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Decision No. 710-R-2004

IN THE MATTER OF the determination by the Canadian Transportation Agency of the Western Grain Revenue Caps for the movement of western grain by prescribed railway companies for crop year 2003-2004, and

IN THE MATTER OF the determination by the Canadian Transportation Agency of a prescribed railway company's revenue for the movement of western grain for crop year 2003-2004 and whether a prescribed railway company's western grain revenue exceeds its corresponding revenue cap, pursuant to sections 150 and 151 of Division VI, Part III of the Canada Transportation Act, S.C., 1996, c. 10.

File No. T6650-2

INTRODUCTION

[1] This Decision provides the Canadian Transportation Agency's (hereinafter the Agency) determinations of the Western Grain Revenue Caps, and revenues, for the movement of western grain by prescribed railway companies for crop year 2003-2004. These determinations, which must be completed by December 31, 2004, are necessary to ensure that a prescribed railway company's western grain revenue does not exceed its maximum revenue entitlement, which is referred to as its Revenue Cap. If a prescribed railway company's revenue exceeds its Revenue Cap, the company must pay out the excess amount and penalties, as specified in the Railway Company Pay Out of Excess Revenue for the Movement of Grain Regulations. There were two prescribed railway companies during the 2003-2004 crop year; the Canadian National Railway Company (hereinafter CN) and the Canadian Pacific Railway Company (hereinafter CP), about which the Agency made its Revenue Cap determinations.

[2] The Agency's determination of CN's and CP's Revenue Caps must utilize the formula, the base year statistics, and the volume-related composite price index as defined in section 151 of the Canada Transportation Act (hereinafter the CTA). It also requires CN's and CP's specific tonnage and length of haul statistics for crop year 2003-2004.

[3] The Agency's determination of CN's and CP's western grain revenue complies with the matters contained in subsections 150(3),(4), (5) and (6) of the CTA. It also complies with Agency Decision No. 114-R-2001 (In the matter of the Western Grain Revenue Cap established pursuant to Division VI, Part III of the CTA dated March 16, 2001) concerning the interpretation of a number of matters that are to be considered when the Agency determines a prescribed railway company's grain revenue for Revenue Cap purposes.

AGENCY DECISION

1.0 CN's and CP's western grain traffic statistics for crop year 2003-2004

[4] A western grain movement for a given crop year is defined in section 147 of the CTA. Key terms are as follows:

"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;

"grain" means any grain or crop included in Schedule II that is grown in the Western Division, or any product of it included in Schedule II that is processed in the Western Division; [Note: there are over 50 types of grain defined in Schedule II as eligible grains under the revenue cap. These include the six major grains - wheat, barley, canola, oats, rye and flax.]

"crop year" means the period beginning on August 1 in any year and ending on July 31 in the next year;

"prescribed railway company" means the Canadian National Railway Company, the Canadian Pacific Railway Company and any railway company that may be specified in the regulations.

[5] The Agency's determination of CN's and CP's volume and length of haul statistics for western grain movements for crop year 2003-2004 is shown in Table 1 below. This determination was based on detailed traffic submissions by CN and CP. The submissions were examined to ensure that the traffic qualified as western grain movements and that the related revenue, tonnage and mileage statistics were accurate. The examination led to the rejection of a relatively small amount of traffic.

Table 1

[6] * Reflects movement by CP to Edmonton, with CN haulage from Edmonton to Prince Rupert.

[7] The above table indicates that 24,526,105 tonnes of western grain were moved in the 2003-2004 crop year. The 24,526,105 volume figure is about 50 percent higher than the western grain volume for the previous crop year, when drought conditions prevailed.

[8] The 2003-2004 crop year average length of haul of 889 miles shown in the above table is 20 miles higher than for the previous crop year. However, the previous crop year's average length of haul would have been 26 miles higher, had CP-originating traffic not been diverted from Vancouver to Prince Rupert because of labour disruptions. Churchill is an eligible western grain destination however, the Churchill-bound movements which took place did not qualify to be included under the Revenue Cap regime. The reason is that the CTA requires the carriage of western grain to be by a "prescribed railway company" and the Hudson Bay Railway Company is not a prescribed railway company.

2.0 CN's and CP's Western Grain Revenue Caps for crop year 2003-2004

[9] Subsection 151(1) of the CTA states that the following formula is to be used by the Agency in its determination of a prescribed railway company's Revenue Cap:

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

where

A is the company's revenue for the movement of grain in the base year;

B is the number of tonnes of grain involved in the company's movement of grain in the base year;

C is the number of miles of the company's average length of haul for the movement of grain in that crop year as determined by the Agency;

D is the number of miles of the company's average length of haul for the movement of grain in the base year;

E is the number of tonnes of grain involved in the company's movement of grain in the crop year as determined by the Agency; and

F is the volume-related composite price index as determined by the Agency.

[10] For CN, in respect of crop year 2003-2004, the values for A, B, C, D, E and F are as follows:

A = $348,000,000
B = 12,437,000
C = 940
D = 1,045
E = 12,302,429
F = 1.0195

[11] The source of CN's values for A, B and D is prescribed by subsection 151(2) of the CTA. As shown earlier in section 1.0 of this Decision, the 2003-2004 crop year values for C and E were 940 miles and 12,302,429 tonnes respectively. The value of 1.0195 for the volume-related composite price index for crop year 2003-2004 was determined previously by the Agency pursuant to subsection 151(5) of the CTA in Decision No. 215-R-2003 dated April 24, 2003.

[12] Substitution of these CN values into the Revenue Cap formula results in a CN Revenue Cap for crop year 2003-2004 of $321,974,366. In other words, after accounting for the actual tonnage and actual length of haul in crop year 2003-2004, CN's Revenue Cap is $321,974,366.

[13] For CP, in respect of crop year 2003-2004, the values for A, B, C, D, E and F are as follows:

A = $362,900,000
B = 13,894,000
C = 839
D = 897
E = 12,223,676
F = 1.0195

[14] As above, CP's values for A, B and D are derived from subsection 151(3) of the CTA and as shown in section 1.0 of this Decision, the 2003-2004 crop year values for C and E were 839 miles and 12,223,676 tonnes respectively. The value of 1.0195 for the volume-related composite price index for crop year 2003-2004 was provided in Agency Decision No. 215-R-2003 dated April 24, 2003.

[15] Substitution of these CP values into the Revenue Cap formula results in a CP Revenue Cap for crop year 2003-2004 of $309,596,747. In other words, after accounting for the actual tonnage and actual length of haul in crop year 2003-2004, CP's Revenue Cap is $309,596,747.

3.0 Determination of CN's and CP's western grain revenue for crop year 2003-2004

i) Revenue and revenue reductions:

[16] The determination of a prescribed railway company's grain revenue requires many assessments as to what is, or is not, to be included as revenue, and what is, or is not, an allowable reduction to revenue. A partial listing of such matters appears in subsections 150(3), (4), and (5) of the CTA. A more comprehensive listing was established, following consultation with the grain industry, in Decision No. 114-R-2001.

[17] As a brief summary, a prescribed railway company's statutory western grain revenue stems mostly from billings generated by application of rates contained in published tariffs or in confidential contracts applicable to western grain movements. A railway company's statutory grain revenue also includes: a portion of amounts received for ensuring car supply through the car ordering process; amounts received for providing premium service; amounts received for performing interswitching or exchange switching; amounts received for additional switching requested by the shipper; and, a portion of grain port demurrage charges. A railway company's statutory grain revenue is to be net of any amounts paid or allowed for incentives, rebates or any other similar reductions and does not include: amounts that are earned which the Agency characterizes as a performance penalty or as being in respect of demurrage or for the storage of railway cars loaded with grain; amounts earned for staging of rail cars in transit; amounts for additional car switching, necessary due to shipper error or failure to meet obligations; and, compensation received for running rights.

[18] Allowable reductions to a railway company's statutory grain revenue include: the amortized amounts of contributions for the development of grain-related facilities to a grain handling undertaking that is not owned by the company (Industrial Development Fund contributions); amounts paid or allowed for interswitching or exchange switching; and, amounts related to container pickup and delivery charges that are included in gross revenue amounts for intermodal movements. The following matters do not reduce a railway company's statutory grain revenue: amounts paid or allowed as dispatch; amounts paid by railway companies resulting from the discontinuance of grain dependent branch lines; amounts paid by the railway companies as a performance penalty; and amounts paid for running rights.

ii) A dispute over definitions:

[19] As part of its determination of CN and CP revenue for the movement of grain for crop year 2003-2004, a dispute arose between both railway companies as to whether some amounts charged and paid should be characterized as being in respect of running rights or exchange switching.

[20] The reason for the disagreement stems from section 150 of the CTA and Decision No. 114-R-2001. Pursuant to paragraph 150(3)(c) of the CTA, a prescribed railway company's revenue for the movement of grain in a crop year shall not include compensation received for running rights. As compensation for running rights received by a host prescribed railway company is not to be included in its revenue for the movement of grain, the Agency, in its Decision No. 114-R-2001, determined that the compensation for running rights paid by a prescribed railway company for the movement of grain can not be claimed as a reduction from its grain movement revenue. That is, the Agency found that a prescribed railway company performing the line-haul over a host railway company's tracks must include the gross revenue for the entire movement in its revenue statistics under the Revenue Cap Regime.

[21] In contrast to compensation received for running rights, the Agency, also in Decision No. 114-R-2001, determined that the amounts received by a prescribed railway company for movements such as interswitching or exchange switching are to be included in that railway company's revenue under the Revenue Cap. Additionally, and given that the amounts received by a prescribed railway company for interswitching and exchange switching are to be included in its revenue, the Agency found that the amount paid by a line-haul prescribed railway company for interswitching and exchange switching qualifies as a reduction to its revenue for the movement of grain.

[22] On December 16, 2004, the Agency issued a Decision in this matter. However, given the confidential nature of the issue - it stems from a confidential agreement between CN and CP - the Agency found that it should be treated in the same fashion as any confidential information filed by the railway company as part of the Agency Revenue Cap determination. As a result, the Agency ordered that the Decision as well as the pleadings and documents filed by both CN and CP be maintained in a confidential file, and therefore, not be made available to the public.

iii) Agency review of revenue and revenue deductions, and general findings:

[23] Railway company records relating to western grain revenue were audited by Agency staff. Initial freight revenue, including payments to other railway companies involved with the carriage of grain, were submitted by CN and CP on a per movement basis. Both were verified, on a test basis, against company accounting records and source documents. Numerous onsite visits were also made to CN and CP offices to ensure that all western grain revenue was captured and to determine whether revenue exclusions or reductions were appropriate and accurate.

[24] Based on the audit findings, a number of relatively-minor adjustments were made to CN and CP revenue-related items in addition to one significant adjustment for CP. This significant adjustment, a disallowance of 49.1 percent of CP's container pickup and delivery charges, is discussed below.

[25] Taking all of the findings and adjustments into account, the Agency has determined CN's and CP's western grain revenue for crop year 2003-2004 to be: CN = $320,783,912; CP = $309,918,659.

iv) CP's pick up and delivery charges:

[26] As part of the verification process of CP's revenues and expenses relating to the Revenue Cap, the Agency, through its Audit Services Division, undertook to review CP's container pickup and delivery charges for intermodal movements. A sample of twelve movements containing 24 amounts (12 for pickup and 12 for delivery) were examined as part of the review of CP's pickup and delivery charges.

[27] As a first comment, the Agency notes that its Audit Services staff were unable to obtain sufficient documents for eight (8) delivery amounts. In addition and upon examination of the supporting documents that were provided by CP for the remaining amounts, the Agency notes that none of the backup documentation submitted by CP matched the corresponding amounts found in CP's traffic database submission.

[28] The problems relating to CP's pickup and delivery charges surfaced early in the Agency's verification process. As these issues had not been resolved, CP was advised on November 26, 2004 that all outstanding issues relating to its Revenue Cap submission, including the problems relating to its pickup and delivery charges, were to be resolved by December 8, 2004 in order to allow the Agency sufficient time to issue its Revenue Cap determination. On December 1, 2004, CP was also advised that failure to resolve the problems relating to the pickup and delivery charges could lead to these charges being fully, or partially, disallowed by the Agency.

[29] In order to assist CP in shedding some light on the reasons behind the incompatibility of the backup documentation obtained and the corresponding amounts found in CP's traffic database submission, Audit Services' staff also offered to meet with CP between December 1 and December 8.

[30] CP chose not to meet with Audit Services's staff and on December 8, 2004, filed a revised traffic database. After examining the revised traffic database, the Agency concluded that it was as unreliable as the original. That is, none of the new amounts submitted by CP matched the documentation previously obtained by the Agency. CP was advised of the incompatibility of the new database with the documentation obtained, and it was unable to satisfactorily explain its revised database.

[31] As a result of the above, Audit Services's staff was not able to perform a successful compliance audit on the sample pickup and delivery charges. From Audit Services staff's perspective, there is no assurance that the system or methodology used by CP to claim pickup and delivery charges for crop year 2003-04 is reliable.

[32] CP, through Agency counsel, was advised of this auditing deficiency and, on December 17, 2004, CP filed an unsworn statutory declaration in which it acknowledged some shortcomings of the data records but nevertheless claimed that a specific dollar amount had been incurred as a cost by CP for pickup and delivery charges in respect of grain subject to the Revenue Cap.

[33] The Agency has examined the unsworn statutory declaration filed by CP. The Agency notes that the amount alleged to have been incurred can not be reconciled with CP's own evidence filed as part of its original and revised submissions and/or during the Agency's auditing process of CP's pickup and delivery charges.

[34] Given that the Agency, through its Audit Services Division, was not able to perform a successful compliance audit on the sample pickup and delivery charges and given that the Agency cannot reasonably rely on CP's estimated amount alleged to have been incurred in the statutory declaration filed on December 17, 2004, there are two options for the Agency. The first one is to exclude all of the pick up and delivery amounts submitted by CP. The second one is to determine, based on the evidence currently before the Agency, the amount that CP reasonably incurred during crop year 2003-2004 for pickup and delivery charges.

[35] The first option fails to recognize that CP did incur substantial pickup and delivery charges for crop year 2003-2004. The Agency's mandate under section 150(1) of the CTA is to determine a prescribed railway company's revenues. While a successful audit is undoubtedly the best way to achieve this legislative mandate, the Agency cannot simply ignore the costs incurred if there is evidence that allows it to make a reasonable determination.

[36] In this case, although the sample obtained by the Agency as part of the auditing of the pickup and delivery charges is limited, the Agency finds that the sample can be used to assist it in reasonably quantifying allowable pickup and delivery charges for crop year 2003-2004. Therefore, this finding provides the Agency with the basis to make a reasonable determination. However, when, as in this case, the evidence allows the Agency to exercise its discretion and make a reasonable determination, the Agency, in doing so, must be mindful that it is the railway company's responsibility to substantiate any claim with respect to its Revenue Cap submission. Therefore a claim or portion thereof will only be determined by the Agency to the extent that evidence supports it.

[37] In this case, the Agency has examined the evidence filed by CP and/or requested by the Agency as part of its verification of the pickup and delivery charges and finds that such evidence substantiates a minimum of 50.9 percent of the pickup and delivery charges claimed by CP. The Agency finds that the documentation filed by CP to substantiate its pickup and delivery charges indicates that CP has incurred a minimum of 50.9 percent of the charges claimed in its original submission. However, as the evidence available to the Agency does not allow it to verify and/or substantiate the remaining 49.1 percent claimed and given that CP failed to provide that evidence, the Agency has no choice but to disallow it.

[38] The Agency therefore, determines that 50.9 percent of the pickup and delivery charges claimed by CP in its original submission is appropriate to be included in the Agency's determination of CP's revenues pursuant to subsection 150(1) of the CTA.

4.0 Comparison of CN's and CP's Revenue Caps and revenue

[39] The Agency has determined western grain Revenue Caps and revenue for CN and CP for the crop year 2003-2004 as summarized below. The grain revenue for CN was below its Revenue Cap while CP's grain revenue exceeded its Revenue Cap.

Table 2

[40] Subsection 150(2) of the CTA provides that if a prescribed railway company's revenues, as determined by the Agency, for the movement of grain in a given crop year exceed the company's Revenue Cap for that year, the company shall pay out the excess amount, and any penalty that may be specified in the regulations. The Railway Company Pay Out of Excess Revenue for the Movement of Grain Regulations, SOR/2001-207 (hereinafter the Regulations) provide, in part:

2. The penalty that a prescribed railway company shall pay out pursuant to subsection 150(2) of the Act, if the company's revenues for the movement of grain in a crop year exceed the company's maximum revenue entitlement for that year, as determined under subsection 151(1) of the Act, is

(a) five per cent of the excess amount, if that excess amount is one per cent or less of the company's maximum revenue entitlement; or

(b) 15 percent of the excess amount, if that excess amount is more than one per cent of the company's maximum revenue entitlement.

3.(1) If the Agency concludes that a prescribed railway company's revenues for the movement of grain in a crop year exceed the company's maximum revenue entitlement for that year, as determined under subsection 151(1) of the Act, the Agency must make a decision or order requiring the company to pay out the excess amount and the applicable penalty, as determined under section 2, in accordance with subsection 150(2) of the Act.

(2) A decision or order in relation to a crop year must be sent to a prescribed railway company no later than 10 days after the Agency determines the company's revenues for the movement of grain and maximum revenue entitlement for that year.

4.(1) The excess amount and the penalty that a prescribed railway company shall pay out pursuant to subsection 150(2) of the Act must be paid out to the Western Grains Research Foundation in the form of a certified cheque, money order or bank draft.

(2) At the time an excess amount and the applicable penalty are paid out, the prescribed railway company must notify the Agency, in writing, of the amount paid out and the date on which it was paid out.

(3) An excess amount and the applicable penalty must be paid out no later than 30 days after the day on which the prescribed railway company receives the decision or order referred to in section 3.

[41] As CN's statutory grain revenue was below its Revenue Cap for crop year 2003-2004, no penalty or payout applies.

[42] Given that CP's statutory grain revenue exceeds its Revenue Cap for crop year 2003-04 by an amount of $321,912, CP is hereby ordered, pursuant to subsection 150(2) of the CTA and subsection 3(1) of the Regulations, to pay the Western Grains Research Foundation, within 30 days from the date of this Decision, an amount of $338,008 representing the sum of the excess amount of $321,912 and the prescribed penalty of $16,096 as provided for under paragraph 2(a) of the Regulation.

[43] Upon payment of the excess amount and the applicable penalty, CP, pursuant to subsection 4(2) of the Regulations, is hereby requested to notify the Agency, in writing, of the amount paid out and the date on which it was paid.

DISSENTING OPINION OF MARY-JANE BENNETT

I have read the reasons of the majority in this proceeding. While I agree with the majority determination of CN's revenue, I dissent with the majority determination of CP's revenue. I disagree with the majority determination of the appropriate allowance for CP's pickup and delivery charges. Although I agree with their view on the background behind CP's pickup and delivery charges, I disagree with their determination of the appropriate allowance for these charges.

I agree with the majority that given the unsuccessful audit of CP's pickup and delivery charges and given that the amounts claimed by CP in its unsworn statutory declaration cannot be reconciled with CP's own submission and documents, there are two options available to the Agency. One option is to exclude all of the amounts submitted by CP; the other being to determine, based on the varying evidence before the Agency, an amount that CP could reasonably have incurred during crop year 2003-04 for pickup and delivery charges.

As the burden of demonstrating that a claim has indeed been incurred rests on CP, the second option should only be resorted to if the evidence otherwise available to the Agency is compelling enough to allow a reasonable determination. Simply put, as the determination of CP's revenue under subsection 150(1) of the CTA is mainly an accounting and financial exercise, the presence of an unsuccessful audit should be sufficient to trigger a reluctance to exercise any discretion if the evidence otherwise available to the Agency is not compelling.

In this case, I have reviewed the evidence obtained by the Agency as part of the audit of CP's pickup and delivery charges and am of the opinion that it cannot reasonably be used to verify and/or authenticate any amount incurred by CP for pickup and delivery for 2003-04. While I acknowledge that some evidence is available to the Agency, I do not find that it provides appropriate proof of costs incurred and/or represents an adequate sampling of the overall movements claimed by CP. As a result and in the absence of any compelling evidence, I resort to option one and exclude all of CP's claims for pickup and delivery charges for 2003-04.

The determination of CP's revenue is an annual exercise by the Agency which has a mandated duty to determine prescribed railway companies' revenues for the movement of grain by December 31. I note that CP has been aware for quite some time of the problems associated with its various submissions on pickup and delivery charges. Not only did CP repeatedly fail to appropriately address the concerns raised by the Agency's Audit Services Division but CP refused the offer extended by that Division to meet in an attempt to resolve the recurrent problems with its pickup and delivery database. By its actions, CP has put the Agency in the position of estimating charges due to time constraints rather than following proper accounting procedures. The differing amounts in an unsworn statutory declaration which are at odds with those provided in an ultimately unsuccesful audit do not allow me to conclude that the estimated amount based on 50.9 percent accuracy of a small sample of 12 movements could reasonably be the appropriate allowance for these charges. The exercise is mainly an accounting one with the excess and penalties tied to arriving at the right allowance.

For these reasons, I exclude all amounts claimed by CP for pickup and delivery charges for 2003-04. As a result of this, my determination of CP's overall revenues would be increased by the amounts otherwise allowed by the majority with respect to pickup and delivery.