Letter Decision No. CONF-15-2018

REDACTED VERSION

October 2, 2018

Application by Paterson Grain, a division of Paterson Globalfoods Inc. (Paterson) against the Canadian National Railway Company (CN) and BNSF Railway Company (BNSF) pursuant to section 127 of the Canada Transportation Act, S.C., 1996, c. 10, as amended (CTA).

Case number: 
17-04865

SUMMARY

[1] Paterson requests that the Agency deem its facility located in Morris, Manitoba (Morris Terminal) to be within the interswitching limits of the CN and BNSF interchange at Emerson, Manitoba (Emerson Interchange).

[2] More specifically, Paterson is seeking that:

  • The Morris Terminal be found to be reasonably close to the Emerson Interchange so that it may be deemed within the prescribed interswitching limit of 30 kilometers (km) of the Emerson Interchange, pursuant to subsection 127(4) of the CTA;
  • CN and BNSF be required to provide reasonable facilities for the convenient interswitching of Paterson’s traffic originating at the Morris Terminal, pursuant to subsection 127(2) of the CTA;
  • CN and BNSF be required to interchange Paterson’s traffic at the prescribed rates; and,
  • The Agency make any other order it may deem just and appropriate in the circumstances.

[3] CN requests that this application be dismissed and seeks costs in this application.

[4] The Agency will address the following issues:

  1. Is the Morris Terminal “reasonably close” to the Emerson Interchange ?
  2. Should CN and BNSF be ordered to interswitch Paterson’s traffic at the rates prescribed in the Railway Interswitching Regulations, SOR/88-41(Regulations)?
  3. Pursuant to subsection 127(2) of the CTA, should CN and BNSF be ordered to provide reasonable facilities for the convenient interswitching of Paterson’s traffic originating at the Morris Terminal?
  4. Should costs be awarded to CN?

[5] For the reasons set out below, the Agency finds, in respect of the first issue, that the Morris Terminal is reasonably close to the Emerson Interchange and should, therefore, be deemed to be within the interswitching limits of the Emerson Interchange.

[6] Pursuant to this finding, the Agency orders CN and BNSF to interswitch Paterson’s traffic at the Emerson Interchange at the rates prescribed in the Regulations. The Agency makes no order concerning the provision of reasonable facilities for the interswitching of Paterson’s traffic.

[7] Finally, the Agency determines that costs will not awarded.

PRELIMINARY MATTERS

Emerson Interchange

[8] The Agency found, in paragraph 116 of Decision No. 466-R-2013, that the Emerson facility is an “interchange” for the purposes of interswitching pursuant to the CTA and the Regulations.

Contract between the parties

Position of the parties

CN’s Position

[9] CN notes that a confidential agreement, which it refers to as the “Morris Contract”, exists between CN and Paterson, and submits that the Agency does not have the power to interfere with such private contracts. CN argues that the Agency cannot make an order that would relieve Paterson of its contractual obligations towards CN. In support of this position, CN refers to subsections 113(4), 116(2) and 126(2) of the CTA and to Decision No. 392-R-2008.

Paterson’s Position

[10] Paterson claims that the Confidential Agreement between CN and Paterson has no relevance to these proceedings. Paterson argues that, in requesting an order for extended interswitching, it does not seek to be released from the terms of its Confidential Agreement with CN,[REDACTED]. Paterson submits it will continue to comply with its contractual obligations under this agreement.

ANALYSIS AND DETERMINATIONS

[11] In Decision No. 392-R-2008, cited by CN, the Agency found that it cannot modify contractual terms agreed between shippers and railway companies in the context of an application under section 120.1 of the CTA. The Agency notes that this decision was ultimately overturned by the Governor-in-Council, thus weighing against reliance on it as argued for by CN. In any event, the decision does not limit the Agency’s authority to grant an application made under subsection 127(4) of the CTA. 

[12] Had Parliament intended to limit the availability of regulated or extended interswitching where a confidential contract exists, it could have included an explicit limitation in the CTA. The absence of such a limitation indicates that private contracts do not remove the Agency’s jurisdiction in respect of interswitching. This is consistent with the Agency’s finding in Decision No. 165-R‑1990 (CIL Decision) that the terms of a siding agreement do not impact on the granting of extended interswitching limits.

[13] In light of the above, the Agency finds that the terms of the agreement between CN and Paterson do not restrict the Agency’s authority to consider an application for extended interswitching under subsection 127(4) of the CTA.

BACKGROUND

[14] Paterson owns and operates 29 licensed grain elevators across western Canada, including 10 high-throughput inland terminal locations. The Morris Terminal is one of Paterson’s high-throughput terminals closest to the United States (U.S.) border, and represents a significant origin point for Paterson’s shipments to the U.S. and Mexico.

[15] The Morris Terminal is serviced by CN via its Letellier Subdivision, and by CP via its La Rivière Subdivision.

THE LAW

[16] Section 5 of the CTA sets out that the National Transportation Policy aims to ensure that “competition and market forces, both within and among the various modes of transportation, are the prime agents in providing viable and effective transportation services”. This provision informs the Agency’s decision-making, including in respect of applications under subsection 127(4).

[17] Section 111 of the CTA sets out the following definitions:

interchange means a place where the line of one railway company connects with the line of another railway company and where loaded or empty cars may be stored until delivered or received by the other railway company;

interswitch means to transfer traffic from the lines of one railway company to the lines of another railway company.

[18] Section 127 of the CTA states:

(1) If a railway line of one railway company connects with the a railway line of another railway company, an application for an interswitching order may be made to the Agency by either company, by a municipal government or by any other interested person.

(2) If the point of origin or destination of a continuous movement of traffic is within a radius of 30 km of an interchange, the Agency may order

(a) one of the companies to interswitch the traffic; and

(b) the railway companies to provide reasonable facilities for the convenient interswitching of traffic in both directions at an interchange between the lines of either railway and those of other railway companies connecting with them.

(3) If the point of origin or destination of a continuous movement of traffic is within a radius of 30 km of an interchange, a railway company shall not transfer the traffic at the interchange except in accordance with the regulations and the interswitching rate.

(4) On the application of a person referred to in subsection (1), the Agency may deem a point of origin or destination of a movement of traffic in any particular case to be within 30 km of an interchange if the Agency is of the opinion that, in the circumstances, the point of origin or destination is reasonably close to the interchange.

[19] The Agency has twice considered applications for extended interswitching: Decision No. 269-R-1988 (Domtar) and Decision No. 165-R-1990 (CIL). Both cases involved subsection 152(3) of the National Transportation Act (NTA). The wording and intent of subsections 127(3) and (4) of the CTA are, in substance, unchanged from that of subsections 152(2) and (3) of the NTA.

ISSUE 1: is THE Morris Terminal “reasonably close” to the Emerson InterchangE

[20] In determining whether a terminal is “reasonably close” to an interchange, the Agency’s previous decisions have considered three factors: the distance between the terminal and the interchange and, with respect to the specific circumstances of the shipper’s operations, the level of service (car supply, service and rates) provided to the shipper by the railway company and the shipper’s position relative to competitors.

Distance between the terminal and the interchange

Positions of the parties

Paterson’s Position

[21] Parterson argues that the only relevant factor when considering a request for an extension of interswitching limit is whether the point of origin or destination is “reasonably close” to the interchange. Paterson submits that in the Domtar Decision, the primary consideration in determining that the Domtar facility was reasonably close to the interchange was the fact it was only seven km beyond the 30 km interswitching limit.

[22] Paterson submits that the point of switching at the Morris Terminal is located at 39.8 radial km from the Emerson Interchange at the U.S. border. Paterson calculated this distance from the point where the siding meets the CN Letellier Subdivision rail line at the Morris Terminal to the point where the rail tracks cross the U.S. border at the Emerson Interchange.

[23] As further set out below, CN has calculated a different radial distance of 42 kilometres.

[24] Paterson takes issue with this calculation, the methodology of which is not explained. Paterson further disputes CN’s assertion that Paterson’s calculation is inaccurate. Lastly, Paterson notes that the map submitted by CN contains no distance scale and does not provide reference points for CN’s calculation.

CN’s Position

[25] CN claims that the radial distance from the Morris elevator rail siding to the Emerson Interchange is “approximately” 42 km, and that the track distance is 42.9 km. CN submits that this radial distance exceeds the maximum regulated distance by 40 per cent, which is longer than the radial distance considered in the Domtar (37 km) and the CIL (35.4 km) Decisons. As such, CN submits that the Morris Terminal is not reasonably close to the Emerson Interchange.

Analysis and determinations

[26] Section 127(2) of the CTA provides that the Agency can make an interswitching order if the point of origin or destination of a continuous movement of traffic is within a radius of 30 km of an interchange.

[27] Section 127(4) of the CTA allows the Agency to deem a point of origin or destination of a movement of traffic to be within 30 km of an interchange, if the Agency is of the opinion that the point of origin or destination is reasonably close to the interchange. 

[28] As articulated by the Supreme Court of Canada in Rizzo & Rizzo Shoes Ltd. (Re), [1998] 1 S.C.R. 27:

Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.

[29] The wording of these two sections, read together “in their entire context and in their grammatical and ordinary sense harmoniously with the scheme, the object “ of the CTA “and the intention of Parliament”, suggests that for the distance criterion applied by the Agency to applications for extended interswitching, radial distance should be the primary consideration, with track distance a secondary but relevant consideration where it is substantially longer than radial distance.

[30] According to Paterson, the radial distance between the Morris Terminal and the Emerson interchange is 39.8 km; according to CN, it is “approximately 42 kilometers”. Paterson’s calculation is supported by a scaled railway plan that illustrates how the measurement was taken, whereas CN’s calculation appears to be an approximation. The Agency, therefore, finds Paterson’s calculation to be more reliable, and accepts that the Morris Terminal is at a radial distance of 39.8 km of the Emerson Interchange.

[31] According to Paterson, the track distance between the Morris Terminal and the Emerson interchange is of 41.8 km. According to CN, it is 42.9 km. Given that in either case, the track distance is not substantially longer than the radial distance, the Agency finds that it is not germane to the determination of this application.

Car supply, service and rates from CN

Positions of the parties

Paterson’s Position

[32] Paterson claims that the application of subsection 127(4) is not dependent on the shipper proving a specific level of unsatisfactory service or uncompetitive rates. Nonetheless, Paterson submits it has good reason to be concerned with CN’s service at the Morris Terminal, and refers to the services provided by CN in 2014 and 2017. Paterson asserts that CN failed and refused to service Paterson’s traffic in the spring and summer of 2014. Paterson refers to data compiled by the AG Transport Coalition, which shows that CN supplied only half of the railcars and 56 per cent of hopper cars ordered on CN’s network by the grain industry in shipping weeks 12 and 17 of 2017. Paterson compares this situation to that experienced during the lead up to the major freight-rail service disruptions in 2014.

[33] Paterson submits that, since the August 1, 2017 termination of extended interswitching limits, CN has “cancelled railcars to Morris”.

[34] Paterson submits that CN’s past failure to service U.S. destinations from the Morris Terminal highlights the importance of having access to BNSF as an alternate carrier, at competitive prices.

[35] Paterson also notes that in Decision No. 2015-07-10 and Decision No. CONF-11-2016, the Agency determined that CN breached its level of service obligations to a shipper at the Emerson Interchange, during the same time period CN asserts there were no service issues.

CN’s Position

[36] CN submits that there is no evidence before the Agency of ongoing, recent, or systemic service issues at the Morris Terminal. CN states that Paterson relies solely on car shortages occurring in 2014, a year of record grain production.

[37] CN claims that, contrary to the vague allegations made by Paterson, it has achieved strong performance in the 2017-2018 crop year in Manitoba. CN adds that its carload volume is up in the eastern half of the province where Paterson competes for grain for its Morris Terminal.

Analysis and determinations

[38] While Paterson is concerned about CN’s service at the Morris Terminal, it does not explain how the purported service issues affected its operations. Paterson’s allegations focus on situations that occurred in 2014 and 2017, both periods when large grain harvests and other factors led to widespread freight rail service issues. The record is therefore insufficient to conclude that Paterson’s Morris Terminal operation suffers from specific service problems, such as chronic car shortages.

Position relative to competitors

Positions of the parties

Paterson’s Position

[39] Paterson notes that much has changed in the Canadian transportation system since the Agency last considered extended interswitching. To that effect, Paterson points to the removal from the CTA, in 2008, of the requirement that a shipper suffer substantial commercial harm before the Agency grants a remedy. Paterson notes that paragraphs 62-64 of Decision No. 35-R-2009 state that interswitching provisions are meant to provide shippers with greater access to competitive services at known prices to alternate rail carriers within interswitching limits.

[40] Paterson indicates that it has access to CP via CP’s La Rivière Subdivision, but that CP is not a reasonably competitive commercial option at the Morris Terminal given that CP’s La Rivière Subdivision does not continue south to the U.S. border. Paterson submits that to reach the U.S. border with CP, rail cars would have to back-track north to Winnipeg to take CP’s Emerson Subdivision. This route is 170.4 km; whereas CN’s Letellier Subdivision is 41.8 km away. Paterson also explains that, given CP’s line “dead-ends” shortly after the Morris Terminal, it provides service limited to three days a week on the La Rivière Subdivision. CP’s service is also limited to full unit trains of traffic, which Paterson submits further limits its shipping options with CP.

[41] Paterson seeks access to BNSF to remove the competitive disadvantage it experiences vis-à-vis neighbouring high-throughput grain terminals operated by three of Paterson’s direct competitors in southern Manitoba: Richardson International Limited (RIL), Viterra Inc. (Viterra), and G3 Canada Limited (G3). Paterson submits that these competitors have access to BNSF and CN services. Paterson submits that RIL is one of its major competitors in respect of the type of commodities shipped and the number of customers. Paterson explains that RIL has a grain terminal in Letellier, Manitoba, which is within 30 km of the Emerson Interchange; therefore, it routinely uses interswitching services at this location to send rail cars to destinations in the U.S. via BNSF. Paterson explains that, in 2016, G3 opened a new high-throughput terminal in Glenlea, Manitoba, located approximately 25 km from the CN-BNSF interchange in Winnipeg, such that G3 receives CN-BNSF interswitching services. Lastly, Paterson indicates that, in 2016, Viterra opened a new high-throughput terminal in Ste. Agathe, Manitoba, and that Viterra will have access to both CN and BNSF rail lines.

[42] Paterson also refers to Cargill Ltd. (Cargill) having a grain terminal in Morris, with access to CP and CN. Paterson explains that Cargill may experience the same disadvantage as Paterson in terms of being able to compete with Viterra, RIL and G3, but that the fact that one competitor is in a similar position to Paterson does not negate the fact that Paterson is at a competitive disadvantage with its three main competitors.

[43] Paterson is of the view that its disadvantage relates to its competitors in southern Manitoba having access to regulated interswitching rates. Paterson asserts that the location of the interswitching is irrelevant to the consideration of the competitive disadvantage; rather, it submits that the rate is the primary consideration. To illustrate its position, Paterson compares prices it was offered by CN to prices available to RIL via regulated interswitching for different destinations in the U.S. from the Morris Terminal: for [REDACTED], the price difference per unit car based on 104 rail cars is of US$[REDACTED]; for [REDACTED], US$[REDACTED]; and for [REDACTED], US$[REDACTED].

[44] Paterson claims that access to BNSF at the Emerson Interchange will encourage competition and improve prices, service levels, rail car supply, and routing options for Paterson. Paterson lists the following as examples of its customers’ locations serviced by BNSF and not by CN: [REDACTED].

CN’s Position

[45] CN submits it offered to exchange Paterson’s traffic destined to markets it does not service with BNSF at negotiated rates. CN submits that it should not be penalized for Paterson’s and CP’s decisions about where to locate their operations, which, in CN’s view, accounts for Paterson’s preference for “other railways”.

[46] CN explains that there are numerous primary elevator facilities in the Red River Valley competing for the same grain. In reference to the four competitors identified by Paterson, CN points out that only RIL and Cargill are in the area surrounding the Emerson Interchange, and that only RIL has access to regulated interswitching. CN adds that both G3 and Viterra interswitch through Winnipeg, and not the Emerson Interchange, such that they may not represent an appropriate comparative basis to assess competitiveness. CN submits that, in determining competitive disadvantage, the Agency ought to look at local competitors surrounding the interchange at issue, and not at competitors throughout the province.

[47] CN argues that granting the interswitching order would provide Paterson with a competitive advantage over its closest competitor, Cargill. CN submits that Cargill’s [REDACTED] , despite not having access to regulated interswitching and [REDACTED]. CN therefore argues that if Paterson is unable to compete with other shippers, it is not due to a lack of access to regulated interswitching.

[48] CN submits that the prices presented by Paterson are selective and do not reflect an appropriate comparator. CN is of the view that the comparison should be made with the commercial rate to transport traffic via CN from the Morris Terminal to the Emerson Interchange, or via CP from the Morris Terminal to the Winnipeg Interchange, and not the regulated rate for the same movements of traffic.

Analysis and determinations

[49] Based on the location of the Morris Terminal and the distance to be travelled to move Paterson’s shipments destined to the U.S. or Mexico via CP’s La Rivière Subdivision, it is reasonable to conclude that CP is not a reasonably competitive commercial option for Paterson. This leaves Paterson with one commercially viable option: CN.

[50] Paterson’s four main competitors, Cargill, G3, Viterra. and RIL, operate high-throughput grain terminals in the same region as Paterson. The evidence indicates that three of these competitors have access to regulated interswitching: G3 and Viterra via Winnipeg, and RIL via the Emerson Interchange. The Agency therefore finds that Paterson is at a commercial disadvantage vis-à-vis three of its four closest competitors.

Conclusion for Issue 1

[51] Of the three factors established in earlier decisions for determining whether a point of origin or destination of a movement of traffic is “reasonably close” to an interchange, the main factor is distance. For this factor, as noted earlier, radial distance is the primary consideration and track distance a secondary but relevant consideration where it is substantially longer than radial distance. The second and third factors – service issues and competitive position – may also be considered by the Agency in the specific circumstances of each application, but will not normally be accorded the same weight as distance. 

[52] Based on the findings that the Morris Terminal is located 39.8 radial km from the Emerson Interchange, that there is insufficient evidence on file to conclude that Paterson suffers from chronic rail service issues at Morris Terminal, and that Paterson is at a competitive disadvantage relative to three of its four main competitors because they each have access to regulated interswitching, the Agency finds that the Morris Terminal is reasonably close to the Emerson Interchange.

ISSUE 2: Should CN and BNSF be ordered to INTERSWITCH Paterson’s traffic at the rates prescribed IN the RAILWAY INTERSWITCHING REGULATIONS?

Positions of the parties

PATERSON’S POSITION

[53] Paterson submits that CN would have no incentive to offer competitive rates to move BNSF cars to destinations serviced by only BNSF. Rather, Paterson submits it is in CN’s interests to encourage Paterson to send CN cars to CN destinations.

CN’S POSITION

[54] CN will consider accepting BNSF cars destined to markets only serviced by BNSF at the Emerson Interchange; however, it has not agreed to provide this service at the regulated interswitching rates.

BNSF’S POSITION

[55] BNSF states that it stands ready to transfer Paterson’s traffic should Paterson be granted an order that deems the Morris Terminal to be within the interswitching limits.

Analysis and determinations

[56] Pursuant to section 127 of the CTA, three criteria must be met for interswitching to be ordered by the Agency:

(1) The line of one railway company must connect with the line of another railway company;

(2) Reasonable facilities must be provided by the railway companies;

(3) The point of origin or destination is within the prescribed distance of an interchange.

[57] It is undisputed that CN and BNSF are railway companies within the definition of the CTA and that their rail lines connect.

[58] The Agency has found that the Emerson facility is an interchange for the purpose of the CTA, and thereby, provides for the storage of cars until transferred to the other railway company.

[59] The Agency finds the Morris Terminal to be reasonably close to the Emerson Interchange.

[60] In light of the above, the Agency finds that CN and BNSF are to interswitch Paterson’s traffic from the Morris Terminal in accordance with the Regulations.

ISSUE 3:  should CN and BNSF be ordered to provide reasonable facilities for the convenient interswitching of Paterson’s traffic originating at the Morris Terminal?

Positions of the parties

BNSF’S POSITION

[61] BNSF submits that, upon an Agency order that it and CN interswitch Paterson’s traffic at the Emerson interchange, it will use its available facilities to do so and that there is no need for the Agency to issue an order requiring BNSF to do so.

PATERSON’S POSITION

[62] While Paterson acknowledges BNSF’s statement that it will use the available facilities at the Emerson Interchange to interswitch traffic with CN, Paterson still requests that the Agency order CN and BNSF to provide reasonable facilities for the convenient interswitching of Paterson’s traffic originating from the Morris terminal to protect against potential changes in policy or operational decisions. 

Analysis and determinations

[63] Paragraph 127(2)(b) of the CTA allows the Agency to order the railway companies to provide reasonable facilities for the convenient interswitching of traffic in both directions at an interchange between the lines of either railway and those of other railway companies connecting with them.

[64] BNSF has indicated its willingness to interswitch Paterson’s traffic. The applicant has stated its desire for an order regarding the provision of reasonable facilities for interswitching, without submitting evidence of a likely failure by CN and BNSF to provide such facilities.  Accordingly, the Agency will not make such an order in the present decision. Should the existing facilities prove inadequate to effect interswitching in the future, the Agency would have the power to make an order pursuant to paragraph127(2)(b) at that time.

ISSUE 4: Should costs be awarded?

[65] CN requests an order awarding it costs, without providing any explanation or justification supporting this request. The Agency has broad discretion to award costs and, in determining whether to do so, considers factors such as the importance and complexity of issues raised by the application, public interest dimensions of the application, the conduct of the parties, and the results of the proceeding. Neither the record nor the application of these factors supports an award of costs in this case and thus, the Agency denies CN’s request.

ORDER

[66] The Agency orders CN and BNSF to interswitch Paterson’s traffic from the Morris Terminal at the Emerson Interchange upon request.

This is a public redacted version of Confidential Decision No. CONF-15-2018 that issued on October 2, 2018 which cannot be made publicly available.

Member(s)

Scott Streiner
J. Mark MacKeigan
Mary Tobin Oates
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