Letter Decision No. LET-R-69-2015

November 6, 2015

The Canadian National Railway Company submissions for the 2014-2015 crop year Maximum Revenue Entitlement determination pursuant to Part III, Division VI of the Canada Transportation Act, S.C., 1996, c. 10, as amended.

Case number: 
15-00046

INTRODUCTION

On June 11, 2015, the Canadian National Railway Company (CN) filed with the Canadian Transportation Agency (Agency) its interim Grain Traffic Data Base (GTDB) submission (interim submission) for the 2014-2015 Maximum Revenue Entitlement (MRE) determination. On September 11, 2015, CN filed its final GTDB submission and on October 9, 2015, CN filed additional adjustments (final submission).

In its final submission, CN made the following adjustments:

  1. Adjusted mileages for traffic originating in Kindersley, Saskatchewan;
  2. Adjusted mileages from Thornton Yard to various destinations in the Greater Vancouver area for export traffic destined to Vancouver and from Neebing Yard to various points in Thunder Bay for traffic destined to Thunder Bay;
  3. Re-coded shipments of soybeans wrongly coded as peas and removed those records;
  4. Removed carloads of Schedule II grains that were destined for domestic consumption in Canada;
  5. Removed carloads of Schedule II grain traffic that was exported to the US from the Vancouver area; and,
  6. Removed Schedule II grain traffic: i) turned over to Southern Railway of British Columbia (SRY), ii) terminating at Thornton yard and iii) terminating at Vancouver Intermodal Terminals.

On October 13, 2015, Agency staff advised CN that items as described in 2 and 6 above could be considered sufficiently material that they would be captured by the process established through Agency Decision Nos. LET-R-212-2010, LET-R-57-2011 and LET-R-100-2011 (see below) and that the matter would therefore be brought forward for consideration by Agency members.

In a submission dated October 23, 2015, CN contends that the adjustments are routine in nature and thus could be made as part of the Agency’s MRE determination without the need for consultation.

ISSUE

Should the Agency accept CN’s proposed adjustments as part of the 2014-2015 MRE determination?

ANALYSIS AND FINDINGS

The Agency is required to determine, by December 31, 2015, the revenues earned for the movement of grain and the MRE for the prescribed railway companies for crop year 2014-2015, commencing August 1, 2014 and ending July 31, 2015. The railway companies provide the Agency with their interim GTDB submission in June and their final GTDB submission in mid‑September. At times there are differences in calculations and other factors reported between the two submissions. In many cases, the requested adjustments are either not material or can be resolved based on well-established rules, and be addressed by staff and reported to the Agency Panel for approval and inclusion in the MRE determination.

However, in Decision Nos. LET-R-212-2010, LET-R-57-2011 and LET-R-100-2011, the Agency established a process, with fixed deadlines, by which railway companies and other stakeholders can submit methodological changes and other issues of interpretation that are material for consideration by the Agency prior to the final MRE determination. This process has worked well since it was established and stakeholders have generally respected the deadline for submitting their requests for issues to be considered. For crop year 2014-2015, industry participants had until April 30, 2015 to bring forward proposals regarding methodological changes/interpretation issues, and none were filed with the Agency by that time.

The Agency is of the opinion that several adjustments proposed by CN as part of its final GTDB submission are routine in nature and can be addressed by the Agency as part of the MRE determination. However, for the reasons set out below, the Agency finds that other proposed adjustments are not routine and need to be addressed differently. While the Agency’s practice is generally to address routine matters in the MRE determination, in this specific instance, given the range of matters raised by CN in its final submission, the Agency finds it appropriate to rule on them immediately.

Routine adjustments

Traffic originating in Kindersley, Saskatchewan

CN identified that traffic originating in Kindersley, Saskatchewan moving to the west coast travels northeast to Saskatoon, Saskatchewan and then west to Edmonton, Alberta. For the first eight months of the 2014-2015 crop year, the waybill calculation program calculated the mileage for this traffic as if the movement was from Kindersley to Calgary and then to Edmonton. The erroneous route was 51 miles longer. The GTDB was corrected for the eight months during which the longer mileage was recorded. The Agency notes that it is no longer possible to route traffic from Kindersley to Calgary and then up to Edmonton as the portion of the line from Oyen, Alberta to Hanna, Alberta was abandoned in 2010 and the line from Hanna to Lyalta, Alberta was abandoned in 2014 as indicated in the Notices of Rail Line Discontinuance.

Traffic identified as soybeans

CN discovered that some movements identified as being peas, were actually soybeans, a commodity explicitly excluded from Schedule II of the Canada Transportation Act (CTA). CN removed these movements from the 2014-2015 GTDB.

Traffic for domestic use

CN identified some traffic that had been moved to Vancouver by CN and then interchanged with SRY, a short-line operating in Vancouver, for use in domestic markets. Traffic that is moved to Vancouver, but that is ultimately destined for domestic use is not eligible under the MRE. CN removed these movements from the GTDB.

Traffic to the United States

Traffic to a port in British Columbia for export to the United States for consumption in that country is not eligible under the MRE. CN identified traffic that had been reported as being destined for export off-shore as being exported to the United States. These records have been removed from the GTDB.

The Agency accepts these routine proposed adjustments, which will be reflected in CN’s revenue and MRE determinations for crop year 2014-2015.

Matters requiring further consideration by the Agency

Mileages in the Greater Vancouver and Thunder Bay port areas

Subsection 151(1) of the CTA sets out the MRE Formula

MRE = [ A/B + ((C - D) x $0.022)] x E x F

A = Base Year Revenues

B = Base Year Tonnes

C = Crop Year Average Length of haul

D = Base Year Average Length of haul

E = Crop Year Volume of Grain Moved (Tonnes)

F = Volume-related composite price index (VRCPI) – (Inflationary Factor)

Factors A, B and D are set in the CTA and cannot change, while factors C, E and F are determined by the Agency in each crop year as part of the MRE determination. The Agency is of the opinion that it is most appropriate that C in the formula be calculated using the same methodology, as that used for establishing the D value set out in paragraph 151(2))(c), as the purpose of the ((C-D)x$0.022) portion of the formula is to adjust the established base year average revenue per tonne (A/B) to reflect changes in the average length of haul in a given crop year (C) as compared to the base year length of haul (D). This means that, if the average length of haul in a given crop year is shorter than in the base year, the base year average revenue per tonne would decrease and the MRE would be lower with the opposite effect if the length of haul is longer.

This adjustment is designed to reflect the total incremental costs borne by a railway company in moving grain over a shorter/longer distance as compared to the average length of haul in the base year.

CN is claiming that due to a routing algorithm error present in the program used to develop the 2014-2015 GTDB, the mileages to some Vancouver and Thunder Bay area ports are being understated in the 2014-2015 statistics. As part of its final submission, CN has filed a GTDB with corrected miles from Thornton Yard to North Vancouver (the North shore), Vancouver (South Shore) and Fraser Surrey Impex, reflecting additional mileages of 18, 15 and 5 miles respectively. As well, similar incremental adjustments ranging between 3 and 12 miles have been added for destinations in the Thunder Bay area where the routing algorithm was stopping at Neebing Yard.

Agency staff have examined the GTDBs used in MRE determinations since the beginning of the program along with other Revenue Freight Traffic Databases (RFTDB) submitted by CN and used prior to the establishment of the MRE program in 2000 including the 1998 RFTDB.

Based on the analysis of this information, the Agency has reason to believe that this claimed understatement of mileage may not necessarily be due to an algorithm error, but that, in fact, the mileage may have been recorded in the same fashion since the establishment of the MRE program. The Agency’s records contain information indicating that the shorter miles have consistently been reported in the GTDB databases, including the 1998 RFTDB used for the development of the base year statistics, i.e., the base year length of haul set out in paragraph 151(2)(c) of the CTA (Factor D, which is 1,045 miles for CN). That is, the mileages recorded for movements to North Vancouver, Vancouver and Fraser Surrey all reported the mileage to Thornton Yard and movements to Thunder Bay and, when applicable, McKellar Island reported the same mileage.

The Agency considers it appropriate to reflect only changes in mileage that are the result of real changes in railway operations, for instance when the distance travelled has changed as a result of the discontinuance of railway lines, traffic shifts etc. However, it would not be appropriate to compute the distance between a given origin and destination in a way that is different from the base year, when there has been no change in operations.

Furthermore, the Agency is of the opinion that the shorter distance used to date in the MRE program may be explained by the manner in which the movements were costed in the early 1990s, i.e., the distance from the Prairies to Thornton Yard were reflecting the line haul portion of the movement, whereas the activities from Thornton Yard to North Vancouver and other locations were reflected as switching activities. Therefore, if mileages are allowed to be added in 2014-2015, the Agency may be, in effect, introducing costs that have already been accounted for in the base year.

In its submission of October 23, 2015, CN claims that the Agency accepted mileage changes recorded from Thornton Yard to Lulu Island and New Westminster. The Agency records show that in the 1998 RFTDB, the mileage recorded from various Prairies origins to Thornton Yard was the same as the mileage recorded from the same prairie origins to Lulu Island and to New Westminster. An analysis of Agency staff records show that mileage changes were first introduced by CN in the 2006-07 GTDB.

The issue of the appropriateness of mileage adjustments for traffic to Lulu Island and New Westminster filed by CN after the beginning of the MRE program was never brought before the Agency for a ruling.

The fact that CN changed its practice, when this was not approved by the Agency, does not provide justification for allowing changes in mileages in respect of other destinations.

The Agency notes this discrepancy in the recording of mileages to Lulu Island and New Westminster and will ensure that it treats these specific mileages in the same manner as those to other points beyond Thornton Yard. Specifically, the mileages to those destinations should be derived in the same manner as they were in the base year.

Based on the above, there is some basis for concluding that the mileages used in developing the base year statistics were the reported miles to Thornton Yard and that adding mileages in 2014‑2015 without any real change in routing (i.e., a change not related to a true change in operations since the base year) and then comparing the longer mileages to the base would be inappropriate.

CN has until November 20, 2015 to provide to the Agency factual information that the mileages that they have requested for the 2014-2015 crop year have been determined in the same manner as the mileages for the base year, that is, CN is being asked to demonstrate the longer distances were also used in the base year. If CN provides factual information that demonstrates clearly that the longer miles were used to compute the base year statistics, the Agency will accept the proposed changes.

In the alternative, should CN be unable to clearly demonstrate that the base year statistics were derived using the same distances as those now proposed by CN, the Agency would consider this matter to be a material issue. In this case, should CN seek to have this matter formally addressed by the Agency, then it can bring the issue forward within the established timelines; namely, before April 30, 2016 for consideration in the context of the 2015-2016 MRE determination. Furthermore, the Agency would not apply the proposed mileage changes for crop year 2014‑2015. As well, given that the matter would not have been fully resolved, the Agency would also not apply reductions to the mileage reported by CN for Lulu Island and New Westminster for the 2014-2015 crop year.

This approach would be consistent with the Agency’s policy for dealing with proposed changes of a material nature, as outlined in Decision Nos. LET-R-212-2010, LET-R-57-2011 and LET‑R‑100-2011.

Traffic to Thornton Yard, Vancouver Intermodal Terminals (VIT) and SRY

CN claims that traffic movements by CN to these locations are not eligible movements on the basis that:

  • In the case of Thornton Yard, the traffic stops at Thornton Yard and is delivered to Global Agriculture Transloading, and neither Thornton Yard nor Surrey British Columbia are stations or places listed in the definition of “port in British Columbia” at section 147 of the CTA such that they should be excluded.
  • The VIT is in Surrey, a place that is not a “port in British Columbia”, and therefore, the traffic CN brings there should be excluded.
  • SRY traffic is destined for Cloverdale, Annacis and South Westminster, which are all points on the railway line of SRY, a provincial railway company that is not a prescribed railway company, thus rendering the traffic ineligible. CN draws a parallel with the traffic destined to Churchill, which is handed over by CN to the Hudson Bay Railway Company.

Section 147 of the CTA contains three definitions which are germane to the issue:

“movement”, in respect of grain, means the carriage of grain by a prescribed railway company over a railway line from a point on any line west of Thunder Bay or Armstrong, Ontario, to

(a) Thunder Bay or Armstrong, Ontario, or

(b) Churchill, Manitoba, or a port in British Columbia for export,

but does not include the carriage of grain to a port in British Columbia for export to the United States for consumption in that country;

“port in British Columbia” means Vancouver, North Vancouver, New Westminster, Roberts Bank, Prince Rupert, Ridley Island, Burnaby, Fraser Mills, Fraser Surrey, Fraser Wharves, Lake City, Lulu Island Junction, Port Coquitlam, Port Moody, Steveston, Tilbury and Woodwards Landing;

“export”, in respect of grain, means shipment by a vessel, as defined in section 2 of the Canada Shipping Act, 2001 , to any destination outside Canada and shipment by any other mode of transport to the United States for use of the grain in that country and not for shipment out of that country;

The Agency notes that the traffic that CN now seeks to have excluded has not been identified by CN as being destined to domestic markets or the United States. Once it reaches Thornton Yard, VIT or SRY, the traffic is furthered to a port facility located in the Greater Vancouver area, where it can be loaded onto a vessel for export. This traffic has always been included as eligible movements in previous years.

The Agency considers that the issue of whether this traffic should now be excluded from the MRE is material, and that its resolution will require the Agency to interpret the relevant provisions of the CTA having regard to the specific railway operations involved and the effect such a change would have on other industry stakeholders.

Furthermore, the Agency notes that the issue of the eligibility of the identified traffic was brought to the Agency’s attention after the 2014-2015 crop year ended and well past the deadline of April 30 2015 for industry stakeholders to propose any methodological changes/interpretation issues related to the 2014-2015 MRE for the Agency’s consideration.

Based on the above, the Agency is not satisfied that the issue is routine and should be excluded from the time lines and process established by Decision Nos. LET-R-212-2010, LET-R-57-2011 and LET-R-100-2011. The adjustments proposed in CN’s final GTDB submission with respect to CN’s traffic to Thornton Yard, VIT and SRY will therefore not be made for the purposes of the 2014-2015 MRE determination.

Should CN seek to have these movements excluded in subsequent MRE determinations, it can bring the issue forward within the established time lines; namely, before April 30, 2016 for consideration in the context of the 2015-2016 MRE determination.

Member(s)

Scott Streiner
Sam Barone
P. Paul Fitzgerald
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