Letter Decision No. LET-R-17-2015

The Canadian Transportation Agency (Agency) received these requests for adjustments to the 2014-2015 Volume-Related Composite Price Index (VRCPI). 

Canadian National Railway Company (CN)

CN filed its application on August 15, 2014. It requests this adjustment be made to reflect the costs it incurred for the purpose of obtaining cars following the withdrawal from service of Government of Canada-owned hopper cars. 

Canadian Pacific Railway Company (CP)

On August 4, 2014, CP filed a submission in response to 150-R-2014">Decision No. 150-R-2014, requesting an adjustment to the VRCPI with respect to Canadian Wheat Board cars. In that Decision, the Agency stated:

[19] The Agency will only consider an adjustment to the 2014-2015 VRCPI in relation to the use of CP subsidiaries’ cars if CP provides an amount representing the actual cost incurred by CP (Canadian operations) in obtaining hopper cars from its subsidiary companies for the movement of regulated grain, that is directly attributable to the replacement of the CWB cars. The amount submitted must be quantifiable and verifiable and must be based on a verified number of cars obtained. More specifically, the submission must reflect the cost incurred by CP for the use of its U.S. subsidiary cars in regulated grain, net of the costs incurred by the subsidiary for the use of the CP cars in regulated grain, over and above its historical base.

[20] Any submission made to the Agency must be filed on a timely basis to allow the Agency enough time to make an informed decision on this matter. Accordingly, the Agency will be prepared to consider such an adjustment in 2014-2015 if CP makes its submission, with supporting material, no later than July 31, 2014.

CP asks that the VRCPI be adjusted to reflect the costs associated with the increased utilization of cars of its wholly owned U.S. subsidiaries.

FINDINGS

The Agency has considered the applications before it and makes the following finding.

Application by CN

The Agency will adjust the 2014-2015 VRCPI, in accordance with the methodology established in 8-R-2013">Decision No. 8-R-2013, for cars obtained through lease agreements where the lessee is CN (the prescribed railway company).

The Agency defers, at this time and until the establishment, after consultation, of an appropriate methodology, any adjustment to the VRCPI for the use of cars obtained through lease agreements where the lessee is a U.S. subsidiary of CN, in this case Illinois Central Railroad Company.

Application by CP

The Agency rejects CP’s request for an adjustment to the 2014-2015 VRCPI. The Agency finds that the proposed methodology and evidence filed in support of CP’s request do not satisfy the requirements for an adjustment as described in both 8-R-2013">Decision No. 8-R-2013 and 150-R-2014">Decision No. 150-R-2014. 

DECISION

The Agency, pursuant to paragraph 151(4)(c) of the CTA, adjusts the 2014-2015  VRCPI upwards to 1.3257 (0.3 percent from its value of 1.3219 set out in 150-R-2014">Decision No. 150-R-2014.)

Pursuant to subsection 151(6) of the CTA, the Agency makes this adjustment effective on August 1, 2014.

Reasons for this Decision will follow.

CONSULTATIONS

The Agency is prepared to consider a cost adjustment under paragraph 151(4)(c) of the CTA in relation to cars obtained by U.S. subsidiaries of prescribed railway companies and used in regulated grain service by the prescribed railway companies, if and when an appropriate methodology is established. For this purpose, the Agency will hold an industry-wide consultation.

As part of this consultation, the Agency will also consider other issues of methodology related to the application of paragraph 151(4)(c) of the CTA, including, but not limited to, the following:

• Whether further amendments to the existing methodologies as established in 8-R-2013">Decision No. 8-R-2013 are necessary;

• A list of conditions and requirements that would allow for an appropriate adjustment under paragraph 151(4)(c);

• The documents, evidence, data, and metrics necessary to calculate that cost adjustment;

• The appropriate implementation and monitoring framework.

Details of the issues for consultation, including a proposed methodology, will follow under separate cover. The timelines for the filing of parties’ comments will be set out in the consultation document.

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REASONS FOR

DECISION NO. LET-R-17-2015

April 23, 2015

APPLICATION by the Canadian National Railway Company and SUBMISSION by the Canadian Pacific Railway Company for adjustments to the Volume-Related Composite Price Index for crop year 2014-2015 pursuant to paragraph 151(4)(c) of the Canada Transportation Act, S.C., 1996, c. 10, as amended.

INTRODUCTION

[1]

In LET-R-17-2015">Decision No. LET‑R‑17‑2015, the Canadian Transportation Agency (Agency) granted, in part, the Canadian National Railway Company’s (CN) application and denied the Canadian Pacific Railway Company’s (CP) request.

[2]

The Agency, pursuant to paragraph 151(4)(c) of the Canada Transportation Act (CTA), adjusted the 2014‑2015 Volume‑Related Composite Price Index (VRCPI) upwards to 1.3257 (0.3 percent from its value of 1.3219 set out in 150-R-2014">Decision No. 150‑R‑2014.), and, pursuant to subsection 151(6) of the CTA, this adjustment is effective on August 1, 2014.

[3]

The reasons for LET-R-17-2015">Decision No. LET‑R‑17‑2015 are set out below.

Application by CN

[4]

On August 15, 2014, CN filed an application with the Agency, pursuant to paragraph 151(4)(c) of the CTA, for an adjustment to the VRCPI to reflect the costs incurred by it for the purpose of obtaining cars as a result of the withdrawal from service of Government of Canada‑owned hopper cars (federal cars).

[5]

CN states that during the period August 1, 2007 to December 2013, it retired 915 steel federal cars either because they had reached the end of their serviceable life or were too heavily damaged to be returned to service. CN also retired 1,902 aluminum federal cars between 2007 and 2009. According to CN, since June of 2012, it has signed a number of lease agreements with third‑party lessors for hopper cars to replace 1,452 of the 2,817 withdrawn federal cars. CN states that by 2012, market and weather conditions made the loss of the federal cars from the available fleet without replacing them untenable, hence the need for replacement cars.

[6]

In support of its request, CN filed seven third‑party leases for hopper cars. The Agency notes that the lessee on three of these leases is one of CN’s U.S. subsidiaries. CN does not explain why these three leases should be considered valid for an adjustment under paragraph 151(4)(c) of the CTA. The other four leases are between CN and a third‑party lessor.

Lease agreements where CN’s U.S. subsidiary is the lessee

[7]

As stated in 161-R-2013">Decision No. 161‑R‑2013, the Agency views the parent railway company and its U.S. subsidiary companies as separate and financially accountable entities and for regulatory costing purposes the Agency does not recognize the financial statements of the consolidated company but rather only those of the parent railway company’s Canadian operations.

[8]

As a result, the 526 cars leased through CN’s U.S. subsidiary could not be considered as having been obtained by CN (the prescribed railway company) but rather by a distinct, though related, entity.

[9]

The Agency finds that cars leased by CN’s U.S. subsidiary do not qualify for an adjustment as they were not directly obtained by the prescribed railway company as required under paragraph 151(4)(c) of the CTA. For this reason, the Agency finds that no adjustment is warranted for those leased cars.

[10]

The Agency recognizes, nevertheless, that the cars obtained through a lease entered into by a subsidiary with a third party, if subsequently used by the prescribed railway company in the movement of regulated grain, may have generated costs to the prescribed railway company (for example, in per diem charges) that could qualify for an adjustment pursuant to paragraph 151(4)(c) of the CTA.

[11]

In this regard, while the Agency currently has a methodology in place for adjustments for cars obtained by a prescribed railway company, no methodology currently exists to account for the costs incurred by a prescribed railway company related to cars that were obtained by a U.S. subsidiary for subsequent use by the prescribed railway company in regulated grain service.

[12]

Therefore, the Agency defers any adjustment to the VRCPI for the use of cars obtained through lease agreements where the lessee is a U.S. subsidiary of CN until the establishment, following consultation, of an appropriate methodology for adjustment in those situations.

Lease agreements where CN is the lessee

[13]

The Agency examined the leases where CN is the lessee and determines that they meet the requirements for an adjustment as described in both 8-R-2013">Decision No. 8‑R‑2013 and 150-R-2014">Decision No. 150‑R‑2014.

[14]

The Agency calculated the amount of the adjustment to the 2014‑2015 VRCPI in accordance with the methodology and principles established in 8-R-2013">Decision No. 8‑R‑2013.

[15]

Consistent with 8-R-2013">Decision No. 8‑R‑2013, in calculating the adjustment, the Agency applied a utilization rate (number of revenue tonne miles (RTM) spent in regulated grain service versus total system RTM) reflecting the historical utilization rate of the returned federal government car fleet. The utilization rate was established based on information submitted by CN and verified by Agency staff for accuracy.

[16]

The Agency considers the use of the historical utilization rate appropriate for the 2014‑2015 crop year i.e. the first year in which an adjustment has been put in place in respect of the federal cars covered in CN’s application. However, in accordance with the monitoring requirements for the use of hopper cars established in 8-R-2013">Decision No. 8‑R‑2013, this utilization rate and the weight within the VRCPI will be adjusted, for all subsequent annual VRCPI determinations, to reflect the annual utilization rate, calculated as the total RTM performed in moving regulated grain relative to the total RTM performed in all other services, of the cars identified by CN as having been obtained for the purposes of paragraph 151(4)(c) of the CTA.

Submission by CP

Background

[17]

In response to a request by CP, the Agency made an adjustment to the 2013‑2014 VRCPI (161-R-2013">Decision No. 161‑R‑2013 dated April 30, 2013) to reflect the costs of replacing 482 Canadian Wheat Board (CWB) cars, using the principles and methodology established in 8-R-2013">Decision No. 8‑R‑2013. In the same Decision, the Agency removed from the VRCPI the positive weight adjustment it had made in LET-R-113-2006">Decision No. LET‑R‑113‑2006 to reflect leasing charges in respect of the entire fleet of CWB cars.

[18]

In 161-R-2013">Decision No. 161‑R‑2013, the Agency considered two questions precipitated by CP’s request:

1. Does the Agency accept CP’s proposal that a deemed number of replacement cars be established and that a cost associated with that deemed number of cars, based on an average of historical leasing costs, be reflected in the 2013‑2014 VRCPI determination? and

2. Does the Agency agree that the increase in costs associated with the increased usage of its subsidiaries’ cars as a result of the withdrawal of the CWB hopper cars notionally represent costs incurred by CP in obtaining hopper cars? If so, how should it make such an adjustment?

[19]

On the first question, the Agency found that CP’s proposed methodology was highly speculative as it was based on an anticipated number of replacement cars to move an anticipated volume of grain. Therefore, it did not provide a clear basis for making the cost adjustment called for by paragraph 151(4)(c) of the CTA.

[20]

With respect to recognizing the increased utilization of CP’s subsidiary cars, the Agency stated in, paragraphs 22 and 23:

(22) The Agency notes that the nature of the arrangement by which CP obtains cars from its subsidiaries differs from the leases considered for paragraph 151(4)(c) of the CTA adjustments in previous Agency decisions. Specifically, the leases previously taken into account were of a longer duration which allowed for the costs incurred to be easily determinable for future periods on the basis of known obligations. The Agency notes that in the case of intercompany use, a car hire or per diem rental charge is used. This is equivalent to leasing these assets on a short‑term basis, and the extent of the use of the assets for the next period cannot be determined with any certainty.

(23) The Agency is prepared to accept, in principle, that the increased utilization of a subsidiary’s cars satisfies the requirement of obtaining cars if the subsidiary’s cars are used in regulated grain service and provided that the costs so incurred are quantifiable and based on a verified number of cars used. […] If CP can demonstrate to the Agency that a quantifiable and verifiable amount representing the net increase in the use of its subsidiaries’ cars that is directly attributable to the withdrawal of the CWB cars has been incurred by CP, the Agency will consider making an adjustment […].

[21]

On February 7, 2014, CP filed a new proposal and an amount with the Agency for an adjustment under paragraph 151(4)(c) of the CTA in relation to the use of subsidiary cars.

[22]

In 150-R-2014">Decision No. 150‑R‑2014 dated April 25, 2014, the Agency determined that the amount submitted did not represent the actual cost incurred by CP for the use of subsidiary cars to replace the CWB cars and rejected CP’s submission citing reasons identical to those in 161-R-2013">Decision No. 161‑R‑2013: “…it considers CP’s proposal to be speculative in nature, not readily quantifiable and verifiable and not based on a verified number of cars obtained by CP for the replacement of the CWB cars.”

[23]

The Agency further stated:

[19] The Agency will only consider an adjustment to the 2014‑2015 VRCPI in relation to the use of CP subsidiaries’ cars if CP provides an amount representing the actual cost incurred by CP (Canadian operations) in obtaining hopper cars from its subsidiary companies for the movement of regulated grain that is directly attributable to the replacement of the CWB cars. The amount submitted must be quantifiable and verifiable and must be based on a verified number of cars obtained. More specifically, the submission must reflect the cost incurred by CP for the use of its U.S. subsidiary cars in regulated grain, net of the costs incurred by the subsidiary for the use of the CP cars in regulated grain, over and above its historical base.

[20] Any submission made to the Agency must be filed on a timely basis to allow the Agency enough time to make an informed decision on this matter. Accordingly, the Agency will be prepared to consider such an adjustment in 2014‑2015 if CP makes its submission, with supporting material, no later than July 31, 2014.

[24]

On August 4, 2014, CP filed a submission in response to 150-R-2014">Decision No. 150‑R‑2014, requesting an adjustment to the VRCPI with respect to its returned CWB cars. CP asks that the VRCPI be adjusted to reflect the costs associated with the increased utilization of cars of its U.S. subsidiary.

[25]

CP stated that, due to the nature of the inter‑company car hire, the inter‑company car “fleet” replacing the CWB cars may consist of “many and various” individual cars. As a result, it calculated the replacement cost based on the CWB capacity that was deemed to be replaced by inter‑company cars, as measured in revenue tonne‑miles (RTM) (Assumption 1). CP assumes that if the increase in the RTM of inter‑company cars between 2011 and 2013 is equal to or greater than CWB RTM production in the base year (2011), then the CWB cars were “effectively” replaced by the inter‑company cars (Assumption 2).

[26]

Under this methodology, CP calculated the difference in RTM produced by CWB cars between years 2011 and 2013 and deducted from that amount the RTM produced by the third party replacement cars, to derive the CWB RTM replaced by the RTM of the inter‑company cars.

[27]

CP calculated an inter‑company car expense per RTM and applied that figure to the replacement CWB RTM to determine the inter‑company replacement cost. It then applied a regulated grain service percentage to calculate the regulated grain portion of the inter‑company replacement cost.

Analysis and findings

Proposed methodology

[28]

The Agency finds that the proposed methodology and evidence filed in support of CP’s request do not satisfy the requirements for an adjustment as described in both 8-R-2013">Decision No. 8-R-2013 and 150-R-2014">Decision No. 150-R-2014. The Agency finds that the calculated replacement cost does not represent the actual cost incurred by the prescribed railway company in obtaining cars for the purposes of paragraph 151(4)(c) of the CTA. The Agency also finds that the proposed methodology does not result in a replacement cost that is directly attributable to the replacement of the CWB cars that is quantifiable, verifiable and based on a verified number of cars.

[29]

The Agency finds that CP’s Assumption 1 does not allow for verification of the number of replacement cars obtained, as required by 8-R-2013">Decision No. 8‑R‑2013 and 150-R-2014">Decision No. 150‑R‑2014. The lack of a verified number of cars obtained and proof of the arrangements by which these cars were obtained, does not allow the Agency to quantify and verify the actual cost incurred.

[30]

The Agency also finds CP’s Assumption 2 to be unfounded, as the Agency is not satisfied that there is a direct link between the increased utilization of subsidiary cars and the withdrawal of the CWB cars. In other words, the Agency cannot ignore that this increase could be a result of factors external to the withdrawal. Examples of such factors may be, but are not limited to, shifts in operating strategy or existing market conditions. The Agency is of the opinion that a conclusion cannot be made that cars have been obtained as replacement cars simply because the incremental RTM of the subsidiary cars is equal to or greater than the base year RTM of the CWB cars.

[31]

Further, although CP in a previous submission stated that “part of the capacity is expected to come from an improvement in car cycle time, and part of it will come from the usage of hopper cars from the SOO and DM&E networks”, in its current methodology CP assumes no improvement in car cycle time of its existing hopper car fleet, and rather aims to replace all RTM withdrawn (net of the ones produced by the direct replacement lease) by the incremental subsidiary cars RTM. The Agency finds the assumption that the residual RTM are replaced solely by subsidiary cars to be unreasonable as it is reasonable to infer that some portion could have been replaced by improved car cycle times of Canadian fleet hopper cars.

Evidence supporting CP’s request for an adjustment

[32]

There was contradictory information between CP’s August 4, 2014 submission and later communications by CP staff with Agency staff as to the number of CWB cars that were withdrawn from service. Specifically, the number of cars CP claims to have returned to the CWB, based on its August 4, 2014 submission, is greater than the number of cars CP staff indicated in subsequent correspondence with Agency staff had been returned. Further, although CP in that  submission did not disclose an ongoing arrangement with the CWB, CP staff later indicated, through communication with Agency staff, that an ongoing informal arrangement with CWB has been in place since September 2013. Based on that communication CP staff indicated to Agency staff that, under this arrangement CP pays a predetermined amount per month for each CWB car used until all remaining cars are returned to CWB. Details of this informal arrangement have not been filed with the Agency.

[33]

The contradictory information concerning the number of cars returned and the lack of disclosure and details around the ongoing arrangement with the CWB makes it impossible for the Agency to determine the number of federal cars withdrawn from service, which is a required condition of 8-R-2013">Decision No. 8‑R‑2013.

[34] Based on the above considerations, the Agency rejects CP’s request for an adjustment to the 2014‑2015 VRCPI. For the reasons explained in this section the Agency finds that the proposed methodology and evidence filed in support of CP’s submission do not satisfy the requirements for an adjustment as described in both 8-R-2013">Decision No. 8‑R‑2013 and 150-R-2014">Decision No. 150‑R‑2014.