Letter Decision No. LET-R-113-2006

Background

[1] On March 7, 2006, the Canadian Pacific Railway Company (CP) and the Canadian National Railway Company (CN) requested that the Agency adjust the volume-related composite price index in accordance with paragraph 151(4)(c) of the Canada Transportation Act (CTA) to reflect the incremental costs CN and CP will incur commencing crop year 2006-2007 to lease hopper cars from the Canadian Wheat Board (CWB). In support of its request, CP provided the Agency with a confidential copy of its lease agreements with the CWB. While CN did not file a formal agreement with the CWB, as one has yet to be executed, CN did provide the Agency with a confidential copy of a Term Sheet and a detailed confidential Letter of Intent signed by both CN and the CWB which outline the specific terms and conditions that will dictate the lease arrangement.

[2] Until recently, the CWB had traditionally provided the hopper cars that are subject to the present request for adjustment free of charge to CN and CP. The CWB however informed the prescribed railway companies that commencing crop year 2006-2007 these government hopper cars will be withdrawn from service and, as a result, offered to enter into lease arrangements with both CN and CP to secure the use of the hopper cars that were previously provided free of charge.

[3] As the requests by CN and CP for adjustment of the volume-related composite price index in accordance with paragraph 151(4)(c) of the CTA entail the application of a provision of the CTA which has yet to be applied or interpreted by the Agency, the Agency, in its Decision No. LET-R-70-2006 dated March 15, 2006 sought comments from the industry on the meaning to be ascribed to the expression "incremental costs" found in paragraph 151(4)(c) of the CTA.

[4] The Agency received submissions from the following parties: CN; CP; Farmer Rail Car Coalition (supported by many industry stakeholders); Alberta Agriculture, Food & Rural Development; Keystone Agricultural Producers; Manitoba Transportation and Government Services; Saskatchewan Highways and Transportation; CWB; Western Grain Elevator Association; Saskatchewan Grain Car Corporation; and Saskatchewan Association of Rural Municipalities (SARM).

[5] While the Agency will not set out these submissions in detail, the quality of the submissions received on such short notice greatly facilitated the Agency's understanding and examination of the issues raised by CN's and CP's request for adjustment of the Maximum Revenue Entitlement under paragraph 151(4)(c) of the CTA.

Relevant Legislative Provisions

[6] 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;

[7] Paragraph 151(4)(c) of the CTA provides:

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

(c) the Agency shall make adjustments to the index to reflect the incremental 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

Preliminary Matter

[8] In their respective requests for adjustment, both CN and CP filed a claim for confidentiality in respect of the lease agreement and/or the Term Sheet and Letter of Intent outlining the lease arrangements with the CWB and, as the case may be, their submissions on how such leases would impact the volume-related composite price index. The Agency has examined these documents and is of the opinion that they are confidential and ought not be disclosed publicly. Therefore, they will be maintained in confidence.

Issue

[9] The issue to be addressed is whether the arrangements entered into between the prescribed railway companies and the CWB for the leasing of hopper cars trigger the application of paragraph 151(4)(c) of the CTA and, in the affirmative, whether the prescribed railway companies incur incremental costs as a result of these lease arrangements.

Analysis and Findings

[10] While the lease agreements between CP and the CWB and/or the Term Sheet and Letter of Intent outlining the lease arrangements between CN and the CWB are confidential, key elements have been disclosed publicly by CN, CP and the CWB for the purpose of determining the issues in this case. First, all of the parties confirm that the lease arrangements involve a payment of a lease by each prescribed railway company to the CWB commencing crop year 2006-2007. Second, all of the parties confirm that under both lease arrangements the hopper cars will continue to be maintained by the prescribed railway companies, as they were prior to the withdrawal from service of these government hopper cars by the CWB.

[11] The first issue to be dealt with is whether the lease arrangements between the prescribed railway companies and the CWB trigger the application of paragraph 151(4)(c)of the CTA. In one submission received, it is noted that section 147 of the CTA defines "government hopper car" as a car provided to a prescribed railway company by the Government of Canada or a government of a province or by the CWB. Based on this definition, it is argued that, as the hopper cars subject to CN's and CP's request for adjustment will still be provided to the prescribed railway companies by the CWB, the hopper cars are still government hopper cars within the meaning of section 147 of the CTA. Therefore, it is argued that as these hopper cars are still government hopper cars; paragraph 151(4)(c) of the CTA is not applicable in this instance.

[12] The purpose of paragraph 151(4)(c) of the CTA is to ensure that the Maximum Revenue Entitlement Regime recognizes the incremental costs incurred by prescribed railway companies as a result of the sale, lease or other disposal or withdrawal from service of government hopper cars. Government hopper cars have, for a number of years, been provided to the prescribed railway companies by the Government of Canada, the government of a province or the CWB free of charge. Because the prescribed railway companies have traditionally only incurred maintenance costs for these cars, the only cost component for these cars included in the cost base embedded in each of the prescribed railway companies' base year revenue under the Maximum Revenue Entitlement relates to maintenance.

[13] In anticipation of the government hopper cars being sold, leased or otherwise transferred or discontinued, paragraph 151(4)(c) of the CTA was enacted and it requires the Agency to make an adjustment to the volume-related composite price index to reflect the "incremental costs" that are incurred by the prescribed railway companies to obtain alternative hoppers cars in replacement of the ones which were previously provided free of charge.

[14] In this instance, while the hopper cars subject to CN's and CP's request for adjustment may still be provided to the prescribed railway companies by the CWB, paragraph 151(4)(c) of the CTA is nevertheless triggered. That is, the prescribed railway companies, because of the withdrawal from service of these government hopper cars, now need to enter into a "lease" arrangement with the CWB to secure the use of alternative hopper cars in replacement of the ones which were previously provided free of charge.

[15] As a result and to the extent that the prescribed railway companies incur "incremental costs" due to the lease arrangements with the CWB, paragraph 151(4)(c) of the CTA requires the Agency to adjust the volume-related composite price index to reflect such costs.

[16] On the second issue, that is, whether the prescribed railway companies will incur incremental costs as a result of the lease arrangements with the CWB, the Agency has received a number of submissions advocating different interpretations to be ascribed to the expression "incremental costs" found in paragraph 151(4)(c) of the CTA. While the submissions differ in their interpretation of the expression "incremental costs", they nevertheless have three crucial commonalities.

[17] First, a majority of the parties recognize that paragraph 151(4)(c) of the CTA does not allow the Agency to review and update the costs associated with the government hopper cars that are currently embedded in the Maximum Revenue Entitlement without a change in the maintenance obligation on the part of the prescribed railway companies for the hopper cars.

[18] In this respect, the Agency notes that participants that alluded to a review and an update of the costs associated with the government hopper cars currently embedded in the Maximum Revenue Entitlement referred to an Agency staff report dated October 28, 2005. In that report, Agency staff, as a first step to its overall analysis of the adjustment to be made under paragraph 151(4)(c) of the CTA, removed an estimated amount of car maintenance embedded in the Maximum Revenue Entitlement for government hopper cars.

[19] The Agency staff consultation and the subsequent report issued on October 28, 2005 were undertaken and prepared at the request of Transport Canada. As the analysis was speculative and prospective in the absence of a definitive transfer scenario, Agency staff was requested to make a number of assumptions, including one that Bill C-44, An Act to Amend the Canada Transportation Act, was in effect. Bill C-44 introduced an amendment to paragraph 151(4)(c) of the CTA in order to give the Agency the authority to adjust the volume-related composite price index to reflect the overall change in costs incurred by prescribed railway companies for government hopper cars following their sale, lease or other disposal or withdrawal from service. However, Bill C-44 died on the order paper in November 2005 and the amendment to paragraph 151(4)(c) never became law.

[20] As both the scheme of the Maximum Revenue Entitlement and the current wording set out in paragraph 151(4)(c) of the CTA do not provide for a general review of the maintenance costs embedded in the Maximum Revenue Entitlement, the Agency does not have the jurisdiction, as suggested by some participants, to remove an estimated amount of car maintenance costs embedded in the Maximum Revenue Entitlement for government hopper cars as part of its present mandate under paragraph 151(4)(c) of the CTA.

[21] In this respect, the Agency agrees with SARM that any concerns that cost components embedded in the Maximum Revenue Entitlement may not accurately reflect the current costs incurred by the prescribed railway companies for the carriage of western grain are policy concerns which should be raised with the policy maker rather than the Agency whose mandate is only to apply the provisions of its enabling statute.

[22] The second commonality among the submissions received is that all of the participants that conceded that the CTA does not allow for a review of the overall costs incurred by the prescribed railway companies for hopper cars agree that the expression "incremental costs" found in paragraph 151(4)(c) of the CTA includes, at a minimum, the additional ownership (either capital or leasing) costs incurred by the prescribed railway companies to obtain hopper cars as a result of the sale, lease or disposal or withdrawal from service of government hopper cars.

[23] The divergence of opinions between the interpretation by the prescribed railway companies and the rest of the industry on the meaning of the expression "incremental costs" focuses on whether this expression contemplates the additional leasing costs incurred by the prescribed railway companies to be offset, in whole or in part, by any cost savings that could be realized by the prescribed railway companies in obtaining hopper cars, and which would relieve the prescribed railway companies of an obligation for which they are fully compensated through the cost base embedded in the Maximum Revenue Entitlement (for example, maintenance).

[24] In this case, the Agency has carefully examined the lease arrangements with the CWB and finds that the divergence of opinions in the interpretation of the expression "incremental costs" has no bearing on the present proceeding. That is, a close examination of the lease arrangements indicates that they do not and will not contain any clauses which relieve the prescribed railway companies of an obligation for which they are fully compensated through the cost base embedded in the Maximum Revenue Entitlement. All parties involved, including the CWB, acknowledge that the only change brought about by the lease arrangements is that the prescribed railway companies, commencing crop year 2006-2007, will incur lease costs for the CWB hopper cars.

[25] As a result and in the absence of any provisions that would relieve the prescribed railway companies of an obligation for which they are fully compensated through the cost base embedded in the Maximum Revenue Entitlement, the mandate of the Agency in this case is straightforward. It is to adjust the volume-related composite price index to reflect the additional leasing costs that will be incurred by the prescribed railway companies for the lease of the CWB cars commencing crop year 2006-2007.

[26] As there is no factual basis for the Agency to determine whether the additional leasing costs incurred by the prescribed railway companies should be offset, in whole or in part, by any cost savings realized by the prescribed railway companies in obtaining hopper cars, the Agency will defer its determination on this question until such time as a transfer scenario involves the prescribed railway companies being relieved of an obligation for which they are fully compensated under the Maximum Revenue Entitlement.

[27] The final commonality among the submissions received is that all participants acknowledge that the incremental costs incurred by the prescribed railway companies should be prorated to exclude any incremental costs incurred for purposes other than the carriage of western grain. The Agency has carefully examined the lease arrangements entered into between CN, CP and the CWB, and finds that both arrangements provide CN and CP with some flexibility with respect to the utilization of the hopper cars. That is, there is no restriction that somehow compels CN and CP to only utilize the hopper cars for the carriage of western grain.

[28] In light of the above, any adjustment to the volume-related composite price index to reflect the additional lease costs incurred by CN and CP to lease the CWB hopper cars will be proportioned to ensure that only the additional lease costs incurred for the movement of western grain are reflected in the adjustment.

[29] The Agency notes that some participants questioned whether there is a need for the prescribed railway companies to lease the hopper cars from the CWB, citing their observation that the prescribed railway companies have significant numbers of hopper cars that are idle due to supply and demand imbalances for hopper cars. Paragraph 151(4)(c)of the CTA does not allow the Agency to assess the "reasonableness" of the incremental costs incurred by a prescribed railway company but only to factor any such costs. Simply put, Parliament, in enacting paragraph 151(4)(c) of the CTA, did not envision the Agency assessing the reasonableness of the prescribed railway companies' commercial and operational decisions to obtain alternative hopper cars following the sale, lease or disposal or withdrawal from service of government hopper cars. In any event, by proportioning the incremental costs incurred by the prescribed railway companies to obtain alternative cars to reflect the time these cars are utilized for the carriage of western grain, the Agency partially addresses this concern.

Conclusion

[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 that only the additional costs incurred for the movement of western grain are reflected in the adjustment.

[31] The adjustment or any relevant methodology to make such an adjustment will form part of the Agency decision on the volume-related composite price index for crop year 2006-2007 to be issued on or before April 30, 2006.

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Dissenting Opinion of Member Mary-Jane Bennett

[32] Under sections 150 and 151 of the CTA, the rail revenue for the movement of western grain by a prescribed railway company (here CN and CP) cannot exceed its maximum revenue entitlement, referred to hereafter as the revenue cap. This maximum rail revenue is determined by the Agency annually and before April 30 of each year based on the formula described in sections 150 and 151 of the CTA. One of the components in the formula is an inflation index, known as the volume-related composite price index. By reference to "F" in subsection 151(1) of the CTA, the Agency sets the volume-related composite price index as it determines appropriate.

[33] Traditionally, the Agency has looked to what it describes in its contacts with industry as a "basket of weights" which are adjusted annually in setting the volume-related composite price index. There are currently six weights which make up the "basket" being labour, fuel, material, non-government car leases, depreciation and cost of capital. Importantly, there is no legislative restriction as to the weights that make up the basket. In fact, for crop year 2006-2007 a further weight is being considered by the Agency which could add railway fringe benefits and railway stock based compensation to the labour weight.

[34] The point of contention here arises as a result of the new lease agreements either signed or contemplated between the two railway companies and the Canadian Wheat Board (CWB). Although CP has entered into an agreement with the CWB, CN has not yet formally reached an agreement. As the issue before the Agency deals squarely with a detailed examination of the lease agreements to determine maintenance and lease costs in order to make the appropriate adjustments to the volume-related composite price index, this dissent will deal with the agreement reached between CP and the CWB only. Without full disclosure of the CN agreement, this Member is uncomfortable with the assumption that no such maintenance clause will eventually exist in the CN agreement.

[35] Historically, the government hopper cars had been provided to the railway companies free of charge by the various governments and by the CWB with the railway companies responsible for the associated maintenance costs of the hopper cars. With the withdrawal of service of these cars from the fleet and the new lease agreements entered into between the CWB and CP, the question arises as to the embedded maintenance costs in the formula. These costs accrued during these years when the cars were provided with the railway companies assuming the maintenance. Should these embedded maintenance costs be carried forward and added to annually through the inflation index? The answer is to be found within a reading of paragraph 151(4)c) of the CTA.

[36] The focus of the railway companies in their pleadings on paragraph 151(4)c) is on the word "incremental" which allows for adjustments to the index to reflect "incremental 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." To the railways, "incremental" refers to "an increase or addition" and consequently, "incremental costs" means "additional costs over the status quo". Hence, the embedded maintenance costs remain and the new lease costs are added to the formula.

[37] A strong position to the contrary is provided by the other parties, including the CWB, Keystone Agricultural Products, Province of Manitoba, Saskatchewan Grain Car Corporation, Saskatchewan Association of Rural Municipalities, Western Grain Elevator Association, Saskatchewan Highways and Transportation and the Farmer's Rail Car Coalition and its member associations. These parties refer to the fact that the revenue cap provisions are built on a mathematical backdrop. Given the mathematical context, Parliament must have intended the word "incremental" to refer to both "positive and negative" changes in value as its derivative word,"increment" is defined as "a change in variable." One of the parties correctly points to the Agency's own use of the term "incremental" as meaning either a positive or negative change in its reporting under the Western Grain Revenue: Determination of the Volume-Related Composite Index for the Crop Year 2005-06. By the definition advanced by these parties, the Agency is given the latitude to remove the embedded costs and add in the new lease costs. This may result in a positive or negative change in the variable.

[38] To this Member, allowing the past maintenance amounts to remain embedded within the revenue cap formula which, in the first place, has no basis in reality and secondly, would be adjusted upwards year after year which would surely cause a curious result to the revenue cap regime. The revenue cap regime was designed and put in place for the sole purpose of shielding grain shippers from excessive pricing by the railways. The past maintenance which the majority would allow to remain embedded would skewer results; would not reflect the real state of inputs into the formula and would consequently negatively affect the cost of grain transportation to those grain shippers who were to benefit from the revenue cap provisions.

[39] This Member looks to the term "incremental" and finds that it is not ambiguous and should be read within the mathematical backdrop of its location in the CTA. Alternatively, if it could be said to be ambiguous in definition, then the word "incremental" must be read in light of the reasonableness of the consequences which follow from giving it one interpretation or the other. This has been termed by some legal authors as the "golden rule of statutory interpretation". The Supreme Court of Canada in R. v. Paul {1982}1 SCR 621 unanimously adopted the following from Maxwell on Interpretation of Statutes as follows:

Where the language of a statute, in its ordinary meaning and grammatical construction, leads to a manifest contradiction of the apparent purpose of the enactment, or to some inconvenience or absurdity which can hardly have been intended, a construction may be put upon it which modifies the meaning of the words and even the structure of the sentence. This may be done by departing from the rules of grammar, by giving an unusual meaning to particular words or by rejecting them altogether on the ground that the legislature could not possibly have intended what its words signify and that the modifications made are merely corrections of careless language and really give the true meaning.

[40] Where, as here, the exercise is determined by mathematical formula, then the words which Parliament used should be read in that light. "Incremental" should be given its mathematical meaning. This is especially so in light of the fact that to do otherwise would result in millions of dollars being embedded in the formula with the effect of artificially creating an increase in grain shipping costs which would be added to annually by the inflation index. Parliament could not have intended by section 150 of the CTA to benefit grain shippers by a maximum grain revenue entitlement only to have it skewered in the next section with embedded costs. Any reading which would give such an absurd or inconvenient result is to be avoided. This Member interprets the word "incremental" as allowing a positive or negative change in variable. Therefore, I would have deducted the embedded maintenance costs and have added in the lease costs relating to CP only.