Decision No. 8-R-2013

BACKGROUND

[1] In July 2011, the Saskatchewan Grain Car Corporation (SGCC) informed the Canadian National Railway Company (CN) and the Canadian Pacific Railway Company (CP) that the hopper cars owned by SGCC would no longer be provided free of ownership costs to CN and CP. Additionally, SGCC informed the railway companies that some, but not all of SGCC’s cars would be available for lease. CP opted to lease hopper cars from SGCC, whereas CN opted to replace SGCC’s cars through leasing larger “jumbo” cars from private firms. CN and CP requested that the Canadian Transportation Agency (Agency) adjust the volume-related composite price index (VRCPI) in accordance with paragraph 151(4)(c) of the Canada Transportation Act (CTA) to reflect the costs CN and CP would incur in relation to the lease of either SGCC’s cars (CP) or private cars (CN).

[2] Each year by April 30 at the latest, the Agency shall set the VRCPI for the following crop year. In addition, paragraph 151(4)(c) of the CTA also requires the Agency to “make adjustments to the index to reflect thecosts incurred by the prescribed railway companies for the purpose of obtaining cars as a result of the sale, lease or other disposal or withdrawal from service of government hopper carsand the costs incurred by the prescribed railway companies for the maintenance of cars that have been so obtained.” (Emphasis added)

[3] The text underlined above reflects text that was incorporated by 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. Specifically, the earlier reference to “incremental costs incurred”, in the previous version of paragraph 151(4)(c) of the CTA was replaced by “costs incurred” and the following new text was added at the end of the paragraph: “and the costs incurred by the prescribed railway companies for the maintenance of cars that have been so obtained.”

[4] The Agency was asked to apply the previous version of paragraph 151(4)(c) of the CTA when the Canadian Wheat Board (CWB) informed CN and CP that the CWB-owned hopper cars would no longer be provided free of ownership costs in 2006. CWB then entered into lease arrangements with both CN and CP for the use of these hopper cars. CN and CP requested that the Agency adjust the VRCPI in accordance with paragraph 151(4)(c) of the CTA, as it then read. The Agency undertook a consultation and subsequently issued Decision No. LET‑R‑113-2006 (2006 Decision), in which it concluded:

[30] In light of the foregoing, the Agency, pursuant to paragraph 151(4)(c) of the CTA, will adjust the volume-related composite-price index for crop year 2006-2007 to reflect the additional lease costs that will be incurred by CN and CP to lease the CWB hopper cars. The additional lease costs to be factored will however be proportioned to ensure thatonlythe additional costs incurred for the movement of western grain are reflected in the adjustment. (Emphasis added)

[5] Additionally, Clause 57 of Bill C-11 (Clause 57) stated:

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.

[6] In Decision No. 67-R-2008 (2008 Decision), the Agency performed the adjustment prescribed by Clause 57 by adding two weights to the VRCPI to reflect the costs incurred for the maintenance of hopper cars used for the movement of grain. A negative weight was created to remove the hopper car maintenance costs “embedded” in the cost base used to calculate the VRCPI and a positive weight was added reflecting the “actual” costs to CN and CP for maintaining the hopper cars used in regulated service.

[7] Considering the issues raised in these applications and the amendments to paragraph 151(4)(c) of the CTA since the 2006 Decision, the Agency initiated an industry consultation in July 2012 to seek comments on five specific issues:

1. What is the meaning of changes in costs?
2. How should capacity used be recognized?
3. How should changes in maintenance costs be recognized?
4. How should commissioning/decommissioning and alternate use fees be recognized?
5. When should the adjustment be made?

[8] The Agency received submissions from the following parties: CN; CP; Alberta Agriculture and Rural Development (Alberta); Keystone Agricultural Producers (KAP); and, Manitoba Infrastructure and Transportation (Manitoba).

[9] The Agency requested CN and CP to provide the lease contracts they entered into as a result of SGCC’s decision to amend or terminate the previous arrangement. Other related information was also requested, including when the hopper cars were returned to the Province or the new leasing arrangements came into effect.

RELEVANT LEGISLATIVE PROVISIONS

[10] Section 147 of the CTA provides:

“government hopper car”

means a hopper car provided to a prescribed railway company by the government of Canada or a province or by the Canadian Wheat Board.

[11] Paragraph 151(4)(c) of the CTA states:

The following rules are applicable to the volume-related composite price index:

• (c) the Agency shall make adjustments to the index to reflect the costs incurred by the prescribed railway companies for the purpose of obtaining cars as a result of the sale, lease or other disposal or withdrawal from service of government hopper cars and the costs incurred by the prescribed railway companies for the maintenance of cars that have been so obtained.

[12] Subsections 151(5) and (6) of the CTA provide:

• (5) The Agency shall make the determination of a prescribed railway company’s maximum revenue entitlement for the movement of grain in a crop year under subsection (1) on or before December 31 of the following crop year and shall make the determination of the volume-related composite price index on or before April 30 of the previous crop year.
• (6) Despite subsection (5), the Agency shall make the adjustments referred to in paragraph (4)(c) at any time that it considers appropriate and determine the date when the adjusted index takes effect.

ANALYSIS AND FINDINGS BY ISSUE

Issue No. 1: What is the meaning of changes in costs?

[13] The Agency notes that there are two significant differences between this situation and that examined in the 2006 Decision. The first is the changes in the wording of paragraph 151(4)(c) of the CTA, which now requires the Agency to determine “the costs incurred” as opposed to “incremental costs incurred”. The second difference is that, in the context of the CWB hopper car adjustment, both CN and CP leased the same hopper cars that were previously provided free of charge while continuing to be responsible for their maintenance (i.e., net leases). The current applications involve CN entering into full service lease agreements involving more and larger hopper cars than the ones being returned; CP, for its part, has entered into an agreement where it will lease all of SGCC’s hopper cars previously assigned to it and continue to be responsible for maintenance.

[14] As compared to these applications, there are also three major differences related to the 2008 Decision. First, the 2008 Decision made an adjustment for the cost incurred for the maintenance of hopper cars used for the movement of grain, whereas the current applications are for a cost adjustment that addresses both the maintenance and leasing costs associated with obtaining hopper cars. Second, the cost adjustment in the 2008 Decision was in respect of all hopper cars used in the movement of regulated grain, whereas the current applications are in respect of those hopper cars that are obtained as a result of SGCC’s decision to amend or terminate an arrangement. Third, the 2008 Decision was a “once only” adjustment to the cost base, a qualifier that does not appear in paragraph 151(4)(c).

[15] The Agency consultation document indicated that a single weight in the VRCPI, net of the positive and negative amounts, could be created to determine the appropriate adjustment for the costs incurred.

Positions of industry participants

[16] CN and CP suggest that the Agency should adopt two distinct weights, one for the positive leasing costs and one for the negative costs, if applicable, for reduced maintenance requirements for CN and CP. CP notes that whereas the lease contracts for SGCC’s hopper cars are net term leases where CN and CP are responsible for all of the maintenance, on some hopper cars leased from private vendors, the leases are on a full service basis. In these leases, the lease rate is higher and includes maintenance service, which is the responsibility of the vendor, except for gates and hatches.

[17] CN and CP note that a negative adjustment associated with any maintenance costs no longer performed by them would be considered an eligible reduction (i.e., a negative or avoided cost). CP states that “under the new provision the Agency is mandated to look at all actual additional costs arising out of the replacement of the government hopper cars”.

[18] Manitoba, Alberta and KAP take a much broader definition of actual costs than CN and CP; they indicate that all actual costs should be considered, not just maintenance costs.

[19] Manitoba and Alberta did not specifically identify what they meant by “actual costs”. Manitoba states that the last extensive costing review for the Western Grain Revenue Cap was conducted in 1992 and since then the costs have primarily only been adjusted for inflation by the VRCPI, without any offsetting correction for productivity gains in railway operations. Alberta maintains that the methodology does not reflect any productivity gain achieved by railway companies over time, which have helped railway companies reduce shipping costs on a per unit basis ($/tonne). Alberta adds that as such, the methodology itself does not represent a complete picture of changes/factors in rail shipping costs on a per tonne basis.KAP states that the CTA does not adequately factor in reductions to railway operating costs related to changes in railway operations.

Analysis

[20] All parties agree that positive and negative costs should be accounted for in any adjustment under paragraph 151(4)(c) of the CTA. However, they differ in their views about the intent of the provision or the interpretation of “costs incurred” in reference to negative cost changes (savings); specifically, whether this should also include productivity gains.

[21] The Agency notes that the CTA clearly limits the scope of the costs to be considered by the Agency in making an adjustment to those associated with the act of obtaining hopper cars and the maintenance of such cars. The Agency, therefore, considered what would be in accordance with the legislative intent and purpose of paragraph 151(4)(c).

[22] The VRCPI is a factor included in the revenue cap formula which purpose is to adjust the revenue cap annually to reflect railway inflation. It is essentially an index that captures price variation in railway costs associated with the movement of grain from a reference year to subsequent years. As it is meant to capture price variation, as a general principle, the cost base used in developing the VRCPI must therefore remain constant in time.

[23] The requirement for the cost base not to be changed must be inferred from paragraph 151(4)(a) of the CTA which sets the VRCPI at 1.0 for crop year 2000-2001, which is linked to the last costing review conducted for 1992. It must also be inferred from the fact that the CTA does not establish a validity period for the cost base on which the VRCPI is calculated, or provide the Agency with the general power to review railway costs used for developing the VRCPI, as was previously the case of the Canadian Transport Commission when railway companies were regulated under the rate scale regime set out in the Western Grain Transportation Act. This interpretation is also in keeping with clause 57 of Bill C-11, which specified that the hopper car maintenance costs adjustment that the Agency was required to make was a “once only” power, which is indicative of the exceptional character of cost adjustments.

[24] The CTA does not provide for a general mechanism to adjust the base costs which means that the VRCPI is designed such that any productivity gains that CN and CP may have made by improving their operations overtime cannot be reflected in the VRCPI. It also means that the Agency’s power to make cost adjustments pursuant to paragraph 151(4)(c) of the CTA is an exception to the principle that the initial cost base embedded in the VRCPI must remain constant over time. Consequently, the Agency must only adjust the cost base to the extent expressly permitted under paragraph 151(4)(c) of the CTA.

[25] The Agency considers that the adjustment called for under paragraph 151(4)(c) is meant to make CN and CP whole – no worse off nor better off with respect to the VRCPI determinations, as compared to what the situation would have been had railway companies not have had to incur these costs if the previous arrangement for government hopper cars had been maintained. In other words, the Agency is to make a cost adjustment such that a railway company’s grain revenue entitlement is adjusted through an adjustment to the VRCPI to offset the net cost impact of having obtained cars as a result of the sale, lease or other disposal or withdrawal from service of government hopper cars.

[26] Under paragraph 151(4)(c) of the CTA, the Agency must adjust the index to “reflect the costs incurred [...] for the purpose of obtaining cars”. This provision restricts the adjustments to added or avoided costs associated with the act of “obtaining” the replacement hopper cars. The Agency cannot either consider productivity gains that CN and CP may or may not be making when operating the replaced hopper cars, as these cannot be characterized as an “avoided cost” associated with the replacement of the hopper cars.

[27] Furthermore, for the purposes of any adjustment resulting from paragraph 151(4)(c) of the CTA, the rail hopper car carrying capacity being obtained by a railway company cannot be more than the carrying capacity of the replaced government hopper cars. This is so because the act of obtaining the hopper cars must be in relation to government hopper cars no longer being available under the original terms and conditions (in this case free of ownership costs). The Agency must recognize all the railway hopper car carrying capacity being obtained as a result of new arrangements as long as that capacity does not exceed the capacity being replaced. Finally, railway company hopper car capacity must be obtained in the replacement of government hopper cars, otherwise there is no basis for a cost adjustment. This is consistent with the objective of making the railway company whole in respect of hopper cars being obtained as a result of government hopper cars being no longer available.

[28] The Agency considers that by using the term “costs incurred”, the legislator intended that net costs be captured, i.e., the net costs of the new arrangement made by the railway company as compared to the previous arrangement for the government hopper cars. This is also how the Agency interpreted this concept in the 2008 Decision. This interpretation is reinforced by the fact that the earlier version of paragraph 151(4)(c) was changed by Parliament following the 2006 Decision where the Agency interpreted the earlier text (incremental costs incurred) and concluded “thatonly the additional costs incurred for the movement of western grain are reflected in the adjustment.” The Agency therefore concludes that the adjustment is no longer limited to additional costs.

Finding

[29] The Agency finds that only costs or avoided costs directly associated with obtaining and maintaining replacement hopper cars constitute costs incurred that will be reflected in the adjustment. The Agency also finds that it has no authority to make cost adjustments beyond those that are authorized by the CTA.

Issue No 2: How should capacity used be recognized?

[30] The lease contracts for CN’s replacement hopper cars involve both a larger number of hopper cars and larger (jumbo) hopper cars than the hopper cars provided by SGCC. Furthermore, both CN and CP will be using the replacement hopper cars in non-regulated service.

[31] Accordingly, to make an adjustment that reflects the actual capacity necessary to replace no more than SGCC’s hopper cars being returned and that is being used in regulated grain service, the Agency must determine:

1. a capacity equivalency factor to reflect available capacity difference between CN’s jumbo hopper cars and SGCC’s hopper cars being returned; and,
2. the percentage of the capacity being replaced that should be assigned to regulated grain service, referred to as utilization.

[32] The Agency will now consider these two issues.

(i) Capacity equivalency – Cubic space available vs. tonnes moved

[33] While the majority of the government hopper cars are of a standard size (4,750 cubic feet), SGCC’s hopper cars are slightly smaller (4,550 cubic feet). These hopper cars were being used by the railway companies in 1992 (the last costing review) and the costs were brought forward into the Revenue Cap Program. The Agency notes that although CP is leasing back SGCC’s hopper cars, CN is leasing jumbo hopper cars from private vendors. The jumbo hopper cars have a volume capacity averaging about 5,200 cubic feet.

[34] The Agency notes that where the same hopper cars are being leased, no capacity equivalency factor is necessary to determine the cost adjustment (as was the case in the 2006 Decision) based on the assumption that the same hopper cars continue to be used to the same extent. However, where jumbo hopper cars replace the smaller SGCC hopper cars, a ratio to determine the equivalency between the capacities of the two car types needs to be applied.

Positions of industry participants

[35] CN and CP suggest that the actual tonnes moved would be a better representation of capacity used. CP states that the cubic feet capacity methodology assumes that the hopper cars are filled to volume capacity, which is not necessarily the case. Manitoba submits that the Agency should consider modifying the principle of keeping the capacity being replaced constant and consider applying improved car turnaround times and performance utilization in its calculations to reduce overall cost estimates for car leasing and maintenance.

Analysis

[36] CN and CP suggest that the ratio between the two different hopper car sizes, based on the average actual tonnes carried per hopper car, is a more appropriate measurement. The Agency is aware that hopper cars are filled to different levels depending on the density of the commodities carried and that on average, neither regular nor jumbo sized hopper cars are filled to their volume capacity. The average tonnes moved in each hopper car size vary year to year depending on the commodity mixes moved in the hopper cars. The consultation document proposed using a ratio that does not need to be calculated annually, such as average tonnes carried, and rather to use the unchanging measure of available cubic feet capacity.

[37] Agency staff compared the average tonnes previously carried by CN in SGCC’s hopper cars to CN’s leased jumbo hopper cars and calculated the ratio to be close to 97 percent. Thus, the actual capacity used was nearly identical, despite the size differences between the jumbo and SGCC’s hopper cars.

[38] Manitoba questions the Agency’s assumption of holding the capacity replaced constant. The Agency considers this assumption is necessary, considering the nature of the cost adjustment that is mandated by the CTA, as set out in the Agency’s analysis on Issue No. 1.

Finding

[39] The Agency finds that as the railway capacity being replaced is best expressed in terms of the average tonnes actually being carried per hopper car (actual practical capacity achieved as opposed to notional maximum volume capacity), the average tonnes carried per hopper car will be used to determine the capacity being replaced. As average tonnes change from year to year, the tonnes will need to be monitored on an annual basis by the Agency. This is further discussed in the Appendix.

(ii) Utilization

[40] Hopper cars are used by railway companies for regulated and non-regulated grain service. The utilization rate is the amount of time that SGCC’s hopper cars are in regulated grain service (for VRCPI purposes) to the total time within a year. However, as the actual number of days for each hopper car in each type of service is not available to the Agency, the consultation document suggested that the utilization be based on revenue-tonne miles (RTM), for regulated and non‑regulated grain, as a proxy for the time in each type of service.

Positions of industry participants

[41] CN and CP suggest that the historical ratio of regulated RTMs to total RTMs for SGCC’s hopper cars be used as the measurement for determining the estimated utilization for the replacement hopper cars.

[42] Manitoba and KAP agree with the methodology proposed in the consultation document; however, Manitoba contends that the Agency should consider “applying improved car turnaround times and performance utilization in its calculations to reduce overall cost estimates for car leasing and maintenance”.

Analysis

[43] The measurement of hopper car utilization should ideally be based on car days and not RTMs as cars are leased on a time rather than on a workload basis. However, as these data are not available, the Agency finds that using RTMs as a proxy reasonably reflects the actual time spent by each hopper car in regulated or non-regulated service. Based on the SGCC hopper car adjustment data submitted by CN for the hopper car adjustment for the 2007-2008 crop year, an average utilization rate of 70 percent (amount of time in regulated service) would be applied. The Agency finds that using the RTMs results in a reasonable and reliable approximate of the amount of time that hopper cars are used in either regulated grain or non-regulated grain service.

Finding

[44] The Agency will adopt, for this determination, the ratio of regulated RTMs to total RTMs of 70 percent and monitor the utilization rate in subsequent years. This is further addressed in the Appendix to this Decision.

Issue No. 3: How should changes in maintenance costs be recognized?

[45] The 2006 Decision considered a case where the same hopper cars were being leased and continued to be maintained by CN and CP. The current applications involve one of the two railway companies (CN) entering into a number of agreements with private vendors. Agreements with private vendors can have different arrangements for maintenance. Such arrangements range from CN and CP being responsible to undertake all the maintenance (net service lease) to them being responsible for only certain specified maintenance, such as maintenance of hopper car gates and hatches (full service lease) or lease options that fall between these two lease options. This raises the issue of how these different arrangements are to be reflected in the cost adjustments to be made to the VRCPI; in particular, the weights that reflect these cost changes.

[46] The consultation document set out a proposal that a single weight be used to represent the net leasing costs (i.e., lease rate less embedded maintenance amount).

Positions of industry participants

[47] Manitoba expresses support for the methodology proposed in the consultation document. Both CN and CP suggest using two separate weights, one positive for the leasing rate and one negative, if applicable, for any maintenance no longer required to be performed by CN or CP.

Analysis

[48] The Agency currently uses two distinct approaches for recognizing the hopper car maintenance costs.

[49] The first is reflected in the leased car price index and is based on one weight. When historical net lease hopper cars were replaced with full service lease hopper cars, the Agency netted out an amount related to maintenance. This was derived by calculating the difference of the monthly lease rates between full service and net leases offered by the industry. Thus, one weight representing the net impact between full service lease and net service lease is used in the leased car price index.

[50] However, in the 2008 Decision, the Agency used two weights to adjust the VRCPI for hopper car maintenance, one to remove the maintenance costs embedded in the VRCPI and one to add in the actual maintenance costs for the hopper cars used in regulated grain service.

[51] The Agency notes that from a practical perspective, whether one weight is used or two, the effect is identical on the VRCPI. Indeed, under the single weight approach, the maintenance costs are extracted from the full lease costs before being implicitly incorporated into the VRCPI. Under the two weights approach, the maintenance costs are explicitly being factored into the VRCPI as a weight. Furthermore, the Agency is of the opinion that the two weights approach suggested by CN and CP is more transparent, as it explicitly discloses the positive effect of the lease costs and the negative effect of avoided maintenance costs on the VRCPI. This approach is also consistent with the 2008 Decision.

Finding

[52] The Agency, as in the 2008 Decision, will use two weights, one positive for lease costs and one negative to reflect, if applicable, the required adjustment to be made for the maintenance costs.

Issue No. 4: How should commissioning/decommissioning and alternate use fees be recognized?

[53] The Agency recognizes that CN and CP, when replacing government hopper cars, may incur costs other than maintenance and lease costs that are nevertheless related to obtaining hopper cars as replacements. The consultation document identified two possible costs as examples of other costs that may need to be recognized: commissioning/decommissioning costs and alternative use fees.

Positions of industry participants

[54] According to CP, overhead costs “should be applied considering the resources employed to plan the appropriate car fleet size and to negotiate car leases and governing terms.” Both CN and CP indicate that a system level contribution to constant costs should be applied.

[55] Manitoba states that “Other cost [...] should be considered only if they are fully absorbed by the rail company.”

Analysis

[56] The Agency notes that only CP addressed the issue of commissioning/decommissioning costs by noting “[...] the cost of car return”. Agency staff queried CN and CP on these costs and received mixed responses. CN indicates that these costs were minimal. As this particular determination relates only to SGCC’s hopper cars returned by CN, and the costs are estimated by CN to be minimal, no adjustment for commissioning/decommissioning costs will be made in this case. No adjustment is required for CP, because CP has leased back hopper cars from SGCC.

[57] The government hopper cars were originally provided to CN and CP free of ownership costs while used in regulated grain service. When the government hopper cars were used outside of regulated grain service, a $17 per diem fee was assigned to each hopper car. The new lease contracts for CN and CP have removed this charge. In making the adjustment, the Agency must only account for the hopper cars used for regulated grain service, not those used in non‑regulated service. The Agency is of the opinion that under previous arrangements with SGCC, the $17 per diem fee was an ownership cost charged to CN and CP for using SGCC’s hopper cars outside of regulated grain service. That is, SGCC only put hopper cars at the disposal of CN and CP free of charge, provided that the cars were used for the transport of regulated grain. The Agency concludes that this charge has no bearing on the current determination.

[58] In the 2006 Decision, the Agency acknowledged that CN and CP would occasionally need to negotiate multi-year lease agreements and added a nominal figure of 2 percent to the lease rate to compensate for these additional costs. The Agency finds that an addition of 2 percent is adequate to cover such costs related to the negotiation of leases.

[59] In the 2008 Decision, following extensive consultations, the Agency made a once-only cost adjustment to the VRCPI of $72.2 million in which it determined that the appropriate contribution level for hopper car maintenance was 3.45 percent. This contribution level was meant to cover the fixed costs of hopper car maintenance for the purpose of costs adjusting the VRCPI. Furthermore, the Agency’s determination of actual hopper car maintenance costs included overhead costs. The Agency sees no reason to change this determination and will continue to apply the 3.45 percent contribution level.

Findings

[60] With respect to the costs of negotiating multi-year lease agreements, the Agency finds that an addition of 2 percent to the lease rate is adequate to cover such costs.

[61] Further, the Agency will continue to apply the 3.45 percent contribution level for hopper car maintenance costs.

Issue No. 5: When should the adjustment be made?

[62] The Agency notes that SGCC informed CN and CP in July 2011 that its hopper cars would no longer be provided free of ownership cost. However, the transition from free hopper cars to leased hopper cars was a long process that continued into crop year 2012-2013. This brings forth the question of when the adjustment to the VRCPI should take effect. The consultation document referred to an Agency adjustment to the 2012-2013 VRCPI, but did not specify if the adjustment would apply to the entire crop year. Under subsection 151(6) of the CTA, the Agency has the discretion to “[...] determine the date when the adjusted index takes effect”.

Positions of industry participants

[63] CN indicates that an adjustment as early as possible in the 2012-2013 crop year would be preferable as it has incurred replacement costs since 2011-2012. Manitoba supports the timing suggested in the consultation document.

Analysis

[64] There are two distinct questions associated with this issue, that is:

1. when should the adjustment take effect; and,
2. how will the Agency ensure that this adjustment remains accurate in the future.

[65] With respect to the first question, the Agency notes that although the notification from SGCC was given in July 2011, the process for returning the hopper cars was still not completed by the end of crop year 2011‑2012 and extended into the 2012-2013 crop year. The Agency finds that adjusting the VRCPI for the entire 2012-2013 crop year is the most fair and practical way of addressing the current applications. The Agency notes that CP has incurred costs for the entire crop year 2011-2012 and CN began to incur some costs in 2011-2012 as SGCC’s hopper cars only started to be returned in that crop year as a result of SGCC’s decision. Furthermore, while the process of returning hopper cars extended into 2012-2013 for CN, making a total adjustment for the crop year, as opposed to a partial adjustment, would not materially affect the overall revenue entitlement of CN and CP. The Agency finds that implementing a complex gradual adjustment in these circumstances would create an unnecessary administrative burden.

[66] With respect to the second question, the Agency notes that the lease agreements filed in support of the applications of CN and CP are for various lease terms, some of short duration. Therefore, the costs incurred on the basis of which the Agency established its adjustment in this Decision are likely to change in subsequent years. In particular, once the original lease agreements expire, CN and CP may decide, at their discretion, not to replace the lost capacity or to negotiate new lease contracts which may provide for different lease rates, terms and conditions.

[67] As discussed above, the cost base on which the VRCPI is to be calculated cannot be changed, unless it is in accordance with a statutory provision authorizing cost adjustments. The adjustment authority set out in paragraph 151(4)(c) of the CTA is limited as to the cost items that can be reflected in the adjustment. However, nothing in the language used in this provision indicates that the authority to make an adjustment is exhausted immediately after it has been exercised in relation to a block of government hopper cars that are, as is the case here, no longer provided free of charge to CN and CP. The Agency notes that Clause 57 of Bill C-11 prescribed that the adjustment to hopper car maintenance costs was to be made “once only”, which indicated Parliament’s clear intention that the adjustment not be further reviewed. Had Parliament found it appropriate to restrict the Agency’s power under paragraph 151(4)(c) of the CTA, the Agency is of the opinion that Parliament would have found it reasonable to use similar language, in particular given that these two provisions were passed at the same time.

[68] Paragraph 151(4)(c) of the CTA states that “the Agency shall make adjustments”. According to section 11 of the Interpretation Act, R.S.C., 1985, c. I-21, the use of the expression “shall” imposes a mandatory obligation on the Agency. Therefore, the Agency must make adjustments when the conditions in paragraph 151(4)(c) of the CTA are satisfied. The conditions that trigger the requirement to make the hopper car adjustment are (1) the government hopper cars are sold, leased, disposed off or withdrawn from service, and (2) as a result of the first condition, the railway company obtains hopper cars.

[69] In this case, as a result of SGCC’s decision to amend or terminate providing hopper cars to CN and CP free of charge, the first condition is met and will continue to be met in subsequent crop years. As for the second condition, it is met each time a railway company acquires hopper cars to replace the capacity loss associated with SGCC’s decision to amend or terminate providing hopper cars free of charge.

Findings

[70] With respect to the timing of the adjustment, the Agency finds that adjusting the VRCPI for the entire 2012-2013 crop year is the most fair and practical way of addressing the current applications.

[71] With respect to ensuring that the adjustment remains accurate in the future, the Agency will continue monitoring the use of, and the contracts for, the replacement hopper cars to ensure that the cost adjustment it made in this respect continues to be reflective of the costs incurred by CN and CP. The Agency may review the adjustment in the future where deemed appropriate.

IMPLEMENTING AND MONITORING THE FRAMEWORK

[72] The Agency has made a number of determinations as to how it will apply the cost adjustments mandated by paragraph 151(4)(c) of the CTA. The Appendix to this Decision provides the specific quantitative approach it will follow for this purpose.

[73] In applying this framework, the Agency, pursuant to subsection 151(4) of the CTA, is adjusting the VRCPI upward for crop year 2012-2013 by 0.2 percent, from its earlier value of 1.2895 to its new value of 1.2919. This adjustment reflects the additional lease costs and corresponding reduction to maintenance costs that will be incurred by CN and CP to replace the government hopper cars previously provided for free by SGCC.

[74] Furthermore, to meet the statutory obligations to make the required cost adjustments, the Agency will monitor the contracts under which they have been acquired. Accordingly, the Agency directs CN and CP to file with the Agency any amendments to, or notice of termination of, the leasing contracts provided to the Agency in support of the current applications, as the case may be. Once the contracts examined in this proceeding have expired or have been terminated, any new commercial agreement that CN and CP may enter into to obtain cars to replace the SGCC car capacity shall also be filed with the Agency.

[75] The Agency has determined that it will also need to continue monitoring the use of the hopper cars to ensure that the weights determined by the Agency are accurate and remain relevant. The specific elements of the monitoring framework are set out in the Appendix. CN and CP are also directed to comply with the monitoring requirements set out in the Appendix.

[76] The Agency may, on its own motion, make further amendments to the cost adjustment set out in this Decision, should the circumstances warrant.

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APPENDIX TO DECISION NO. 8-R-2013

QUANTITATIVE APPROACH

The Agency set out the factors that it will consider for this specific cost adjustment under paragraph 151(4)(c) of the Canada Transportation Act, S.C., 1996, c. 10, as amended (CTA). As a general rule, unless circumstances change warranting some modifications, the following formulas will be used in determining the appropriate weights when CN and/or CP obtain hopper cars as a result of the sale, lease or other disposal or withdrawal from service of government hopper cars.

The Agency determined that a positive and negative weight will be added to the VRCPI to reflect cost adjustments made pursuant to paragraph 151(4)(c) of the CTA. The two formulas below for these two weights are based on three assumptions:

1. that if government hopper cars are leased back to a railway company, both the average tonnage moved per hopper car and the utilization rate remain unchanged as compared to when the government hopper cars were provided free of ownership costs to that railway company.
2. that if the government hopper cars are leased back to a railway company, then the negative weight is assumed to be zero for that railway company.
3. lease agreements are not modified or terminated before the end of the lease term specified in the agreement.

The positive weight (per railway company) is determined as follows:

Positive weight = number of replaced hopper cars (A) x monthly lease rate (B) x 12 months x regular-to-jumbo ratio (C) x utilization rate (D) x contribution level (E)

where,

A.

The number of hopper cars obtained up to but not more than the number of government hopper cars returned.

B.

The monthly rental rate of both net and full service lease.

C.

The ratio of the average weight carried in the government hopper cars returned compared to the average weight carried in the obtained jumbo hopper cars. When the government hopper cars are leased back to a railway company, or when regular-sized hopper cars are leased, this ratio is deemed to be 1.0.

D.

Utilization rate is the estimated amount of time that the obtained hopper cars are in regulated grain service. For this determination, that rate is set at 70 percent.

E.

Contribution level is the nominal amount assigned as extra railway costs for negotiating and administrating the lease agreements. This level is set at 2 percent.

The negative weight (per railway company) is determined as follows:

Negative weight^{Note 1}  = number of replaced hopper cars (A) x 2007-2008 Sask. hopper car maintenance cost per RTM (B) x (1-(Maintenance still being performed by the railway/B)) x specific maintenance inflation (C) x specific freight car productivity (D) x projected RTM (E)

where,

A.

Already defined in the positive weight.

B.

2007-2008 Sask. hopper car maintenance cost per RTM represents the maintenance costs per RTM from the 2008 Decision attributable to the Saskatchewan hopper car fleet assigned to CN. Note that the figure set out in the 2008 Decision includes overhead costs and a contribution level of 3.45 percent, so there is no need to establish a distinct scaling up factor in the formula.

C.

Specific maintenance inflation represents the estimated inflation related to freight car maintenance from 2007-2008 to 2012-2013, consistent with the Agency’s methodology set out in the 2008 Decision.

D.

Specific freight car productivity represents the estimated productivity gains (or losses) in freight cars from 2007-2008 to 2012-2013, consistent with the Agency’s methodology set out in the 2008 Decision.

E.

Projected RTM represents the estimated RTM associated with the replaced hopper cars.

The combined CN and CP estimated leasing costs will be added as a tenth (positive) weight and the combined CN and CP amount of maintenance costs no longer required to be performed by the railway companies will be added as an eleventh (negative) weight to the annual Agency VRCPI primary input factors.

MONITORING REQUIREMENTS FOR THE USE OF THE HOPPER CARS

Furthermore, to monitor the continued reasonability of the cost adjustment, the Agency will require additional information to be submitted by the railway companies on an annual basis, specifically:

• the average tonnes carried in government versus jumbo hopper cars (factor C in the positive weight);
• the utilization rates of various hopper cars (factor D in the positive weight and if required, in the negative weight);
• the projected RTM for the obtained hopper cars (factor E in the negative weight).

Agency staff will contact officials of CN and CP with the specific data request.