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Decision No. 530-R-1998

ERRATUM

November 2, 1998

ERRATUM to Decision No. 530-R-1998 dated October 30, 1998 - St. Lawrence & Hudson Railway Company Limited.

File No. T6338-2

On page 15 of the English version, in the fourth paragraph, the amount "$12,251" should read "$15,984" and in the fifth paragraph, the amount "$237,338" should read "$241,486".

October 30, 1998

APPLICATION by the St. Lawrence & Hudson Railway Company Limited, pursuant to subsection 145(5) of the Canada Transportation Act, S.C. 1996, c. 10, for a determination of the net salvage value of the Goderich Subdivision between mileage 31.75 and mileage 34.9, the trackage to the Canadian National Railway Company interchange and the Canadian Pacific Railway Company's [St. Lawrence & Hudson Railway Company Limited] interest in the trackage located in the Guelph Industrial Park (hereinafter the railway line), in the city of Guelph, in the province of Ontario.

File No. T6338-2

APPLICATION

BACKGROUND

LEGISLATIVE AUTHORITY

DEFINITION OF NET SALVAGE VALUE

ISSUES IN DETERMINATION OF NET SALVAGE VALUE

Change in Net Salvage Value
Interest Included in the Application
The Chatham Decision
Inclusion of Terms and Conditions
Effective Date of Transfer of the Railway Line

VALUE OF THE TRACK ASSETS

Track condition
Valuation of Specific Line Assets
Rail
Turnouts
Ties
Other Track Materials (Tie Plates, Joint Bars, Bolts, Spikes, Anchors and Crossing Materials)
Gross Salvage Value
Cost of Removal and Salvaging
Agency Determination of Net Salvage Value for Track Materials

LAND VALUATION

Assemblage Premium
Discount Factor
Agency Determination of Net Salvage Value for Land

IMPACT OF TERMS AND CONDITIONS

Conveyance
Environmental Indemnity
Interest in Leases and Agreements

CONCLUSION

APPLICATION

On May 26, 1998, the St. Lawrence and Hudson Railway Company Limited (hereinafter SL&H) applied to the Canadian Transportation Agency (hereinafter the Agency) for a determination of the net salvage value of the railway line to be transferred.

A site visit and inspection of the railway line was conducted on July 6, 1998 by Agency staff and representatives from SL&H, and the City of Guelph (hereinafter the City), the minutes for which were prepared and circulated by Agency staff.

The City filed its comments on SL&H's application on July 10, 1998 and SL&H filed its response to those comments on August 5, 1998. The City submitted additional comments with the Agency on August 14, 1998 responding to new issues raised in SL&H's response that were not contained in its application. On August 28, 1998, SL&H submitted its response to those comments. Pursuant to a request by Agency staff, the City and SL&H also provided additional information.

A draft staff report was circulated to parties on September 8, 1998 and comments were to be received by September 15, 1998. On September 11, 1998, SL&H requested documentation used to support the analysis and recommendations in the staff report, and an additional three days to provide comments. By Decision No. LET-R-247-1998 dated September 16, 1998, the Agency provided the requested documentation to both parties.

In its application, SL&H filed two documents for which a claim for confidentiality was made pursuant to section 11 of the National Transportation Agency General Rules, SOR/88-23. The documents pertained to the valuation of the track materials and the land appraisal for the railway right of way. In response to a request by the City for these documents, SL&H advised the City that the Agency must make a determination with respect to the confidentiality of the documents before they could be forwarded to the City. In its Decision No. LET-R-160-1998 dated June 10, 1998, the Agency provided an opportunity to both parties to file submissions with respect to the claim for confidentiality. In its submission, SL&H agreed to provide the City with the land appraisal report, but requested that the working papers for the track value be kept confidential. In its Decision No. LET-R-169-1998 dated June 19, 1998, the Agency found, in part, that the City would not be able to adequately reply without SL&H's working papers for the valuation track materials. Accordingly, the Agency directed the City and persons requiring access to the confidential information, and these undertakings were provided to the Agency and SL&H on June 21, 1998.

Pursuant to section 29 of the Canada Transportation Act (hereinafter the CTA), the Agency is to make its decision no later than 120 days after the application is received unless, both parties agree to an extension. The parties have agreed to an extension of the deadline until October 30, 1998.

The portion of the Goderich Subdivision which is subject to the net salvage value determination runs north of Norwich Street between mileages 31.75 and 34.9 in the city of Guelph. The railway line includes SL&H's interest in trackage extending from the level crossing in the vicinity of Woodlawn Road and Edinburg Road, south, parallel to Edinburg Road and continues to the interchange tracks with the Canadian National Railway Company (hereinafter CN) and the trackage within the Guelph Industrial Park situated west of Edinburg between Woodlawn Road and Speedvale Avenue in the city of Guelph. The location of the line is shown on the attached map (Appendix 1).

This railway line is used exclusively to provide freight service to several local industries such as ABB, ARMCO and Owens Corning. Ontario Southland Railway Inc. operates on the railway line three to four times per week.

On May 12, 1997, SL&H offered to transfer its interest in the railway line to the Government of the Province of Ontario for a net salvage value of $1,096,400. The offer was also communicated to the City who could accept the offer if the Government of the Province of Ontario did not do so within 30 days. On July 3 and 9, 1997, the City communicated its intention to purchase the railway line, subject to certain conditions. At that time, SL&H alleged that the acceptance of the SL&H offer was not a clear, unconditional and absolute indication of the intention of the City to accept the offer, but was conditional on further negotiations of the purchase price and other terms and conditions as well as final approval of the transaction by the Guelph City Council.

On July 15, 1997, the Guelph Junction Railway Company (hereinafter the GJR), a wholly owned subsidiary of the City, requested the Agency to investigate whether the acceptance of the offer by the City was valid pursuant to subsection 145(3) of the CTA. In Decision No. 497-R-1997 dated August 7, 1997, the Agency ruled that there was a valid acceptance. The Agency stated:

... In order for the offer or acceptance to be valid for the purposes of the CTA, it is not necessary for the parties to agree on the actual price to be paid for the railway line. It is merely necessary for the parties to agree on the principle of net salvage value for the railway line which amount, in the absence of an agreement between the parties, can be set by the Agency at the request of either party.

In its response to the staff consultation report, SL&H states "... the difficulty experienced by the Agency staff and both parties in resolving this matter by written pleadings suggests that this would have been an appropriate matter for the Agency to have considered at an oral hearing where the many novel and difficult issues could be more fully explored and resolved.". Within the time constraints permitted for its review, the Agency has carefully assessed all the evidence and arguments presented by the parties in this case including comments received in respect of the staff report. In this regard, the staff report accomplished what it was supposed to have done; that is, it highlighted, among other things, areas of staff uncertainty arising from a lack of particularity or information on file. In the circumstances of this case, the Agency concludes that further pleadings or argument by way of an oral hearing is not necessary.

Section 145 of the CTA provides:

145(1) The railway company shall offer to transfer all of its interest in the railway line to the governments mentioned in this section for not more than its net salvage value to be used for any purpose if

(a) no person makes their interest known to the railway company, or no agreement with an interested person is reached, within the required time; or

(b) an agreement is reached within the required time, but the transfer is not completed in accordance with the agreement.

(2) After the requirement to make the offer arises, the railway company shall send it simultaneously

(a) to the Minister if the railway line passes through

(i) more than one province or outside Canada, or

(ii) land that is or was a reserve, as defined in subsection 2(l) of the Indian Act;

(b) to the minister responsible for transportation matters in the government of each province that the railway line passes through; and

(c) to the clerk or other senior administrative officer of each municipal or district government through whose territory the railway line passes.

(3) After the offer is received

(a) by the Minister, the Government of Canada may accept it within thirty days;

(b) by a provincial minister, the government of the province may accept it within thirty days, unless the offer is received by the Minister, in which case the government of each province may accept it within an additional thirty days after the end of the period mentioned in paragraph (a) if it is not accepted under that paragraph; and

(c) by a municipal or district government, it may accept it within an additional thirty days after the end of the period or periods for acceptance under paragraph (a) and (b), if it is not accepted under those paragraphs.

(4) Once a government communicates its written acceptance of the offer to the railway company, the right of any other government to accept the offer is extinguished and the railway company shall notify the other governments of the acceptance.

(5) If a government accepts the offer, but cannot agree with the railway company on the net salvage value within ninety days after the acceptance, the Agency may, on the application of the government or the railway company, determine the net salvage value.

Subsection 146(2) of the CTA provides:

If the railway line, or any interest of the railway company therein, is sold, leased or otherwise transferred by an agreement entered into through the process prescribed by sections 143 to 145 or otherwise, the railway company that conveyed the railway line has no obligations under this Act in respect of the operation of the railway line as and from the date of sale, lease or other transfer was completed and has no obligations with respect to any operations by VIA Rail Canada Inc. over the railway line as and from that date.

In making its decision, the Agency has considered all submissions and arguments received from both parties. The Agency also relied on internal engineering and environmental expertise as well as an independent accredited land appraiser that evaluated the submissions of each party on the value of land. The Agency used all of this information to determine the net salvage value of the land and track materials based on the most appropriate methodology.

For the purposes of these proceedings, the term 'net salvage value' shall be considered to mean the realizable market value of the track materials and land, less their associated dismantling, disposal and other relevant costs. These costs can include, but are not limited to, sales commissions, excavation, disposal, and environmental restoration.

Subsection 145(1) of the CTA states that the transfer of a railway line to governments is to be "... not more that its net salvage value to be used for any purpose ..." (emphasis added). This statement implies that a government, to whom the railway line is to be transferred, is not bound to use the railway line in a specific manner. This contrasts with subsection 143(1) of the CTA where the railway company can sell, lease or otherwise transfer a railway line for continued operation. The phrase 'for any purpose' set out in subsection 145(1) of the CTA indicates that in its determination, the Agency is not limited in the uses of the assets upon which the net salvage value is based.

The Agency finds that the contrast between these two sections indicates that the railway line is not to be valued as if for continued use as a railway. Under the legislation, the Agency may determine the net salvage value of a railway line once the vending railway company has complied with several preconditions. These include trying to sell the line of railway to persons who would continue to operate the line as a railway when the vending company determines that the lines need not be operated by the vendor. In the absence of either an offer for continued operation or when negotiations for transfer of a line have failed, the railway company must next offer to sell the railway line to governments. In these latter situations, the sale is not specifically for continued operations, it is for any purpose. The Agency finds that had Parliament intended the valuation process for transfers of railway lines to governments to be limited to its use as a 'going concern', it would have used this language, perhaps comparable to that used in section 143 of the CTA. Alternatively, were the valuation process to have excluded certain types of uses, Parliament would have used express language to this effect.

There are five distinct issues pertaining to the SL&H offer to transfer its interest in the railway line that the Agency is required to resolve in the course of determining the net salvage value of the railway line. The first is whether the net salvage value contained in a railway company's offer to transfer a railway line to governments can be subsequently adjusted for changes in market conditions or revised due to new information. The second issue is the determination of the precise interests included in the offer to transfer. The third issue pertains to the relevance of Decision No. 467-R-1996 dated August 16, 1996 (hereinafter the Chatham Decision), a net salvage value precedent under the National Transportation Act, 1987, R.S.C., 1985, c. 28 (3rd Supp.) (hereinafter the NTA, 1987), for determining net salvage value under the CTA. The fourth issue pertains to the extent to which terms and conditions contained in the offer to transfer can impact the net salvage value determination, and what that cost should be, if relevant. The final issue concerns the effective date of the transfer of the railway line.

SL&H offered its interest in the railway line to the Government of the Province of Ontario on May 12, 1997 at net salvage value, which was stated to be $1,096,400. In SL&H's application received by the Agency on May 26, 1998, the net salvage value of the line is now set at $2,054,651.

The City states that SL&H has not provided a satisfactory explanation for the increase, except for the inclusion of 0.85 miles of trackage which were inadvertently excluded from the original offer. The City submits that subsection 145(1) of the CTA requires the railway company to offer to transfer all of its interest in the railway line for not more than its net salvage value to be used for any purpose and that there is no provision in the CTA for the net salvage value to be changed from the amount set out in the statutory offer. The City maintains that a change in the offer is neither authorized by the statute nor is it fair since the governments receiving the offer have no ability to determine the parameters of the net salvage value before they are required to accept the offer within the statutory time limits other than based on the net salvage value identified in the offer.

SL&H states that the change in the net salvage value is due to an inadvertent omission of a portion of trackage, and that this error was corrected in the application. SL&H submits that the CTA requires the railway company to transfer all of its interests for not more than its net salvage value. SL&H expresses its opinion that an offer to transfer can be less than net salvage value, and the Agency is free to determine a net salvage value that is higher than what is contained in the offer. SL&H takes the position that the original offer made to the City is not at net salvage value, and there is no limit to the 'authorities' the Agency may consider to determine the net salvage value of the railway line. In addition, there is no obligation for the Agency to consider the terms of the statutory offer and prior negotiations, and it should not do so as it would be unfair if a railway company were bound by an offer which was not accepted, as it would place the purchaser in a no-lose situation.

Subsection 145(1) of the CTA states that, "The railway company shall offer to transfer all of its interest in the railway line...for not more than its net salvage value..." (emphasis added). The subsection provides no other requirements regarding the railway company's offer or the valuation itself. Further, under subsection 145(5) of the CTA, the Agency's role is only to determine the net salvage value of the railway line. In carrying out this role, the Agency may consider the offer to transfer and any information supporting the value contained in the offer. The Agency may also consider any other information supporting a different net salvage value. Ultimately, the Agency is also free to weigh all available information based on its evaluation of the merits and validity of that information.

Subsection 145(1) of the CTA requires railway companies to offer to transfer the line for not more than net salvage value which implies that they are free to offer the railway line at less than the net salvage value. In this case, the offer by SL&H dated May 12, 1997 stated, in part, that "... The NSV of the Line has been determined at $1,096,400 ...". The difference between the net salvage value in the offer to transfer and in the application does not result solely from an inadvertent omission. Rather, there was a revision of the net salvage value from the offer which pertained mostly to the value of the land component. The offer by SL&H was at net salvage value and, as such, SL&H should not, in the absence of extenuating circumstances, be able to revise its original offer.

However, the CTA allows the Agency to determine a net salvage value different from the offer, regardless if it has been offered by a vendor at what that vendor claims at the time is the net salvage value or less.

There are four segments of trackage included in SL&H's application to the Agency as indicated in Appendix 1. Segment 1 can be considered the main line track of the railway line and is 3.15 miles in length. Segment 2 is a 1.5 mile segment of trackage connecting the main line to the Guelph Industrial Park. Segment 3 is a 4.6 mile industrial lead. Segment 4 consists of trackage connecting the lead to 5 industries, totalling 0.74 miles of track. Portions of the railway line to be transferred to the City (Segments 3 and 4) are wholly located in the Guelph Industrial Park and are subject to a tripartite agreement between the GJR, CN, and the Canadian Pacific Railway Company (hereinafter CP). In its offer, SL&H offered to transfer its fifty percent interest of the track in Segment 3, (CN owns the other fifty percent of the track structures and the GJR owns all of the land in the Industrial Park but has no interest in the track) and Segment 4 was inadvertently omitted from the offer but was included in the application to the Agency.

The City submits that Segments 3 and 4 should be excluded from the Agency's determination of net salvage value because it is not clear from the tripartite agreement whether a sale of SL&H's interest in the track is allowed, and if allowed, would grant operating rights pursuant to that agreement and because Segment 3 was not included in The Notice of Discontinuance of Railway Lines dated December 6, 1996. The City concludes that these segments should not be included in an Agency net salvage value determination, rather they should be dealt with privately. The City also submits that the private sidings, Segment 4, should be dealt with separately as they are governed by private lease or licence agreements.

SL&H states that subsection 145(1) of the CTA presents the railway company with an obligation to transfer "all of its interest in the railway line", which has been fulfilled with the inclusion of Segments 3 and 4 as they constitute a portion of SL&H's interest in the railway line. SL&H states that whether its interest is limited by a tripartite, lease or licence agreement is irrelevant as the interest possessed by SL&H would be transferred to the City. SL&H maintains that the City cannot pick and choose which portions of SL&H's interest it wishes to purchase, rather it "... must take either 'all' of the Applicant's interest offered or nothing at all.".

The CTA provides that the railway company shall offer to transfer all of its interest in the railway line. Subject to other agreements, the City may accept or reject this offer. If it is accepted, the City must take all of the interest in the railway line offered.

The Agency determines that Segments 1, 2 and 3 shall be included in the net salvage value determination for two reasons. Firstly, SL&H included these in its offer to transfer the railway line, which was accepted by the City. Secondly, they were all integral to the rail service of the Goderich Subdivision between mileages 31.75 and 34.9 and, therefore, should be included in the net salvage value determination.

The Agency notes that at the time the offer was tendered on May 12, 1997, Segment 3 was not owned by the railway company. Under the tripartite agreement, SL&H would not have a fifty percent interest in Segment 3 until it completed certain payments to GJR, which it did on September 4, 1997. As SL&H had at least a beneficial interest in Segment 3 at the time of the offer, the Agency determines that it shall be included in the Agency's determination.

The trackage in Segment 4 is also integral to SL&H's operation of the railway line. The purpose of the railway line is to serve the industries located in the industrial park and its various segments must be taken as a whole. Without the trackage in Segment 4, it would be difficult for SL&H to provide the service necessary to make the railway line viable, and therefore, it is considered as part of the railway line.

The Agency notes that the trackage in Segment 4 was not included in the railway company's offer. On the one hand, adding railway lines subsequent to the offer can present undue hardship to proposed purchasers by way of creating uncertainty as to the interest that is included in the transfer. This should be avoided if the efficacy and integrity of the statutory transfer process is to be kept intact. On the other hand, when the railway lines which are subsequently added are functionally connected to the railway lines in the offer and when they do not represent a disproportionate addition, there should be some scope for them to be added. Accordingly, the Agency finds that Segment 4 shall be included as forming part of the offer for the purpose of this application.

The Agency recommends that all railway companies which propose to transfer railway lines pursuant to section 145 of the CTA should exercise due diligence in ensuring that the nature and extent of all their interests are represented in their offers to transfer railway lines to governments, rather than subsequently revising or amending the offer due to omissions - inadvertent or otherwise.

In summary, the Agency has considered the arguments presented by the City in support of excluding Segments 3 and 4 and the arguments presented by SL&H in support of including them. For the above reasons, the Agency finds that SL&H may include these segments in its application. In doing so, the Agency is mindful that the City has also offered valuations for the net salvage value of the track and other assets comprised in Segments 3 and 4. The Agency takes this as the City's acceptance that in this case, the Agency's mandate under Part III, Division V of the CTA extends to these particular segments.

The Chatham Decision

The City makes reference to the Chatham Decision wherein the Agency made a net salvage value determination of the CN Chatham Subdivision following an application made by VIA Rail Canada Inc. pursuant to subsection 168(6) of the NTA, 1987. The City has used the Chatham Decision to support its methodology for calculating net salvage value.

SL&H maintains that the Chatham Decision does not, nor was intended to, have applicability beyond the particular facts of that case. During that case, CP requested intervener status on the basis that it had an interest in the determination of net salvage value. SL&H refers to the Agency's rationale in denying CP intervener status as the Agency stated in Decision No. LET-R-16-1996, "Should the Agency be required to make a determination of net salvage value pursuant to the Canada Transportation Act, it will do so under the provisions of that Act at that time." In SL&H's view, the refusal to grant intervener status reflects the Agency's position that the determination of net salvage value is limited to the facts of that application and are not widely applicable.

SL&H states that unlike the NTA, 1987, under which the Chatham Decision was made, the CTA requires that governments have the first opportunity to purchase a railway line at net salvage value for any purpose after the railway company has offered it to private interests for 'continued operation'. In SL&H's opinion, this, in effect, grants a right of first refusal to governments for a potentially valuable asset of a railway company. SL&H also states that:

... The fact that the railway company could sell the railway right of way on the open market should be considered in evaluating the NSV of the line, since the 'salvage' value of the land may be very high indeed. The Applicant submits that the Act is not intended as a vehicle to force a railway company to transfer an asset for less than its actual value, as may have been the case in Chatham. Even expropriation proceedings allow the land owner fair market value of the land. ... The Applicant submits that there is no justification for what would in essence be a 'taking' of the Applicant's asset for less than fair market value. In such circumstances the Applicant's shareholders do not receive fair market value and the purchaser may receive a windfall profit.

The Agency finds that the determination in the Chatham Decision was made under different legislation and, as a result, the application of that Decision may be limited. The CTA differs from the predecessor legislation by providing, in part, that the railway line can be used for any purpose, whereas at the time of the Chatham Decision, the provisions of the NTA, 1987 contemplated that the railway line was intended to be used for continued operation of passenger rail service. This distinction in the legislation is important as it impacts on how net salvage value may be determined by the tribunal. The 'for any purpose' criterion requires the Agency to now consider a wider number of potential uses for the right of way, some of which may render it more or less valuable.

The relevant land assets and their characteristics vary between railway lines subject to net salvage value determination. The principle of applying a discount factor as adopted by the Agency in the Chatham Decision, is not in and of itself sufficient justification for the application of a discount factor in this case or indeed in respect of other railway rights of way. In determining the net salvage value of a railway line, the Agency may or may not apply an adjustment factor to the land depending on the specific characteristics of the right of way. In the same manner, the salvage costs of a railway line itself will vary according to the differences in the composition of each railway line. The Agency will determine, on a case by case basis, the various costs and adjustments, if any, used in determining the net salvage value of all the relevant components of the railway line.

The intention of the CTA is to ensure that the assets which comprise the railway line are transferred to governments at not more than their net salvage value. In the adoption of the net salvage value test, the intention of the statute is not to create a 'windfall profit' or to prevent shareholders from receiving fair market value from their assets. A net salvage value determination is based on the net realizable value of the assets which comprise a railway line, which is inherently what would be received for the assets on the open market.

The SL&H offer to transfer the railway line contains eighteen General Terms and Conditions of Sale. The City expresses its opinion that terms and conditions are not provided for in the CTA and that the inclusion of certain terms and conditions impact on the net salvage value of the railway line. The City submits that terms pertaining to the method of transfer (in this case, via a quit claim deed), costs of the land transfer (including surveys), the environmental condition of the railway line, the release and granting of indemnity to the vendor for all environmental claims from third parties and the assignment of interests in leases and other agreements impact on the net salvage value of the railway line.

SL&H states that the Agency should not determine the terms and conditions of transfer, and if it decides that it should, the Agency should only consider the limited impact that these conditions have on net salvage value.

In Decision No. 497-R-1997, the Agency stated that:

... Other terms and conditions may be relevant in determining the amount of the net salvage value of the railway line and are therefore subject to negotiation between the parties as provided for in the CTA. On this matter, it is important to note that if the parties are not able to resolve the issue, they may request the Agency to determine the net salvage value of the railway line pursuant to subsection 145(5) of the CTA. In such a case, some of these terms and conditions, such as those dealing with environmental matters, may well be considered by the Agency in making its determination. ...

The Agency will consider any terms and conditions attached to offers to transfer railway lines that impact on net salvage value. The specific impact of terms and conditions for this particular determination are outlined in the section entitled 'Impact of Terms and Conditions'.

SL&H requests that the Agency make a statement concerning the timing of the transfer of the property and set out three possible options. The first option entails the transfer of the railway line being effective the date upon which the offer was accepted. The second option is that the transfer would become effective upon determination of the net salvage value by the Agency. The final option tendered by SL&H is that the railway line would be transferred on a date specified by the Agency, after the Agency's decision on the net salvage value. SL&H submits that the first option is consistent with Decision No. 497-R-1997 as a binding agreement was reached and the establishment of the specific terms is all that is required. SL&H also submits that if the Agency finds the second or third option more appropriate, the Agency should set out some guidelines relating to the circumstance triggering the transfer and the consequent cessation of SL&H's obligations under the CTA.

In its Decision No. 497-R-1997, the Agency found that "... While further negotiations are required by the parties to complete the transaction, such further negotiations after the offer and the acceptance of the offer are specifically contemplated by the CTA. ...". Section 146 of the CTA states, in part, that the railway company's obligations for the railway line ends when the sale, lease or transfer is completed. The Agency finds that the transfer of the railway line is not completed upon acceptance of an offer, nor is it necessarily complete when the net salvage value is determined by the Agency. The CTA, specifically subsection 146(2), contemplates finality in the sale or transfer process as a condition precedent to the elimination of a railway company's obligations in respect of the operation of a railway line. The Agency determines that such finality can only occur upon the actual closing of the transaction.

The net salvage value that each party determined for the track assets of the railway line varied significantly. SL&H determined the net salvage value of the track assets by using an internal method developed for the purpose of establishing actual loss and calculating subsidy for uneconomic branch lines under a previous legal framework established under the NTA, 1987. In Working Papers Supporting Determination of the Net Salvage Value of Track Materials on the Goderich Subdivision From Mile 31.75 to Mile 34.9 including all associated Lead and Industrial Trackage, SL&H states that the net salvage value for the track assets is $754,651. SL&H used the Purchasing Department of CP as its source for the unit prices of track assets and the unit prices for scrap steel was determined from actual company sales. SL&H also determined a quantity of reusable timber and assigned it a value, while it assigned scrap timber a value of zero. For salvaging costs, SL&H used unit costs to lift a mile of track and applied it to the total miles of track to be lifted in this case.

The City retained the services of an engineering consulting firm to determine the net salvage value for track materials. The City submits that the value of the track assets for all segments of the railway line is $217,254. In determining the market value and costs for the determination of net salvage value, the City assigned unit prices which were based on the values used in the Chatham Decision. However, the City also estimated that all ties would be scrapped, and used a value of $15,000 per mile to represent the cost of salvaging.

Agency staff conducted a site inspection on July 6, 1998 to assess the condition of the track as well as to confirm the quantities of track material to be used in the Agency's determination of net salvage value. An inspection report was prepared and sent to all parties to confirm the quantity and condition of the track material included in the application. The quantities and conditions of the track assets used for the determination of net salvage value in this case incorporates information from the inspection report, the parties' submissions and comments thereon, as well as subsequent changes to the track quantities indicated by SL&H.

Each of the track assets, including rail, other steel items, ties and turnouts were also assessed as to the proportion that is reusable or would be scrapped, and for those parts that have to be scrapped whether there is a scrap value (e.g. steel) or whether they have to be disposed of (e.g. waste ties).

Broadly speaking, the Agency notes that reusable rail has a value which can be obtained from Canadian sources or sources in the United States. Scrap steel also has a value, depending on the quality of the steel to be melted down which can be determined from the same sources. In addition, the cost of salvaging and sorting the materials, transporting and storing them and/or disposing of them are to be taken into account. The cost of restoring the level crossings is also to be included.

As stated previously, SL&H determined the proposed net salvage value of the track assets by using an internal method developed for the purpose of establishing actual loss and calculating subsidy for uneconomic branch lines under a previous legal framework. The City's approach to determination of net salvage value was stated to be predicated on determining the market value for the assets and salvage costs.

In a valuation exercise involving net salvage value, the Agency is guided somewhat by the Railway Costing Regulations, promulgated pursuant to section 157 of the CTA. These Regulations prescribe items and factors that the Agency shall consider in considering railway costs in the course of carrying out its statutory duties under Part III of the CTA. Section 8 thereof states "Whenever specific costs are known or can readily be determined from [railway] company records, such costs shall be used in lieu of averaged or allocated costs." The Regulations, including section 8, have been and continue to be used for various regulatory purposes wherein the Agency and its predecessors have been called upon to calculate railway company costs. In this net salvage value determination, the Agency will use specific costs when they are known or can readily be ascertained as they are often the best evidence of 'value' in any given circumstance. However, if these costs are not known or cannot be substantiated, the Agency will rely on system-wide averaged or allocated costs. This approach is consistent with the Regulations and the definition of net salvage value as set out by the Agency, above. It is an approach which is respected in the industry and has provided objectivity and consistency over time.

Having said this, however, the Regulations are premised upon the principle of 'costing' the operations of a railway or portions thereof as a 'going concern'. Thus, relevant costs should include an opportunity cost or cost of capital representing the continued use of assets for railway purposes. It is to be noted, however, that under section 145 of the CTA, the valuation is to be conducted based upon a 'for any purpose' test.

During the site visit, SL&H and the City agreed that the track condition is satisfactory for the present use and does not require any major maintenance work in the near future. The speed is restricted to 10 mph on the main line. The maximum head wear is 9/32 inches, noted on one rail on the main line and on two on spurs. A maximum flange wear of 3/16 inches was noted at one location. On the main line, a maximum of 1/8 inch of flange wear was noted at three different locations, one of which is where the maximum head wear was also noted. The overall condition of rail ends is good, with few chips, and minimum batter.

The Agency concludes that the overall quality of the rail on the main line is good, while the rails on the leads show more wear. Based on field observation, in the eventuality of the track being removed, the percentage of rails that would be scrapped would be approximately 10 percent of the main line, and 25 percent of the other trackage, accounting for sharp curves and existing wear. Some rails recovered from main line would need to be cropped, before reusing. The only exception would be the trackage serving ABB which was in place long before the trackage located in the industrial park. Therefore a 90 percent scrap is assigned to this trackage. (1 mile in segment 2 )

There are nine different categories of assets which comprise the railway line. They are:

- Rail (100 lb and 85 lb)
- Turnouts (#9 and #7)
-Tie Plates (100 lb and 85 lb)
- Joint Bars (100 lb and 85 lb)
- Bolts (100 lb and 85 lb)
- Spikes
- Anchors
- Cross Ties
- Switch Ties

There were several discrepancies of note between the SL&H valuation of certain track infrastructure items and that of the City, such as the value of rail, turnouts, tie plates, joint bars, ties and scrap steel and other scrap material.

SL&H valued 85 lb rail as scrap, regardless of its condition. Based on actual sales records, SL&H determined that the unit value of scrap rail is approximately 20 percent of the value of new rail. The City concurs with this analysis and the unit values assigned to the 85 lb rail by both parties is comparable. Both parties also agree that the scrap 100 lb rail is to be valued at 20 percent of new, and the unit value assigned by both parties is comparable.

The valuation of reusable 100 lb rail, which formed the majority of the railway line, differs dramatically between the two parties. SL&H submits that the value of reusable rail is approximately 70 percent of the value of new rail, which is based on an analysis of the remaining value of the average rail in the branch line, and the terms and conditions contained in Branch line Rehabilitation agreements between the Government of Canada and CP. The City derived the value of 100 lb reusable rail by determining the sale prices of 100 lb rail from several vendors.

The Agency has examined the values assigned by both parties to the scrap rail, and has slightly modified them due to current market conditions. However, the Agency does not adopt the approach taken by SL&H in establishing overall system unit values for reusable rail. In determining the value of reusable 100 lb rail used in a particular railway line being transferred, the Agency must consider the market value of the particular asset when and where it is available, and not upon an averaged or allocated value of the asset. In its submission, SL&H also valued the reusable rail at 70 percent of the value for new intermediate rail, however, the reusable rail on the line was determined to be standard rail, which would yield a lower value even if it were to be valued at 70 percent of new standard rail.

In determining the salvage value of reusable standard grade 100 lb rail, current market values were solicited from four suppliers of track materials located in the United States and Canada. Quotes were obtained based on the quantity and quality of the available rail. Unit values were then calculated and these values were then applied to the quantity of reusable rail. Surveying a variety of sources from various geographic locations in this manner enabled the Agency to assess the market demand for the material across North America and assess the relative value and availability for the asset. The quotes received by the Agency indicate that there is no shortage or scarcity of standard grade 100 lb reusable rail as SL&H contends in its application, and that there is only limited market demand relative to the supply of reusable standard grade 100 lb rail. The overall approach taken by the Agency in valuing reusable rail yielded a gross salvage value for these particular assets, which is consistent with the specific costing approach (when available) contained in the Railway Costing Regulations.

In adopting this framework, the Agency finds that the third party costs to buy these assets is representative of the value of these assets upon disposal. The disposal assumption does not, therefore, permit an inclusion of cost of capital or opportunity costs for these assets.

In respect of the valuations of 100 lb rail, the Agency has accommodated the wide variation in quotes for reusable rail by removing the lowest quote received from market sources and then taking an average of the valuations received from the other market sources as well as the valuations of SL&H and the City. The inclusion of SL&H's valuation of reusable rail decreases the reliance on what SL&H terms as informal quotes, yet remains consistent with the philosophy that the market value is the more appropriate measure of the value of reusable rail. The Agency arrived at a value of $333 per ton for reusable 100 lb standard rail, $150 per ton for scrap 100 lb standard rail and $150 per ton for scrap 85 lb rail.

In respect of turnouts, SL&H states that the unit value of a turnout is approximately 50 percent of the value of a new one. Similar to the methodology used for determining the unit value of rail, the City developed its own market value to derive the proposed unit value of a turnout.

The Agency finds that SL&H's valuation is understated as it does not include several components which would form part of a turnout. These components include guard rails, rail braces, hook plates, sliding plates and heel blocks. Accounting for these components in the valuation of a turnout, the Agency determines that the value of a reusable turnout is $3,000 for this particular case. The scrap turnouts were valued at $170 per ton of material.

SL&H relied on the method for calculating net salvage value for branch line subsidies in order to determine the value of reusable and scrap ties. SL&H states that the value of reusable ties is 50 percent of the value of new #1 ties whereas the City argues that the market is flooded with ties and that demand is nonexistent, for the moment.

The Agency finds that a reusable tie has a value and that the present market condition should be considered as a temporary situation. As outlined above, the Agency finds that the approach based on determining the current market value is more consistent with the net salvage value determination process set out in CTA. Surveying market sources also allows the Agency to assess and account for conditions of shortage and surplus in its valuation of a particular asset. During the site visit, it was ascertained that the ties on the rail line are #2 grade, not the #1 grade applied by SL&H to determine the value of a reusable cross tie. Subsequent to the release of the staff report, the Agency surveyed additional railway material suppliers across Canada to determine the value of reusable #2 grade cross ties. The lowest quote received from market sources was discarded prior to averaging the valuations received from the other market sources. As a result, the Agency determined that a value of $6.40 per # 2 reusable cross tie is reasonable. For switch ties, the Agency took the value of a cross tie, converted it into a value per lineal foot and adjusted it to reflect the dimensions of the switch tie. The value determined is $1.05 per lineal foot. This amount was then applied to the total number of lineal feet of switch ties on each segment.

The approaches taken by the parties in valuing the other track materials (hereinafter OTM) did not differ from the methodology they used to value rail and turnouts. The Agency reiterates that the approach based on determining the current market value is more consistent with the net salvage value determination process as prescribed by the CTA. In arriving at unit values for OTM, the Agency surveyed several market sources to determine unit values for reusable and scrap materials and weighted them according to the values submitted by SL&H and the City. The Agency determined that reusable tie plates would be valued at $1.50 each, reusable joint bars would be valued at $5.00 each. The scrap tie plates, joint bars, bolts and anchors would be valued at $170 per ton of material. With respect to crossing signal materials, SL&H states that "... the additional costs associated with recovery of these components off-set the value to be extracted. As a consequence, StL&H has included a zero NSV for these components." SL&H also states that if the crossings are only partially restored, the crossing material would not be salvaged, however if a more full restoration were to take place, SL&H would then recover the materials and sell them for salvage value. The Agency notes that the values proposed by each party for the crossing components are the same. The Agency finds that crossing materials are valued at $4,000 each.

In summary, relevant track materials here include for example, rail, tie plates, joint bars, and scrap materials. Several sources were surveyed to determine unit values under current market conditions. As noted above, the relevant quantities were determined after the site inspection and minutes thereof were completed from additional information supplied by SL&H. The unit values for the various assets were multiplied by the respective quantities to arrive at the gross salvage value. The evaluation of the track assets and the quantities of those assets are included in tables which have been provided to the parties under separate cover which, due to the confidential nature of the information, will not form part of the public record. The Agency determines the gross salvage value for the track materials to be $573,549.

In estimating the cost of salvaging, SL&H combined unit costs for various activities associated with lifting a mile of track to arrive at a single unit cost per mile of track lifted, which was then applied to the total miles of track lifted. The costs of transporting the scrap rail and OTM to market and the serviceable rail to its yard is then added. SL&H acknowledges that in reality, the majority of railway lines are dismantled by contractors. The dismantling contracts tend to be unique for each line and the application to other lines is somewhat problematic. This is due to the fact that the payment for dismantling, sorting and stockpiling the track assets is often made partly in cash and partly in material ceded to the contractor. The value of the track assets which are ceded to the contractor in lieu of payment is crucial in determining the actual cost of a dismantling contract. SL&H submits that if the materials given to the contractor in lieu of payment are valued at the same unit prices as SL&H uses in a net salvage value determination, the dismantling costs per mile for a contractor would be two-thirds of those derived from a unit cost perspective. Therefore, SL&H expresses the view that its methodology is conservative, as a higher cost of salvaging reduces net salvage value, and therefore more appropriate than relying on estimates from contractors. Based on its methodology, SL&H submits that the overall cost of salvage per mile is $16,600 with a transportation cost of $4,700 per mile.

In its estimation of the salvage costs, the City obtained an estimated removal cost per mile from various contractors that specialize in this type of work. The City also relied on the information contained in the Chatham Decision to determine its dismantling costs. In the Chatham Decision, the Agency determined the cost of salvage was $20,000 per mile, based on submissions from CN and Agency expertise. The City adjusted this amount based on the type of rail contained on this portion of the Goderich Subdivision and the cost for restoring public crossings. As a result of this analysis the City estimates that the cost of salvage is $15,000 per mile.

With respect to certain evidence provided by SL&H and the City, which was based on dismantling costs for other railway lines, the Agency finds that this information is not a specific cost for the subject railway line and is too limited in order for it to be considered a system wide average. Further, as stated by SL&H, "... These contracts tend to be unique for each line and their interpretation in terms of dismantling costs is often difficult. ...". Therefore, in this case, the Agency will use a salvage cost of $16,600 per mile and an additional $4,700 per mile for transportation based on various system average unit costs.

In determining the salvage costs, the Agency did not apply salvage costs for Segment 4, as removal of the track is at industry expense. The Agency also included only the salvage costs for 0.54 miles on Segment 2, as the remainder of the salvage costs is the responsibility of the industry located adjacent to the trackage. The Agency finds that a cost must be added to cover the restoration of public crossings which could vary, according to the location. The Agency also added a restoration cost of $5,000 per crossing for a two-lane city road, and $10,000 for a four-lane city road. Furthermore, the Agency included a cost for the environmentally sound disposal of scrap ties which amounted to $12,251 for the scrap ties on the line (only 50 percent of the ties in Segment 3 were included).

The Agency finds that the salvage cost for the track assets amounts to $237,338.

The net salvage value for track material is obtained by subtracting the cost of removal and salvage of $241,486 from the gross salvage value of the track materials of $573,549. Under the tripartite agreement covering Segment 3, only fifty percent of the track assets are owned by CP, with the other half owned by CN. Therefore, only half of the value of that portion of track and the crossing signal material were included (Segment 3 - total length 4.65 miles). The Agency determines that the net salvage value of the track materials on the railway line is $332,063.

The net salvage value by segment is as follows:

Note: Numbers may not add due to rounding

The value of the land component of the railway line was appraised by both parties, each using a distinctly different methodology to arrive at a net salvage value. Each appraisal methodology was examined by an independent appraiser contracted by the Agency, who also arrived at a proposed net salvage value of the land.

The land on the right of way is approximately 25 acres. The railway line travels through a variety of zones where there are various uses for the land which abut the right of way including:

- Parkland
- Residential
- Industrial
- Commercial
- Agricultural
- Wetland

The valuations submitted by each party for the unadjusted market value of the land, prior to the application of an assemblage premium or a discount factor are approximately $140,000 apart. The difference in the net salvage values where an assemblage premium or discount factor is applied is quite substantial ($1,300,000 for SL&H vs $391,000 for the City). SL&H submits that a premium (which is called an 'assemblage premium') should be applied to the unadjusted market value while the City argues that the unadjusted market value of each block of land that constitutes the railway line should be discounted to reflect the reduction in value caused by the difficulties in disposing of the property. The Agency acknowledges that the wide discrepancy in the final estimates of value contained in these two appraisals is because of the opposite direction taken in adjusting their estimate of value.

SL&H submitted an appraisal report from Arthur Andersen & Co. (hereinafter the Andersen Appraiser). The appraiser proposes to establish that an upward adjustment - called an 'assemblage premium' - is required in estimating the final value for the subject property. The Andersen Appraiser proposes the market value for the right of way at its highest and best use - as a transportation corridor. In its report, the appraiser for SL&H states, "Our determination of the Highest and Best use of the subject property is for its continued use as a right-of-way corridor and in particular its continued use as a commuter rail line. ...". To determine the value as a transportation corridor, the Andersen Appraiser first divided the land into various 'blocks' and valuation categories based upon the adjoining uses and zoning classifications. The appraiser then undertook to find comparable sales for each type of block comprising the railway line. Each comparable sale was analyzed in order to arrive at a value for the portions of the right of way being appraised. The Andersen Appraiser applied adjustments to the comparable sales for various factors including time of sale, location, size and other relevant factors in order to determine the value of 'typical' land abutting the property. After arriving at a value for each block of land, the appraiser for SL&H made an upward adjustment to reflect the assemblage cost and to reflect that the "... cost involved is greater than the typical market value of the real estate on an individual parcel basis. When taking into consideration the time required to assemble, relocation cost of property owners, damages resulting from partial takings, etc., these costs are usually extensive. ...".

The Andersen Appraiser states that "... many existing corridors are extremely valuable as they exist and carry a premium value over and above the market value of the land on its own.". The Andersen Appraiser divided the land portion into 7 segments, consisting of 18 'blocks' of land. The value of each block was determined based on its size and comparable market sales for similarly zoned properties. The value for each block was then 'grossed-up' by an assemblage premium which varied depending on the zoning of the block. The unadjusted value of the blocks was determined to be $1,083,058. After applying the assemblage premiums to the blocks, the value of the land was determined to be $1,300,461, yielding an average assemblage premium of approximately 1.2.

In supporting the application of an assemblage premium, the Andersen Appraiser referred to articles giving several examples in the United States where an assemblage premium was paid for corridors continued as rail use and when new corridors were purchased for continued railway operations and provided internal sales data to support its application of an assemblage premium. While certain of the examples are in respect of the acquisition 'as new', others, including the Canadian example, were in respect of a corridor acquisition from a railway company for continued railway or urban transit operation by the purchaser.

The City maintains that it would be inappropriate to apply an assemblage premium as the subject right of way already exists and has existed for over ninety years and therefore no land assembly is required. The City also states that,

... this is a corridor that passes through parkland, wetland, residential areas and a cemetery, as well as commercial and industrial areas. If the City and the GJR were considering the establishment of a railway corridor today, there would be no assumption that the existing corridor would be the best or preferred location or that the costs of the assembly would increase its value. ...

It is the City's position that for the net salvage value process, the land must be valued based on the disposition of the rail line and not on its ability to be used as a transportation corridor for continued operations of a railway company. According to the City, the very discontinuance of the line by SL&H and the failure to transfer it as a continued operation indicate that there is no market for the railway line as a transportation corridor.

The Andersen Appraiser asserts that the highest and best use for this railway line is as a transportation corridor and this forms the basis for the application of an assemblage premium. This may have been applicable under section 143 of the CTA where railway companies may transfer a railway line for 'continued use' and anticipate a value for the line based upon the railway's perception of it being used as a railway transportation corridor. Under section 145 of the CTA, however, a railway company is instructed to offer to "transfer all of its interest in the railway line to the governments mentioned in this section for not more than its net salvage value to be used for any purpose ...".

SL&H cited some examples where such a market for a railway transportation corridor may exist yet these are instances where the sale is outside of a statutory transfer process like that set out under Part III, Division V of the CTA. As such, these examples are not applicable here.

In this case, the fact that the SL&H was unable to either sell, transfer or lease the railway line for continued operation under section 143 indicates that its market as a going-concern railway transportation corridor is, in SL&H's view, limited to non-existent and implies that the highest and best use here is not as a railway transportation corridor but as a source of income as an asset to be disposed of.

The Agency finds that the mere fact that the corridor is already assembled does not automatically mean that a premium is warranted. The Agency also finds that there is no evidence to indicate that this property ought to be valued based upon its sole use as a right of way for continued railway operations. The Agency also determines that, in this case, as an existing right of way that is subject to proposed transfer in the process contemplated under sections 145 to 146 of the CTA, an assemblage premium is not applicable.

The Agency's mandate under section 145 requires an examination of asset values for any purpose. This may mean, in any given situation, an assessment of values based on sales of disassembled parcels, likely to adjoining owners for non-railway purposes or indeed to no one at all if there is no such market.

The City submitted an appraisal report from S.W. Irvine and Associates (hereinafter Irvine and Farley). Irvine and Farley submit that the value of the land should be determined by discounting the unadjusted market value of the land to arrive at an adjusted value for the subject lands. The City argues that the determination of net salvage value pursuant to section 145 of the CTA requires a valuation assuming the disposition of the railway line. The fact that SL&H was not able to sell the line for continued operations as contemplated by section 143 of the CTA implies that the line is not valuable as a transportation corridor and that disposing of the line would require the railway company to parcel the line and sell portions to abutting land owners. The value that these parcels would be sold for would be less than the market value in order to overcome the unwillingness of the abutting land owners to purchase additional property as well as to account for the delays and difficulties in selling the parcels. Irvine and Farley state that most of the residential properties, adjacent to the right of way "... are 40 to 80 years old and range from fair to average in appeal. ..." and that the market values of residential properties tend to be lower in this area as much of the neighborhood has a certain stigma. Irvine and Farley state,

It is further my opinion that there would be very few, if any, purchasers for the individual parcels that make up the right-of-way other than adjoining owners who would wish to control its future use or alternatively, where it bisects their property or where acquisition would improve the use potential and/or appearance of their property. Such owners, realizing their advantageous position would, in all probability wish to acquire the lands for next to nothing. Indeed this appears to have been the experience of the CNR in most cases where their rights of way have been disposed of. It is for these reasons that it is my opinion that the individual parcels making up the right-of-way have substantially less market value than that of adjoining lands.

As evidence to support a 'discount factor', Irvine and Farley also state that their instructions were, "... to consider the subject parcels AS IF vacant and unencumbered (the rails removed at C.P.'s [SL&H] expense) and the properties sold for their highest and best use.". In other words, this means the properties should be valued as if sold to the abutting land owner. They maintain that for those portions of the subject property which are considered to have little or no alternate use (only one abutting owner), an appropriate indication of value of these portions of the right of way is from 10 percent to 20 percent of the (average) estimated value of the land in the general area, most probably 15 percent. This is strictly a judgment estimate, however in their opinion, it is reasonable and in line, all factors considered.

In valuing the line, Irvine and Farley apply only two different discount rates: either at 0 percent (no discount) or at 85 percent, assuming average sale prices for each block. Irvine and Farley state that with respect to the value of various portions of the right-of-way with no apparent alternate use, recent market activity involving similar properties is, to the best of their knowledge, limited to non-existent. The overall discount rate applied by Irvine and Farley is 68 percent.

Irvine and Farley state that each case is different and is based on the availability and willingness of the parties to negotiate. If a single purchaser is not found, the next step would be for the vendor (the railway company) to divide up and sell off individual parcels, thereby incurring additional costs (dealing with multiple owners, surveying, etc.), time to sell, and the risk that several parcels scattered along the line may never sell. Based on this, Irvine and Farley advocate using average discount factors.

In applying a discount rate, averages are used by Irvine and Farley for the block of land with the same highest and best use (determined by zoning blocks), rather than on an individual property-by-property basis. This is a matter of convenience for the purpose and intent of their report, and offers a reasonable compromise (similar to the manner that the Andersen Appraiser applied the assemblage premium by block).

SL&H asserts that the City should have given further consideration to valuing the railway line as a transportation corridor. SL&H states that existing corridors are extremely valuable as they exist and carry a premium value over and above the market value of the land under a break-up scenario. In SL&H's view, the discount rate of 15 percent used by Irvine and Farley is arbitrary and cannot be substantiated. SL&H submitted a table of sales of railway property for consideration which indicates that the average discount rate for properties sold by SL&H is approximately 25 percent.

The Agency finds that the application of an adjustment factor, either positive or negative, by individual block is both reasonable and appropriate as it more accurately captures the net salvage value of the railway line to be transferred. In an article entitled, Rail Corridor Markets and Sales Factors: Revisited referred to by the Andersen Appraiser, the author states,

If, however, the land is to be sold for other purposes, it is probable that only the parcels to which the railroad has fee simple title can be sold. This is usually referred to as liquidation.⁽¹⁾...

If liquidation has been determined to be the highest and best use of the corridor, the appraiser summarizes the ATF prices of the section to which the railroad has fee simple title to estimate the ATF prices of these sections. If liquidation of the fee-owned sections is considered to be the highest and best use of the corridor, the estimated total ATF prices of these sections are reduced by the estimated cost of the sales, the time involved, an allowance for those parcels not sold, and a profit for the purchaser if all sections are sold to one buyer ...⁽²⁾ (emphasis added)

The Agency is of the opinion that there is evidence of examples of discounting rail lands. There are many examples in which corridors, or parts thereof, have been sold at a discount to their across the fence (ATF) value. These were generally discounted within the appraisal itself. Other railway companies have been selling numerous parcels of land to various abutting land owners in southwestern Ontario. When sold individually and to abutting land owners, land parcels are often heavily discounted to reflect the lack of demand (i.e. no true competitive market exists) and to reflect the condition of these parcels (contaminated soils, differing elevations, irregular shape, etc.). Generally, they do sell in a surveyed and decommissioned state or the price is adjusted accordingly. No standard rule exists in terms of an exact amount and it becomes a judgement call on behalf of the appraiser.

Although the Andersen Appraiser does not use the Cost Approach to value, one of the premises of the assemblage premium is based on the cost to reproduce the corridor. In the Cost Approach, losses in value due to physical deterioration and functional and/or external obsolescence must be reflected. As there is an alternative route into the industrial park in this case and due to the fact that the subject railway line does not provide a direct route from 'point A to point B', and, in fact, requires a significant amount of extra mileage, a downward adjustment would be warranted for likely functional obsolescence.

Considering the nature of the abutting property, the relative willingness of the abutting property owners to purchase additional land, the probability of delays and difficulty in selling the line and the functional obsolescence, the Agency finds that, in this particular case, a discount factor is warranted.

The Agency notes that the discount factor is determined on a case by case basis depending on the individual characteristics of the railway line and the market in which it is located. As such, it is important to note that the adjustment may not necessarily always be negative as it is in this particular case.

In determining the land value for the railway line, the Agency evaluated each appraisal submissions as to the value for each block. When considered appropriate in order to reflect market dynamics, the Agency made adjustments to the values for each block and also determined the discount rate for each block. The discount rate varied based on the probability of the adjoining land owners purchasing the block. In some cases, no discount was applied similar to the approach of Irvine and Farley. A discount for the parkland and wetlands was not applied as the size of the blocks is so small that it would not be appropriate as the purchasing authorities would not likely require a discount based on the small size of the purchase. In other blocks, land may not have been discounted due to location and size considerations and/or the use of the land for industrial or commercial purposes. In some cases a higher discount rate was used. This was in cases where the abutting land was already under utilized, and that the likelihood of the abutting land owner purchasing the subject property would be slim since it would offer no additional benefit.

The Agency concludes that the sale of other corridor lands in other areas is not necessarily useful in applying a rate per acre/mile due primarily to location, size and abutting uses which differ, and especially without knowing the details of each sale. As such, the Agency examined all aspects of this particular property and in doing so, concluded that it was appropriate to apply four different discount rates ranging from 0 percent to 85 percent depending on the nature of the block.

SL&H submitted that if the Agency were to accept the concept of a discount rate, it should not be 68 percent as presented by Irvine and Farley rather it should be 25 percent and provided a table of comparable railway land sales as evidence. However, the sales shown are primarily individual parcels sold to abutting owners, not all of them are corridor sales. In fact, SL&H's submission illustrates that in attempt to sell a corridor, many sales to abutting owners are at a discount. In addition, the SL&H submission does not reflect the parcels that remain unsold in the corridor.

The Agency also questions the sale indicated under the 'Goderich Subdivision' which SL&H claimed to have had an adjustment factor of 461 percent. This corridor runs north from Guelph to Goderich (in fact, its terminus abuts the northern terminus of the rail line subject to this determination), and was sold as a corridor by CP to the Government of the Province of Ontario. The adjustment factor of 461 percent was based on what the land was sold for and SL&H's estimated appraised value. However, it was ascertained that the purchaser had a third party appraisal which appraised the land at more than double the purchase price which in fact would reduce the percentage of sale price to approximately 50 percent of the appraised value.

The unadjusted market value of the subject property as at July 18, 1998 is determined to be $1,186,974 (100 percent) and the resulting net salvage value of the subject property after applying the appropriate discount factor for each block is determined to be $504,080 which is an overall discount rate of 58 percent. The application of the discount rate is detailed as follows:

Notes: Numbers may not add due to rounding

Land is not a uniform commodity and therefore cannot be valued as such. The rate per acre and discount rate varied, even with respect to land with the same highest and best use. Land having the same highest and best use may have different rate(s) per acre and/or discount rates due to size, location, potential for development and various other considerations.

SL&H attached eighteen Terms and Conditions to the offer to transfer the railway line. The City identified three categories of terms and conditions which impact on net salvage value to varying degrees. The impact of these conditions are outlined in the following paragraphs.

There are two terms and conditions that pertain to conveyance of the land. Clause 3 of the General Terms and Conditions of Sale indicates the conveyance of the land assets will be via a 'quit claim deed'. Clause 10 indicates that the legal descriptions with respect to the rail assets may not be available at the time of closing. Clause 10 also indicates that the land assets are not surveyed and any survey would be at the expense of the purchaser.

The City submits that,

the transfer of land contemplated by Section 145 of the CTA is to be by way of deed in a form and with a legal description acceptable for registration in the Land Registry Office. It is therefore submitted that the requirement contained in Clause 10 of the General Terms and Conditions of Sale, namely that all costs of the land transfer including surveys are to be paid by the purchaser, not be attached as a condition to the transfer. If this requirement is to be imposed, it is respectfully submitted that the cost of such surveys should be deducted from the NSV.

SL&H states that it undertakes to provide the City with registerable transfers to the property and to provide, register and pay for such surveys if it is required by the local land registry office.

The Agency finds that these two terms and conditions would have an impact on the net salvage value of the railway line. When land is sold, it is generally surveyed and decommissioned, or the price is adjusted accordingly. If the land was previously surveyed and legal descriptions and plans for the land existed and title is intact, transfer via a quit claim deed would not impact on net salvage value. However, if the land titles were to be transferred without knowing the precise acreage or any encroachments or encumbrances that exist, a measure of uncertainty would be forced on the purchaser. This uncertainty would undoubtedly affect the purchase price, as the vendor would have to compensate for the marginal utility lost to uncertainty. In this case, however, SL&H has undertaken to provide the City with registerable transfers and to provide, register and pay for surveys if required, thereby effectively eliminating the effect of these two clauses. The Agency finds that there shall be no adjustment to the net salvage value for these conditions.

Clauses 5 and 6 of the General Terms and Conditions of Sale pertain to the environmental condition of the track.

Clause 5 provides that,

The Purchaser would acknowledge the prior industrial use of the land as a railway. ... Purchaser would provide the Railway with a Release from all environmental claims relating to the property and shall indemnify the Railway from all such claims from Third Parties.

Clause 6 states,

The Railway would make available to Purchaser all environmental assessments, surveys and information currently in its possession, and would cooperate with any environmental survey the Purchaser may need to undertake. The Railway would give no representation or warranty with respect to the accuracy or completeness of the environmental assessments, surveys or information. Purchaser would acknowledge that the assets referred to herein are being sold on an "as is, where is" basis.

The City asserts that the soils on the railway line are stained to the railway use and that all costs to remediate the soil and to remove surface contaminants such as discarded ties should be identified by an environmental audit and deducted from the net salvage value. The City is of the view that it should not be required to provide a release to SL&H, however if this is the case, an environmental audit is required to determine the value of such a release which should subsequently be deducted from net salvage value.

SL&H submits that there should be no discount for environmental conditions for the subject property as a Phase 1 Environmental Report conducted in December of 1997 did not identify any specific concerns to the railway line. SL&H maintains that there should be no discount for the environmental indemnity as the condition lends certainty to the agreement. SL&H states that even if the Agency decides that there should be an adjustment for these factors, it should be quite small as there is no evidence of any contamination and therefore the costs of remediation and any potential liability are minimal.

The Agency finds that generally the costs to remediate the property should be included in a net salvage value determination. The Agency also finds that the indemnity for environmental conditions can impact on the net salvage value as the indemnity provides 'certainty' for the vendor, and creates 'uncertainty' for the purchaser. In A Buyers Guide to Contaminated Land, the author, Dianne Saxe, states the following:

As a rule of thumb, contaminated property is worth no more than the normal property value minus the cost of cleanup, including associated costs such as legal expenses and interest. A further discount is appropriate to account for the increased delay, aggravation and uncertainty entailed in any cleanup. There may be a further discount to take account of any residual stigma that may affect some land even after the property has been cleaned up to provincial standards.⁽³⁾...

Allocating risk is a business matter. As a general rule, there is a direct trade-off between the price to be paid for the property and the risk to be assumed.⁽⁴⁾

The author also states that the three riskiest purchase agreements would be to buy the land at a discount, buy the land without any provision for environmental issues and to buy the land 'as is'; with the latter being the riskiest of the three. Environmental risk undoubtedly affects the purchase price of land, as the vendor would have to compensate the purchaser for the marginal utility that would be lost to uncertainty.

In order to estimate the impact on net salvage value here, a complete environmental audit with an estimation of costs is necessary.

Based upon the evidence before it, the Agency finds that the environmental risk in this case is minimal. In a Phase I Environmental Site Assessment, SL&H indicated that there are no petroleum storage tanks on the line, no locomotive fuelling occurred, there were no batteries stored along the Subdivision and there had been no incidents, leaks or derailments causing environmental harm along the subject portion of the Goderich Subdivision. The only environmental concern in the report was the location of a former gasoline service station which has two underground storage tanks located two metres from the right of way. Phase I environmental assessments are used to identify potential contamination that may require clean up and are common practice when a site is being transferred or leased or where financial assistance is being sought. From the report provided, the Agency concludes that most activities along and on the right of way appear to be environmentally benign with no evidence of contamination. The only activity of concern is an industry located on land leased from SL&H adjacent to the right of way which stores a small amount of chemicals on the exterior of the building. However, in the terms of its lease, the industry agreed to keep the premises clear of all environmental contamination, comply with applicable laws to maintain a clean environment, leave premises free of any environmental contamination and to correct any environmental contamination.

The City submitted that the costs to remediate the land for environmental contamination may include disposal costs for the ballast which it estimates to be $804,000. However, there is no substantiating information pertaining to the need, cost to remediate the land or the potential value of any environmental indemnity other than that offered by SL&H, which stated that the risks are minimal. In these circumstances, the Agency finds that the net salvage value shall not be adjusted for environmental concerns or the environmental indemnity for this particular railway line.

The Agency notes that in considering environmental conditions and indemnity, it can only determine the impact of these conditions on net salvage value.

Clause 15 of the General Terms and Agreement of Sales provides that,

On the Closing Date the Railway would assign to the Purchaser its interest in leases and agreements located on or related to the line.

The City asserts that it is not prepared to accept such an assignment as SL&H has not provided it with information with respect to the provisions of such leases or agreements. The City states that because the land was valued as if it is free and clear of encumbrances, liens, easements etc. with title that is assumed to be good and marketable, any obligation or provision in the lease impacts on the value of land and therefore the obligations contained in the leases and agreements should be valued and deducted from the net salvage value.

SL&H provided the City with copies of all agreements and leases.

The Agency finds that any obligation, financial or otherwise, resulting from a lease or agreement can impact on the calculation of net salvage value. The Agency is of the opinion that just as an obligation impacts adversely on the net salvage value, a positive net cash flow impacts positively on net salvage value. However, as described more fully above, net salvage value is determined on the 'for any purpose' basis. As previously stated, the Agency has concluded that this land is not to be valued as a transportation corridor, rather, it is to be valued on the basis of its use 'for any purpose' which means it is to be valued as if sold to abutting land owners at its net realizable value. Therefore, any obligation or agreement that results from the operation as a railway line will not be included. Only the obligations and agreements that would remain after the track has been lifted and land sold should be accounted for in the determination.

The annual fees that SL&H currently receives from agreements and from crossings amount to $377 per year. This amount does not include any annual adjustments contained in the crossing agreements. To determine the impact of these conditions, the Agency estimated a ten year stream of the net benefit for inclusion in the net salvage value determination with an interest rate of 5.56 percent which is the rate of return on Canadian bonds which mature after May of 2008. The result is a $2,833 increase in net salvage value.

The Agency, pursuant to subsection 145(5) of the CTA, hereby determines the net salvage value for the Goderich Subdivision between mileage 31.75 and mileage 34.9, the trackage to the CN interchange and SL&H's interest in the trackage located in the Guelph Industrial Park to be $838,976.