject to change under the current wording of the CTA. ASWPC adds that it agrees with the FRCC that legislated action is needed to reduce the [60-percent] level of contribution to the 27 percent level that was originally built into the Revenue Caps.

CWB

[15] The CWB notes that the 60-percent level of contribution to constant costs, excluding the Clause 57 adjustment, far exceeds the contribution level that was realized under the WGTA. It adds that to be fair and reasonable, a 20-percent contribution is the most appropriate level for hopper car maintenance costs and this approach would be consistent with other measures.

[16] The CWB is very concerned that the contribution level is at 60 percent. However, it indicates that this issue should be addressed in another venue.

FRCC/SARM

[17] The FRCC indicates that it agrees with the railway companies that the level of contribution to constant costs (which the FRCC recommended to be 27 percent) should be the same for embedded and actual costs.

[18] The FRCC notes the Agency's comments in the Consultation Document that even if the railway companies received no contribution respecting current maintenance costs, they would still earn a contribution exceeding 45 percent of variable costs. It adds that this is about the same contribution level as the railway companies earned in 1998 which led Parliament to reduce revenue by 18 percent to return the contribution levels at the start of the Revenue Cap Program to the levels averaged under the WGTA.

[19] The FRCC concludes that while it cannot recommend a different treatment of contribution for embedded versus actual costs, the current situation calls for legislative action to reduce the contribution level to 27 percent, the level that was originally legislated into the Revenue Caps.

KAP

[20] KAP notes that if the current level of contribution to constant costs has increased from 27 percent to about 60 percent, it is a clear indication of a need for a costing review. It adds that the 60-percent level of contribution to constant costs suggests that farmers are paying about $180 million more annually than they should be.

Manitoba

[21] Manitoba notes that since August 2000, the Agency no longer prescribes rail rates and the railway companies are free to set their own rates. The determination of the contribution to constant costs is thus a market exercise, subject only to the maximum entitlement constraint.

[22] Manitoba notes the Agency's comments in the Consultation Document that, even if the railway companies received no contribution respecting current maintenance costs, they would still earn a contribution exceeding 45 percent of variable costs. It notes that the 45-percent level exceeds the 20-percent level legislated under the WGTA [for Costing Review years] and the 27 percent that was achieved during the time that the WGTA applied. Manitoba then concludes that the railway companies do not need any mark-up for contribution to constant costs for the 2007-2008 hopper car maintenance costs.

[23] Manitoba then estimates the current amount of variable costs, for crop year 2006-2007, given a contribution level of 60 percent. It concludes that if no contribution to constant costs were assigned to the actual hopper car maintenance costs, even after the Clause 57 adjustment was applied, the railway companies would still receive an additional $90 million of annual contribution above the 27-percent level deemed appropriate at the start of the Revenue Cap Program.

WRAP

[24] WRAP indicates that "current contributions by the railway companies are excessive and that a contribution level of 27 percent, a level that was originally legislated into the Revenue Cap, would be appropriate." It adds that a contribution level of 60 percent, as suggested in the Consultation Document, means that western Canadian farmers are paying over $200 million annually in excess freight rates even after considering a generous profit for the railway companies.

Railway companies' rebuttal comments

CP

[25] CP notes that almost all of the non-railway participants are recommending that the Agency take into account the current perceived contribution level in determining the appropriate level of contribution for crop year 2007-2008. CP reiterates its comments under Issue No. 3 that there should be no adjustment in relation to the contribution as it is not a cost but a contribution towards a cost. CP adds that even under a more liberal reading of Clause 57, any adjustment related to the contribution must be limited to reflect the hopper-car maintenance-related contribution.

[26] CP asserts that the AF calculation of perceived system-wide productivity gains (which ignores the capital component in its calculations) is not relevant and even if the Agency were to consider it, AF's calculations are erroneous.

[27] CP adds that the determination of current hopper car maintenance costs already reflects cost reductions resulting from any productivity gains in the freight car maintenance function. It adds that "if the AF proposal is adjusted to remove the double count, the residual productivity gain would apply to all the remaining cost components which are not the subject of adjustment according to the language of Clause 57."


APPENDIX 8

1992 WGTA COSTING REVIEW STATISTICS

[13] The following statistics stem from the 1992 WGTA Costing Review and reflect combined CN and CP totals:

Total Tonnage
= 35.15 million tonnes
Average Length of Haul
= 1,023 miles
Total Revenue Tonne Miles
= 35.96 billion
Hopper Car Tonnage [All hopper cars]
= 33.65 million tonnes
Hopper Car Tonnage [Excluding Fgn & ST lease]
= 31.20 million tonnes
Hopper Car Length of Haul (Est'd)
= 1,023 miles
Hopper Car Revenue Tonne Miles [All hopper cars]
= 34.42 billion
Hopper Car Revenue Tonne Miles [Exc Fgn & ST lease]
= 31.92 billion

[14] The following amounts for hopper car maintenance also stem from the 1992 WGTA Costing Review. Amounts are after the removal of non-recurring costs and do not include contribution to constant costs (hence, they reflect variable costs only).

1992 hopper car Main Shop costs [Account 511]
= $ 30.66 million
1992 hopper car Line Point costs [Acc'ts 513/515]
= $ 76.11 million
1992 hopper car Inspection costs [Account 517] [50%]
= $ 10.32 million
1992 TOTAL hopper car maintenance costs
= $117.09 million

[15]

Amount of 1992 car maintenance (20 percent contribution)
= $140.51 million

[16] 1992 total hopper car maintenance costs, adjusted to reflect projected crop year 2007-2008 RTMs, would be derived as follows.

As noted in paragraph 13 above, in 1992, hopper cars (excluding foreign and short-term full-service leased cars) moved 31.20 million tonnes of grain out of a total movement of 35.15 million tonnes. Hence, 88.77 percent of the movement took place in hopper cars. Using this same ratio for crop year 2007-2008, and assuming a total movement of 27.85 million tonnes, hopper cars are projected to move 24.72 million tonnes of grain. If an average LOH of 953 miles is used, hopper car movements will generate a total of 23.56 billion RTMs during crop year 2007-2008, resulting in a reconciliation ratio equal to [23.56/31.92] or .7381 (indicating a reduction of about 26 percent from 1992).

Thus, using the change in RTMs to estimate the change in hopper car maintenance costs, the total 1992 hopper car maintenance costs, adjusted to reflect the lower estimated crop year 2007-2008 RTMs, are:

$140.51 million X .7381 = $103.7 million


APPENDIX 9

THE DETERMINATION OF THE AMOUNT OF HOPPER CAR MAINTENANCE COSTS THAT ARE "EMBEDDED" WITHIN THE 2007-2008 REVENUE CAPS
  INPUTS MEASURE VALUE
1992:   Tonnage Million tonnes - all cars 35.15
LOH Miles 1,023
RTM's For hopper cars, at 88.77% of volume (billion) 31.92
07-08:   Tonnage Based on 15-year interval: (million tonnes) 27.85
LOH Based on 15-year interval: (miles) 953
RTM's For hopper cars, at 88.77% of volume (billion) 23.56
  1992 Maintenance Costs Variable 20% contribution ($million) $140.51
  RTM Reconciliation Adj. To reconcile 1992 RTM's to 2007-2008 [23.56 / 31.92] .7381
[P] Adjusted 1992 Maint'ce Costs Total costs X reconciliation ratio ($million) $103.71
[Q] Inflation: 1992-1998 Specific to car maintenance 1.1436
[R] Revenue/Rate Ratio: Not applicable (therefore, unity) 1.0000
[S] Productivity/Cost Savings Specific 31.4%
[T] Productivity Clawback: Applied at the "4/5" level 81.8%
[ST] Net Productivity Savings Adjustment, from above two items [1 - (81.8% x 31.4%) ] .7431
[U] Inflation: 2000-01 Specific to car maintenance 1.0230
[V] Inflation: 2000-01 to 2007-08 Specific to car maintenance 1.1484
[W] Rev Cap/ RTM Ratio: Applied to car maintenance amounts 1.0149
TOTAL EMBEDDED HOPPER CAR MAINTENANCE COSTS FOR CROP YEAR 2007-2008
  = P x Q x R x "ST" x U x V x W
  = $103.71 million x 1.1436 x 1.0000 x .7431 x 1.0230 x 1.1484 x 1.0149
  = $105.1 million

Notes

Note 1

It has been a long accepted regulatory practice to use a combination of specific and unit costs in the determination of "actual" costs. By definition, specific costs are known and readily determined from company records and such costs shall be used in lieu of averaged or allocated costs. In addition, the requirements, as prescribed by the Uniform Classification of Accounts and Related Railways Records Accounts, stipulate that CN and CP must separately record maintenance costs for standard hopper cars for Accounts 511 and 513 -Major Components.

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Note 2

In Decision No. 388-R-2007, the Agency set an interim index and referenced an estimate of $2.00/tonne. This estimate was based upon work undertaken by the Agency in 2005 and 2006 further to the request for costing assistance from Transport Canada. Both railway companies participated in consultations that took place and the $2.00/tonne estimate was released to the public by Transport Canada in a News Release dated May 4, 2006.

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Note 3

The definition of grain is set out in section 147 of the CTA.

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