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DECISION NO. 471-R-1996


August 21, 1996

APPLICATION by Halifax Grain Elevator Limited pursuant to section 59 of the National Transportation Act, 1987, R.S.C., 1985, c. 28 (3rd Supp.).

File No. T 7435/96-1

BACKGROUND

On April 23, 1996, Halifax Grain Elevator Limited (hereinafter HGEL) requested the National Transportation Agency (hereinafter the NTA) to investigate certain rates established by the Canadian National Railway Company (hereinafter CN), with respect to the carriage of feed corn, feed wheat, and feed barley, in Freight Tariffs CNR 4436 and CNR 4484 for rail movements from southwestern Ontario and western Canadian origins to certain Nova Scotia destinations, and in Freight Tariff GTW 4501 for rail movements from various United States origins to certain Nova Scotia destinations. HGEL asked the Agency to find that these rates may be prejudicial to the public interest for the carriage of goods within, into or from Canada and to require CN to remove the prejudicial features in these tariffs and require CN to establish and maintain its rates for feed grain movements to Atlantic Canada, such that HGEL can fairly compete for the traffic. HGEL also requested that the NTA hold public hearings as part of its investigation.

On July 1, 1996, the National Transportation Act, 1987 (hereinafter the NTA, 1987) was repealed with the proclamation of the Canada Transportation Act, S.C., 1996, c. 10 (hereinafter the CTA). Although this application was filed with the NTA, it will now be dealt with by the Canadian Transportation Agency (hereinafter the Agency) as provided for in section 195 of the CTA. Section 195 of the CTA provides that proceedings relating to any matter before the NTA shall be continued by the Agency, and that these proceedings are to be dealt with and determined in accordance with the provisions of the NTA, 1987, unless otherwise ordered by the Governor in Council. No such order of the Governor in Council affects this matter.

LEGISLATIVE PROVISIONS

Subsection 59(2) of the NTA, 1987 states:

Where a person or organization has reason to believe
    (a) that the effect of any rate established by a carrier or carriers, or
    (b) that any act or omission of a carrier, or of any two or more carriers,
may prejudicially affect the public interest in respect of rates for, or conditions of, the carriage of goods within, into or from Canada, the person may request the Agency to investigate the rate, act or omission and the Agency shall make such investigation of the rate, act or omission and the effect thereof as in its opinion is warranted.

In carrying out its investigation, the Agency shall consider such factors as enumerated in section 60 of the NTA, 1987. If upon conclusion of its investigation, the Agency finds that the rate, act or omission is prejudicial to the public interest, the Agency may require the carrier to remove the prejudicial feature in the rates or conditions or make such other order as the Agency considers proper. The Agency is required to render its decision on an investigation under section 59 not later than one hundred and twenty days after the Agency receives the request unless the parties agree to an extension. With respect to this request made by HGEL, the Agency must render its decision by August 21, 1996.

POSITIONS OF THE PARTIES

HGEL

HGEL indicates that it is incorporated as a privately held company under the laws of the Province of Nova Scotia to operate the Halifax Grain Elevator as a private enterprise in lieu of its direct operation by the Halifax Port Corporation. It assumed operations in late 1985 under a long-term lease.

HGEL submits that it currently serves primarily three markets: feed grains for the Atlantic Canada feed market; wheat for milling purposes for Dover Mills Ltd., and Canadian Wheat Board winter export grain movements. HGEL states that at its inception, its major markets were Dover Mills Ltd. and Canadian Wheat Board traffic. Some of this traffic is delivered by water from Thunder Bay to the elevator. The feed grain movements which originate in western Canada and southwestern Ontario and terminate at various Nova Scotia destinations are handled by CN to Windsor Junction, Nova Scotia, where they are interchanged with the Dominion Atlantic Railway (hereinafter DAR) a subsidiary of Canadian Pacific Limited, for forwarding to destination. HGEL submits that, in 1986, it developed an alternative to rail transport for the feed grain traffic. This alternative was to transport the feed grains from Thunder Bay and southwestern Ontario to HGEL by water, and subsequent delivery by truck to destination. According to HGEL, this water-truck alternative resulted in HGEL capturing approximately 50 percent of the feed grain traffic destined to Atlantic Canada.

In 1994, DAR was sold to a short line railway known as the Windsor & Hantsport Railway Company Limited (hereinafter WHR). HGEL indicates that, in 1994, CN first established certain Nova Scotia points as CN points in Freight Tariffs CNR 4436 and CNR 4484. CN accorded this traffic the same or lower rates as applicable to its traffic originating in western Canada and southwestern Ontario and terminating at Moncton, New Brunswick. In addition, Freight Tariff GTW 4501 also established equal or lower rates to these same Annapolis Valley destinations on traffic from United States origins to Moncton. HGEL states that the Atlantic Canada feed market has become the most significant of its three markets, and that CN's tariff action has resulted in HGEL losing a significant portion of its traffic base. A continuing loss of HGEL's feed grain market will result in a corresponding loss of its complementary export grain traffic. Unless the traffic is regained, HGEL would have to close down its operations as it will no longer be commercially viable. HGEL maintains that the rates were established to deliberately drive it from the marketplace.

HGEL provides several reasons why CN's rates are prejudicial to the public interest. It is HGEL's position that a review of Freight Tariffs CNR 4436, CNR 4484, and GTW 4501 will reveal that CN's tolls progressively increase with distance travelled, except for movements beyond Moncton to Truro and the Annapolis Valley destinations. These destinations have rates which are either equal to or below the level of rates on traffic destined to Moncton. In order to set rates at these levels, HGEL is of the view

that CN absorbs both the additional costs involved in handling this traffic beyond Moncton, i.e., switching and transfer costs, and the charges of the WHR with whom CN interchanges its traffic at Windsor Junction for final delivery to the Annapolis Valley destinations.

CN's established rates are substantially less than the rates available over the only alternative carrier, i.e., the water/truck combination. HGEL submits that these rates are targeted toward HGEL's feed grain market and are deliberately designed to eliminate HGEL as a competitor.

HGEL is of the opinion that if CN's rates were permitted to remain at the current levels, its own operation would have to cease and this would create a monopolistic situation for CN. If the HGEL operation closed down, this would also affect the Canadian Wheat Board export grain tonnage and have an impact on the port of Halifax.

HGEL submits that these rates are representative of an acknowledged policy of CN to attract revenues to its Eastern lines without regard for its costs and the long-term viability of its eastern railway system. HGEL substantiates its claim by referencing comments made by CN's CEO in 1993See footnote 1.

HGEL claims that CN's rates also represent an acknowledged policy of CN to cross-subsidize unprofitable operations from profitable operations elsewhere, in order to attract traffic.

HGEL indicates that it is not a large company, and unlike CN, it does not have the benefit of federal grain subsidies or government-owned hopper cars, and it does not have the luxury of being able to operate unprofitably for substantial periods.

Finally, HGEL submits that CN's rates are anti-competitive and a violation of the national transportation policy. It is HGEL's position that the unreasonably low rate levels do not permit continuation of water competition for the traffic in question.

ANSWER OF CN

CN takes the position that HGEL is not a carrier in its own right, but rather a broker in specified commodities. The true transportation enterprises are the water and motor vehicle carriers. It is also CN's opinion that the Agency should look into the financial standing of HGEL to ensure that this application is not a means to divert attention from any financial difficulties being encountered by HGEL.

CN submits that its rates are predicated on market forces and not necessarily on costs incurred provided that the rates are compensatory and not predatory in nature. CN states that rates are governed by many competitive factors and not solely on HGEL's notion of distance.

In addressing the documentation filed by HGEL with respect to tonnages being handled over the years, CN expresses the opinion that the figures provided only illustrate the decline in traffic. The documents fail to specify which feed markets are being addressed, nor is specific reference made to the Annapolis Valley market.

CN notes that certain rates on traffic originating in Armstrong, Ontario had to be used in conjunction with a so-called "Prairie Tariff" in order to arrive at the total charges. Further, CN submits that HGEL is being selective in its choice of examples to use to support its case. CN indicates, for example, that on movements of corn from southwestern Ontario origins, the rates may be lower to Nova Scotia destinations as compared to Moncton; however, for movements originating at Thunder Bay, rates beyond Moncton are higher.

With respect to the disparities between rail rates and water/truck rates, CN points out that rail rates may be lower because of: a) inefficient operations in the HGEL distribution system; b) excessive profit margins sought by HGEL; and 3) the availability of backhaul traffic for rail which is seldom available to vessels delivering grain to HGEL. Further, the sale of the DAR line to the provincially-incorporated WHR has resulted in a lower cost structure for the interchange of traffic, making shipments more competitive with the water/truck distribution system. Finally, HGEL is faced with difficulties such as limited storage capacity, unavailability of water shipments during the winter and additional costs associated with loading and unloading of vessels. CN is of the view that its rates are not anti-competitive and not designed to eliminate competition, and that HGEL's difficulties are inherent to its own distribution system.

CN also submits its own estimate of the water/truck costs versus its current rail rates. CN's position is that HGEL's operation is marginally uncompetitive with CN and rates are not substantially lower as suggested by HGEL. HGEL figures do not account for rail movements from the Prairies to Thunder Bay or similar points "off-water" on the Great Lakes which would be built into the price of the commodity itself.

With respect to the use of government-owned hopper cars, CN indicates that it did not enjoy an undue advantage over HGEL since the vast majority of traffic moving into Nova Scotia was in CN-owned equipment. In a subsequent response to interrogatories, CN confirms that the majority of traffic is carried in government hopper cars. Where it did use these cars, it had to pay a per diem similar to other commercial traffic moving in foreign cars.

REPLY OF HGEL

In its reply to CN's answer to the application, HGEL submits that CN's views are incorrect and insupportable. HGEL states that no evidence has been presented which would suggest that its operation is inefficient. HGEL submits that there is ample evidence to demonstrate that HGEL operates efficiently, citing the evidence presented by several interveners. With respect to the efficiency of CN's operation, HGEL indicates that while CN claims that the emergence of WHR has resulted in a lower cost structure for the interchange of traffic, it is incorrect to state that these efficiencies enable CN to charge no revenue beyond Moncton to Truro, Windsor Junction, New Minas and Port Williams nor divisional charges to WHR.

With respect to backhaul traffic, HGEL indicates that Canada Steamship Lines does take advantage of the feed grain movements by handling gypsum to Quebec and Ontario, coal from Sydney and iron/ore from Sept-Îles to various destinations. HGEL also refutes CN's assertion regarding CN's ability to backhaul sugar, potash and salt in government supplied hopper cars in grain service, maintaining that this equipment could not be used to carry these commodities as a backhaul movement. Further, HGEL submits that the evidence demonstrated that CN used government hopper cars approximately 72 percent of the time, therefore its ability to take advantage of backhaul opportunities could not exceed 28 percent.

HGEL states that although CN pays a per diem charge and performs running repairs on the government supplied hopper cars, the costs associated with major repairs are passed along to the Prairie farmers through the Rate Scale, and these are major costs that CN avoids with respect to 72 percent of the traffic in question.

With respect to the issue of subsidies, HGEL reaffirms that, unlike CN, it has not received any payments from any municipal, provincial or federal government. HGEL submits that CN has received federal subsidies in excess of $100 billion. According to HGEL, this counters CN's position that "... in a commercially viable company, earnings from marketplace endeavours should support internal capital requirements."

HGEL also challenges CN's estimates of the per tonne cost of moving feed grain via water from Thunder Bay to Halifax and furtherance by truck to the Annapolis Valley. HGEL submits that the estimates developed by CN were based on "cargo flo" rates which require specialized facilities. No such facilities exist at either Port Williams or New Minas. HGEL also looks at movements to points on the Cape Breton & Central Nova Scotia Railway. (hereinafter CBCNSR). In light of the fact that CB&CNSR is owned by RailTex, Inc., a short line operator with extensive experience in Canada and the U.S., HGEL makes the assumption that the CBCNSR is as efficient as the WHR. Further, by comparing movements to Little Bras d'Or, Nova Scotia on CB&CNSR with those between Moncton and Port Williams, HGEL estimates that CN is absorbing $556.86 per carload to force HGEL out of business.

HGEL is of the view that CN's rates were not set based upon "market forces" as alleged by CN. HGEL submits that if this were the case, CN's rates would be competitive and not excessively low. HGEL refers to the Prince Rupert grain elevator situation where freight rates to Vancouver and Prince Rupert were equalized under the Western Grain Transportation Act, R.S.C., 1985, c W-8 (hereinafter the WGTA). However, this situation changed following the repeal of the WGTA at which time CN raised its rates on grain traffic to reflect additional distances involved.

HGEL is of the view that CN is also trying to convert this application into a compensatory rate complaint when the issue is specifically related to CN's pricing policies which are driving HGEL out of the marketplace and are contrary to the public interest. It also questions CN's explanation that the current rates on movements out of Armstrong, Ontario must be used in conjunction with the "Prairie Rates". HGEL is of the view that rates must be related to distance while CN submits that market forces dictate the rates. HGEL submits that CN's position is therefore inconsistent as "Prairie Rates" are developed by the Agency pursuant to the Rate Scale and "... those rates reflect a single linear relationship between distances and rates.".

In addressing CN's comments that HGEL is trying to protect an obsolete, high cost mode of transportation, HGEL submits that the water/truck mode is competitive with long-haul rail movements. The vessels handling HGEL's traffic accommodate up to 25,000 tonnes of feed grain as opposed to the 8,000 to 10,000 tonnes possible with a fully loaded unit train. CN does not operate unit trains of feed grain to Nova Scotia. HGEL states that this provides the water mode with enormous economies of scale. In addition, water is more fuel efficient than rail and does not incur the costs of owning and maintaining its roadbed. Although costs are incurred to deliver the grain from the elevator to the consignees, rail also incurs these costs.

To support its position that CN was receiving massive amounts of subsidies, HGEL refers to P.C. Order No. 1993-1603 dated July 22, 1993 which indicated that CN paid two dollars for the acquisition of the Canadian Government Railways (hereinafter the CGR) and the National Transcontinental Railway (hereinafter the NTR). HGEL is of the view that CN's contention that feed grain rates to Nova Scotia destinations were compensatory should be examined in the context of "... the federal government's gift of the Canadian Government Railways...".

Finally, HGEL submits that since approval for the sale of CGR to CN was not obtained pursuant to section 158 of the NTA, 1987, CN is operating over these lines unlawfully and without authority, and HGEL requests that the Agency make this determination.

INTERVENTIONS

The Agency received submissions from WHR, Halifax Port Corporation, Canada Steamship Lines, Dover Mills Limited, Mr. Joe Von Bommel, Parrish & Heimbecker Limited, Smith Brokerage Limited, the Nova Scotia Department of Agriculture and Marketing, Interpro Sales Limited, Bidalosy Farms Limited, Sproule Farms, the Nova Scotia Chicken Producers Board, the Nova Scotia Turkey Producers' Marketing Board, the Chicken Producers Association of Nova Scotia and ACA Co-operative Limited.

WHR, in opposing the application, states at the outset that the Agency does not have the jurisdiction to consider this matter under section 59 of the NTA, 1987 as WHR is a provincially-regulated railway not subject to the Railway Act, R.S.C., 1985, c. R-3. WHR adds that it does not support the arguments presented by HGEL. WHR is of the opinion that increased use of the rail routing is a result of efficiencies instituted by WHR and provision of improved service.

WHR is of the view that HGEL's service is not as efficient as rail service for several reasons. Customers want the stable, year-round service that rail provides. HGEL's competitiveness is hampered in the winter months as it has to inventory its feed grains resulting in interest and elevator storage charges which affect the overall price. Rail shipments are generally only transferred twice whereas HGEL must transfer feed grains up to five times. Increased transfers affect the efficiency and quality of the product. Although HGEL states that it was able to capture part of the market share of the feed grain movements, WHR submits that the reason for this is attributable to the fact that CP did very little to market the line, and as such, HGEL was able to attract some of the business. WHR asserts that tariff action did not cause HGEL's traffic loss. Rather, it was competition from an alternative mode of transport.

With respect to the railway's costs, as a provincially-regulated short line railway, WHR submits that it operates in an entirely different manner than its predecessor, DAR. It is able to move traffic at a lower unit cost than CP and it has established an interline rate with CN. When CP operated the line, no such interline rate could be established. WHR also adds that CN does not pay it divisional charges as alleged by HGEL. In its application, HGEL submits that terminal switching costs and costs associated with the transfer of traffic at the CN/WHR interchange were expensive elements of the total line haul costs; however, WHR submits that HGEL's views are incorrect in the present context. CN offers a lower tariff than the one prevailing when CP operated the line because of the reduced costs of operating a short line railway, and consequently, the reduced charge payable to WHR. As WHR is an efficient delivering carrier, this has enabled CN to offer reduced unit costs as well.

WHR also comments on HGEL's position of having to close down operations unless it could recapture its share of the Atlantic feed grain market. WHR submits that this application only relates to a small segment of the Atlantic Canada feed market, and if HGEL's business is so tenuous that a price variation could result in closure, the business is operating on precarious grounds. It would therefore not be in the public interest for the Agency to order a rate increase for CN so that a competitor could stay in business.

In closing, WHR requests that the Agency dismiss HGEL's complaint in light of the absence of Agency jurisdiction, the inaccuracies and omissions contained within the application, and on the basis that the complaint does not disclose any negative impact on the public interest.

In replying to an Agency request for further information, WHR clarified some of its previous submission. The Agency accepted the submission and provided HGEL the opportunity to reply to the points of clarification. WHR submits that it did not pay 'divisional charges' to CN, as suggested by HGEL. WHR charges CN a specific per-car fee. This loaded car fee is a flat charge regardless of the commodity or distance carried. WHR states that there is no evidence that HGEL has ever asked CN for a rate to Port Williams.

According to WHR, the purpose of the short line industry is to make rail services more economic for society as a whole, and the NTA, 1987 should not be used to support companies unable to withstand competition. WHR further submits that HGEL had solicited support for its application among area customers without mention of its request to increase rail rates.

HGEL subsequently replied to WHR's supplementary comments. HGEL submits that WHR charges to CN are not reflected in CN's tariff rates. Since both WHR and CBCNSR are totally reliant on CN for long hauls, it is CN that dictates the terms of its arrangements with each short line company.

HGEL indicates that it had approached WHR with respect to the possibility of direct WHR service to HGEL via trackage rights arrangements, but received no reply.

HGEL states that despite WHR's comments that the vast majority of traffic moved, without adverse impact, by rail prior to the inception of HGEL in 1986, rail rates had nonetheless increased by 24 percent during the period 1982-86.

According to HGEL, despite WHR's alleged efficiencies, CN's rates beyond Moncton were equal to, or lower than, its rates to Moncton, and WHR has not explained how its efficiencies had permitted CN to operate beyond Moncton for no revenue.

In response to suggestions that the water routing has inefficiencies, HGEL indicates that its transportation arrangement had several benefits including year-round local inventory and 24 hour-a-day, seven day-a-week service, and adds that it continuously monitors quality and thus offers uniform product.

Finally, HGEL notes that WHR has not rebutted comments on CN's rate increases prior to 1986, the absence of alternatives to move traffic, CN's pricing beyond Moncton, or the advantages in the HGEL transportation arrangement.

Halifax Port Corporation (hereinafter HPC) expresses concern that the operations of HGEL would not continue. In its view, HGEL has operated the grain facility economically and efficiently despite factors such as the termination of the "At and East" rail subsidy program. HPC submits that the elevator is important to the interests of Atlantic agriculture and to Dover Mills Limited. HPC also indicates that bulk vessels calling inbound with grain can handle outbound gypsum movements. The economics of the port's gypsum trade could be adversely affected should grain movements by water decline or cease. Continued operation of the elevator is important as a generator of economic activity.

Canada Steamship Lines (hereinafter CSL), in support of HGEL, opposes the actions being taken by CN especially CN's utilization of government-owned hopper cars. In CSL's view, the sustained use of subsidized equipment which bypasses the elevator would lead to the elimination of marine service for grains from western Canada into the port of Halifax and may lead to a rail monopolistic situation.

Dover Mills, in support, states that HGEL is the essential conduit for receipt, storage and delivery of milling wheat to its facility. Dover Mills submits that without the elevator, it would be unable to operate competitively against the mills in Montréal. Its mill is the only commercial flour mill east of Montréal. Dover Mills indicates that most of its 80,000 metric tonne annual wheat purchases arrive by vessel during the months of seaway clearance in order to build sufficient inventory to carry its operation until spring. Rail is used only to supplement gristing needs. Direct rail movement to its facility is competitive with water. However, when the elevator is required to supplement its storage capacity, rail is more costly by approximately 25 percent.

Mr. Joe Von Bommel, in opposition, expresses the view that there is nothing wrong with CN hauling grain at a loss if it is willing to do so.

Parrish & Heimbecker Limited (hereinafter P&H) submits that there is a unique situation in the Atlantic region given that there are two available transportation systems to users. It is unique because each mode is a monopoly unto itself. If the CN-WHR mode ceased, the region would be totally captive to the water-truck distribution system. Accordingly, P&H is of the view that it is of paramount importance to maintain both modes from the end users perspective.

Although the grain elevator requires substantial renovation work to continue to be viable, P&H indicates that spending should be examined carefully in order to avoid creating an imbalance between rail and water.

Smith Brokerage Limited, in support of HGEL, indicates that HGEL is important to the maritime livestock industry as transportation by water has often been the most cost-efficient method. With the potential sources of grain/proteins for the livestock industry becoming global in nature, Smith Brokerage is of the opinion that it is imperative that there is an elevator to handle grain/proteins by vessel.

The Nova Scotia Department of Agriculture and Marketing submits that with the termination of the Feed Freight Assistance Program in 1995, it is critical that a highly efficient and competitive grain transportation system be maintained and improved. Any actions taken should consider the interests of the many farm businesses that have been seriously hurt by the changes in grain transportation programs in recent years.

Interpro Sales Limited, in support, submits that the elevator is the only way of receiving grains from foreign countries in addition to or as an alternative to grains grown in western Canada. If the elevator closed, the nearest elevator is located in Québec, some 677 miles away. According to Interpro, that is too distant for a high intensity agriculture community. Further, Interpro states that it expects to be exporting Maritime grain within a few years; without the elevator, however, this would not materialize. Interpro is of the view that CN is basing its rates on what the competition charges and if HGEL were to close, rail and trucking rates would increase by $30.00 per metric tonne within eighteen months as there would be no competition.

Bidalosy Farms Limited (hereinafter Bidalosy) in support of HGEL, submits that Nova Scotia livestock farms will require growth in the future in order to keep the industry competitive. Access to competitively priced grains and oilseeds is the single most important factor in permitting this growth. Bidalosy's position is that CN would take advantage of the situation if access to water transportation were no longer an option. With the elimination of the Feed Freight Assistance Program and the changing regulations that allow more flexibility for importing feed grains, Bidalosy is of the opinion that there will be more options to purchase offshore grains and oilseeds. It is also Bidalosy's view that the livestock industry could not withstand any more negative impacts from increased feed costs and still contribute towards the Maritime economy.

Sproule Farms submits that HGEL has been a significant benefit to Sproule Farms and the livestock industry in the Maritimes. Its position is that transporting grain by water into Halifax has been the most efficient source of grain and has been a big factor in ensuring the most economical transportation costs. Livestock producers and Sproule Farms depend on sourcing grains and proteins from the most economical points. Sproule Farms also states that the elevator would soon be required to handle offshore products.

The comments of the Nova Scotia Chicken Producers Board and the Nova Scotia Turkey Producers' Marketing Board views are similar to those of Sproule Farms. These interveners add that, in order for the producers of Nova Scotia to sustain outside competition in their finished products, the necessary repairs to the elevator should be made.

ACA Co-operative Limited (hereinafter ACA) states that it is involved in the agricultural production, processing and marketing of Maritime poultry and egg producers. Its organization and the poultry industry in Nova Scotia rely heavily upon feed ingredients brought into the region by rail and through HGEL. ACA indicates that prior to 1994, no feed grains were received into its mill by rail as rail was not competitive with HGEL. When the WHR commenced operations, rail rates became competitive with HGEL's marine/truck routing and ACA then utilized both companies. As feed is one of the largest input costs of the poultry industry, ACA indicates that any cost fluctuations would have a serious impact on the entire industry. ACA states that its dependence on both water and rail transportation modes makes it vulnerable if either mode increased its service costs.

The Chicken Producers Association of Nova Scotia stresses the importance of year-round cost-competitive supply of feed grains. The existence of the elevator is a vital component in ensuring both supply and competitive transportation rates.

PROCEDURAL MATTERS

Interrogatories and motions for disclosure

On May 14, 1996, CN submitted a series of interrogatories for reply by HGEL. HGEL responded to these interrogatories on May 27, 1996.

On May 14, 1996, CN also filed a motion requesting that the NTA require HGEL to disclose the confidential portions of Appendix F of the application. HGEL responded that the information should not be disclosed for reasons of competitive sensitivity. On June 3, 1996, the NTA provided an aggregated summary of the confidential material to CN.

On May 29, 1996 HGEL served a list of 22 interrogatories on CN. On June 13, 1996, CN provided its response; however, many of the questions were not answered, as CN claimed that the replies were either unavailable, confidential or the questions irrelevant.

On June 21, 1996, the NTA submitted questions to the following parties: HGEL, CN, Dover Mills, CSL, and the Atlantic Provinces Transportation Commission. The questions sought to obtain various operational, costing, commercial and financial information. In due course, each party replied, answering questions to the best of its ability. Following an NTA request, CSL filed a second set of answers that expanded upon certain of its original answers. This second reply was filed with a claim of confidentiality.

On June 19, 1996, HGEL filed a motion that asked the NTA to require CN to file more complete answers to its interrogatories. On June 21, 1996, the NTA ordered CN to answer certain of the original interrogatories as well as some interrogatories that were revised by the NTA. On June 27, 1996, CN filed two versions of its answers to the revised questions, a 'complete' version with the NTA and an 'expurgated' version with HGEL. CN indicated that some of its answers were filed under a claim for confidentiality, pursuant to the provisions of the National Transportation Agency General Rules, SOR/88-23 (hereinafter the General Rules).

HGEL subsequently filed two motions asking the NTA to address CN's refusal to provide certain information. The motions complained at the lack of depth of the replies and further alleged that CN, in several instances, was in contempt of specific directions contained in the NTA's revised questions of June 21. On July 19, 1996, the Agency ruled on the motions, ordering, in part, HGEL to specify, pursuant to subsection 11(6) of the General Rules, the relevance of the information sought and the public interest in its disclosure. CN was provided the opportunity to reply.

On July 22, 1996, HGEL filed its submissions respecting the disclosure of nine specific questions. For each question, HGEL filed its comments respecting disclosure and the public interest. CN filed its reply on July 24, providing its comments as to the potential harm of disclosure.

On July 31, 1996, the Agency made its final determination with regard to HGEL's disclosure submissions, noting that HGEL had sufficient information on most of the specific questions, and that one question could not be answered. The Agency disclosed additional information to HGEL with regard to feed grain volumes handled by CN and the WHR from Moncton to points east from 1993-1996. The Agency ruled that it would not release an appendix to the CN-WHR Operating and Marketing Agreement as this would likely result in specific and direct harm due to confidential commercial contents. The Agency also ruled against the disclosure requested by HGEL of CN internal documents relating to CN marketing, strategy and financial studies relating to its Atlantic Provinces operation. A further ruling was made against disclosure of CN's internal and external correspondence relating to decisions to add points and reduce its tariffs on feed grain traffic.

HGEL, in response to the Agency's determinations in its July 31, 1996 letter, made further comments on August 6, 1996 regarding its motions for disclosure of information by CN. On August 13, 1996, the Agency ruled that CN and WHR documents regarding interchange agreements and marketing, provided to HGEL by CN, were not public documents in the proceedings. The Agency noted that no further disclosures in relation to the HGEL interrogatories need be made.

On August 8, 1996 HGEL requested that the Agency staff auditors' report on HGEL be treated as confidential due to its sensitive nature. CN replied on August 8, 1996 to request an expurgated version of the report. The Agency provided an expurgated version of the Agency staff auditors' report to CN on August 12, 1996.

On August 8, 1996 CN sought leave to comment on traffic volume evidence submitted by HGEL in its August 6, 1996 letter, claiming it was new evidence. On August 12, 1996, the Agency allowed CN to file further comments determining that the information differed from that supplied to CN by HGEL on May 27, 1996.

On August 13, 1996, the Agency directed the HPC to provide it with an engineering study of the facilities of HGEL which the HPC had in its possession.

Representations regarding the confidentiality of this study were solicited from the parties and received on August 20, 1996. The reply of HPC was received on August 20, 1996. The Agency ruled that this study should be treated as confidential and not disclosed to the parties. On review of the engineering survey report provided by HPC, the Agency determines that the information contained therein to be of limited utility and relevance in rendering its decision.

The Agency's treatment of information submitted to it under a claim of confidentiality and requests for disclosure was consistent with sections 11, 12 and 20 of the General Rules. Following the various motions for disclosure in these proceedings, the Agency, in some cases, required that the information be disclosed or that a representative summary of the information be disclosed. In other cases the Agency summarized the information itself and disclosed it. In several instances, the Agency found that the information submitted was commercially sensitive and did not order disclosure.

Motions respecting CN's acquisition of CGR

In its interrogatories to CN, HGEL asked whether CN had obtained the approval of the NTA with respect to its acquisition of the CGR from the federal government in accordance with the provisions of the NTA, 1987. If yes, HGEL sought full details of the approval that was given.

CN responded stating that no NTA approval was required as per section 23 of the Canadian National Railways Act (hereinafter the "CNRAct").

In its reply dated July 2, 1996, HGEL claimed that CN's interpretation of section 23 of the CNRAct was incorrect. HGEL stated that CN was in fact subject to section 158 of the NTA, 1987, and its acquisition of the CGR without approval of the Agency is therefore unlawful. HGEL submitted that CN is, therefore, operating over the CGR lines unlawfully and without authority, and requested the Agency to so find in its determination of HGEL's application under section 59 of the NTA, 1987.

HGEL stated that the approvals required of CN under the CNRAct are in addition to that required from the NTA under section 158, NTA, 1987. That is, HGEL stated that both CN and the Government of Canada are railway companies within the meaning of subsection 158(1) which provides:

    158(1) Subject to the approval of the Agency, a railway company may enter into an agreement with any other company, whether within the legislative authority of Parliament or not, to sell, lease or otherwise convey to the other company a line of railway or a segment thereof and, in such case, the railway company shall be deemed not to have abandoned the line or segment for the purposes of this or any other Act.

Regarding the Government of Canada, HGEL noted that section 2 of the Railway Act provides that 'company' includes a person, and 'company' or 'railway company', when it means or includes 'railway company', includes any person having authority to construct or operate a railway.

HGEL asserted that the Special Act which authorized the construction of the Intercolonial Railway was "An Act respecting the construction of 'The Intercolonial Railway'", S.C. 31 Vict. Cap. XIII, assented to December 21, 1867. The Special Act which authorized the construction of the NTR was "An Act respecting the construction of a National Transcontinental Railway", S.C. 3 Edward VII. Chap. 71, assented to October 24, 1903. In each case the Government of Canada had the authority to construct and operate the railway.

By its letter dated July 11, 1996, CN responded to HGEL's reply, claiming, in part, that the reply involves a supplementary application for a finding on a question of law e.g. status of the CGR following its acquisition by CN, which theretofore had not been part of the pleadings. CN asked that this part of the reply be struck from the record as being totally irrelevant to the proceedings, or alternatively, CN should be given an opportunity to rebut HGEL's claims relating to this issue.

The Agency granted CN the opportunity to respond. In its letter dated July 22, 1996, CN responded, stating, in part, that HGEL's request for an Agency ruling on this issue constituted a distinct and separate application within the main application which was highly improper, a diversionary tactic and would, if answered by the Agency, set a "dangerous precedent". CN also said that HGEL is estopped from requesting such a ruling since such a request is inconsistent with its main application. That is, HGEL cannot elect to have the impugned rates investigated as being against the public interest and then claim that there is no lawful authority for these rates in the first place.

CN also submitted that HGEL lacked the status to submit this application, claiming that HGEL's rights were circumscribed by the language of section 59 of the NTA, 1987, that is, to request the Agency to investigate the rates being complained of. CN also asserted that a determination of this request by the Agency was beyond the statutory mandate of the Agency.

CN stated that Order in Council P.C. 1993-1603 (July 22, 1993) terminated CN's management and operation of the lands entrusted to CN by the Government of Canada, with such termination to be effective upon the date of transfer to CN of the CGR lands. CN stated that this Order deals only with the "lands entrusted" to CN in that all other original railway assets were replaced, substituted or replenished by CN itself, the ownership of which was never in dispute.

The lands were transferred to CN under the Order in Council which Order was predicated on paragraphs 23(2)(a) and 23(3)(b) of the CNRAct. These provisions permitted, contingent upon the approval of the Governor in Council upon recommendation of the Minister of Transport, agreements for the purchase or sale of all or part of the railway or the undertaking between two or more companies comprised in the National Railways (being defined to include the CGR and CN).

CN then indicated that subsection 23(9) of the CNRAct prescribes that no application to, or recommendation by, the Agency is necessary with respect to an agreement made under subsection 23(2). Further, CN stated that section 16 of the CNRAct excluded the application of those provisions of the NTA, 1987 that were inconsistent with the CNRAct and that section 158 of the NTA, 1987 was an example of such inconsistency in light of subsection 23(9) of the CNRAct.

By letter dated July 24, 1996, HGEL responded. HGEL claimed, in part, that the status of the CGR is an essential element of the public interest in this investigation. That is, if CN is operating without the necessary authority then these rates are unlawful and the charging and collecting of such rates is, therefore, not in the public interest. Accordingly, HGEL stated that it had the standing to raise this issue and the Agency the jurisdiction to determine it.

HGEL stated that the Order in Council did not approve an agreement for transfer of the subject lands since, unlike certain precedents in respect of similar acquisitions, this Order made no reference to section 23 of the CNRAct. Notwithstanding, HGEL stated that the transfer of the CGR could not have been authorized by section 23 in any event. On this point HGEL noted that Her Majesty the Queen in Right of Canada is neither a company comprised in the National Railways nor a "company" approved or designated for the purpose and, therefore, is outside the enabling ambit of section 23.

HGEL concluded by saying that the Order specifically excludes NTR lands, which sale is subject to the provisions of the NTA, 1987. Since the NTA, 1987 specifically binds the Crown, then the Crown and CN must comply with section 158 thereof.

The Agency has carefully examined all the pleadings relating to HGEL's request for an Agency ruling that CN is operating over the CGR lines unlawfully and without authority. In particular, the Agency has examined the subject Order in Council, the transfer Agreement filed as Appendix 'E' to HGEL's letter dated July 2, 1996, and the relevant legislation.

The Agency finds, notwithstanding the failure of the Order to reference section 23 of the CNRAct, that the clear intent of the Order and the Agreement incorporated by reference into the Order was to give effect to a transfer of the CGR lands and the NTR lands to CN. The Agreement in support of this Order is between CN, the Commissioners of the NTR and the Crown, with the latter two signing on behalf of the two Special Act railway companies. It represents an agreement for the purchase and sale of the whole or part of a railway between two or more companies comprised in the National Railways. As such, it falls within the scope of subsections 23(2) and (3), CNRAct.

The Agency notes that paragraph (b) in the Order excludes NTR lands, but also notes that paragraph (a) thereof provides authority for the Agreement itself. Clause 2 of the Agreement, in turn, transfers the NTR lands. Accordingly, the Order and Agreement embrace both transfers.

Although subsection 2(1), NTA, 1987 is a general provision which binds Her Majesty the Queen in Right of Canada to the provisions of that legislation, subsection 23(9) of the CNRAct is a specific provision which grants an exemption from the NTA, 1987 in respect of certain purchases or sales of a railway. In this case, CN's acquisition of the CGR and the NTR fall within the scope of this specific exemption.

For these above reasons, the Agency denies HGEL's request and does not find that CN is operating over the Canadian Government Railway lines unlawfully and without authority by virtue of non-compliance with section 158, NTA, 1987.

Motions respecting Agency jurisdiction over the Windsor and Hantsport Railway Company

In its intervention to the Agency, WHR submitted that the Agency does not have jurisdiction to investigate HGEL's complaint because, as a provincially incorporated short line railway, WHR is not subject to the investigatory provisions of section 59 of the NTA, 1987. WHR states that this provision applies only in respect of matters arising between shippers and carriers that involve the carriage of goods by railways to which the federal Railway Act applies. By virtue of it being a provincially regulated short line railway, WHR submitted that the Railway Act is inapplicable to it.

HGEL, in its reply to the WHR arguments that its activities do not fall under the jurisdiction of the Agency, submitted that the Agency's investigation concerned CN freight tariffs and that CN had established destinations on the WHR line as CN local points, thus bringing it within the ambit of section 59 of the NTA, 1987. HGEL noted further that CN pays a charge to WHR for the movement of its traffic.

In a further submission responding to HGEL, WHR reiterated its position that section 59 of the NTA, 1987 did not apply, due to WHR not being caught by the Railway Act, and that it had not attorned to the jurisdiction of the Agency by virtue of providing its comments to the Agency. Moreover, WHR emphasized that payments by CN to WHR do not constitute divisional charges, but rather are payments of an amount per loaded car handled, regardless of commodity or distance travelled.

The Agency finds that HGEL's complaint in this case relates, in part, to specific CN rates to various Nova Scotia destinations, which include destinations located on the WHR, as per Tariffs CNR 4436, CNR 4484 and GTW 4501. These tariffs identify points on the WHR as local CN points. The rates in these tariffs are identified as CN through rates to these WHR destinations in respect of which WHR receives haulage fees pursuant to an Operating and Marketing Agreement. The Agency's jurisdiction to investigate such published rates is not impaired by the fact that a portion of the movement for such through traffic on a single rate occurs over a provincially-regulated railway.

AGENCY FINDINGS

The Agency determines that a public hearing is not necessary and that it can render its Decision based on the information on file.

Section 59, NTA, 1987

The Agency notes that this is the first application made pursuant to section 59 of the NTA, 1987 in which it has been asked to raise rates. Section 59 is normally utilized as a vehicle in which to bring complaints of excessive (high) rates, rather than rates that are alleged to be too low. Normally, rates alleged to be unreasonably low are also alleged to be non-compensatory, and come before the Agency pursuant to sections 112 and 113 of the NTA, 1987. However, these sections do not involve an express 'public interest' consideration by the Agency, and in the present matter, the public interest is central to the position of HGEL. Therefore, the Agency is investigating the allegedly low rates pursuant to section 59 of the NTA 1987.

Potential Impact

In its examination of the potential public interest ramifications of the withdrawal of HGEL from the feed grain market, the Agency has identified several potentially-affected parties, including the livestock/dairy industry of the Annapolis Valley and other users of feed grains, Dover Mills, the Port and City of Halifax, export grain trade ex-Halifax, Great Lakes marine carriers, the Seaway system and, feed grain producers in western Canada and southwestern Ontario. The Agency has focused its analysis on the parties that, in its view, would be most affected, as follows:

(i) Annapolis Valley customers

These users presently enjoy a competitive supply situation with respect to transportation services. In general economic theory, such a competitive situation encourages low pricing by the service-providers involved. This is brought out in several of the interventions submitted by end users.

HGEL alleges that if the rail rates are not adjusted, it would cease operations. The potential negative impact for Annapolis Valley customers is the potential for market abuse by a monopolist CN. HGEL's on-going existence ensures continued competition.

If there was a finding in favour of the application (or portion thereof), the Agency appreciates that there would be in an increase in current rail rates. Most interveners, however, recognize a requirement to ensure continued operation of HGEL. Some interveners also refer to significantly high rail rates prior to HGEL's commencement of operations. Some further cite potential opportunities to import products from other sources through HGEL. Access to these sources is perceived as necessary to ensure continued growth of the local industry.

(ii) Dover Mills

Dover Mills, among other potentially affected parties, has a unique dependence on HGEL; indeed, the two businesses are physically connected. Although Dover Mills can be served by rail, HGEL is its key supplier since it serves not only as a source, but also as a handling and storage facility for the mill. HGEL's storage capability allows Dover to take advantage of economical marine rates during the Seaway season to purchase most of its required annual volume of milling wheat. Dover Mills' submission stated that HGEL's continued operation is essential for its (Dover's) continued viability. Dover states that without HGEL, it would not be able to compete with Montreal-area mills, adding that it is the only commercial flour mill located east of Montréal.

Dover maintained that both rail and water should compete for available tonnage, in order to moderate prices. According to Dover, new sources of supply and markets for grains will continue to evolve, and that the continued operation of HGEL is necessary to permit potential sourcing of product from global origins. The receipt and storage options offered by alternative modes in cooperation with HGEL will offer the best opportunities for industry growth.

(iii) HPC

HPC described the importance of HGEL as a generator of economic activity for Halifax and the Port. This importance is accentuated by the dependence of Dover Mills on HGEL; Dover is described by HPC as making a significant economic contribution to the region. HPC further noted the importance of the marine carriage of feed grains as it represents the outbound haul for gypsum movements from Nova

Scotia to central Canada. According to HPC, the economics of the gypsum trade, representing volumes of more than three million tonnes annually, "... will be adversely affected should waterborne grain movements decline or cease."

(iv) Great Lakes marine fleet and the Seaway

CSL emphasized the importance of the outbound, i.e. from the Great Lakes to Halifax, grain trade as a return haul essential to the viability of inbound gypsum movements. According to CSL, because of the long-term nature of its gypsum contracts, it would be obliged to ship gypsum "... at a significant loss on a shuttle basis in the absence of the headhaul grain." Once the gypsum contracts have expired, CSL submits that (without the grain movements) the continuation of the gypsum trade would be uneconomic. Without this trade, water rates on gypsum would therefore increase, forcing central Canadian (gypsum) users to seek alternate sources such as U.S. producers, accessible via U.S. Great Lakes ports.

CSL also provided a brief description of the current Great Lakes fleet. According to CSL, several shipping interests, including the Meisner Family, James Richardson & Sons and Great Lakes Bulk Carriers have exited the Great Lakes market. CSL further points out that only certain portions of its fleet can serve Halifax; many of its smaller 'Lakes class' vessels cannot exit the St. Lawrence River. This signifies to the Agency that the industry is on a precarious footing, and amplifies the Agency's concerns that if the marine service redeployed, it would be difficult to restore ships to this trade.

Tariffs

The Agency has reviewed the tariffs referenced in the application of HGEL and has focused its analysis on the feed grain items of Tariffs CNR 4484 and CNR 4436. The traffic that is the subject of the application, feed grains of wheat, barley and oats ex-Armstrong, Ontario and corn ex-southwestern Ontario origins to Atlantic province destinations, is moving under items contained in Tariff CNR 4484 and Tariff CNR 4436. Although there is no evidence that traffic has moved under Tariff GTW 4501, this tariff is also referenced in the application as it established rates on feed grain movements ex-U.S. origins to Atlantic region destinations.

This review has confirmed that the applicable published tariff rates were reduced in October 1994 and early 1995. The rate reductions were most significant on traffic destined for the WHR destinations of New Minas, and Port Williams, N.S., points that are listed as destinations in the subject CN tariffs. On this traffic, rates were reduced by more than 25 percent, or approximately $15.00 a tonne. CN's rates applicable to points not situated on the WHR were reduced to a lesser extent; for example, rates on movements to Little Bras d'Or on the CBCNSR in eastern Nova Scotia declined by 2 to 10 percent, depending on origin. Rates to Moncton, the point closest to the grain origins, were reduced by 18 percent or more. CN's tariff adjustments changed the existing relationship between rates and distance, such that the new rate levels to Truro and points on the WHR were lower than or equal to those applicable to Moncton, N.B., despite the fact that these points are further from the grain origins. (Truro is 125 miles beyond Moncton; New Minas is 229 miles beyond Moncton.) Rate levels to those WHR points in the GTW tariff were reduced by approximately 22 percent in 1995, while rates to Moncton were reduced by 15 percent.

CN's rate reductions were even more significant on movements of corn ex-southwestern Ontario. Rates to the two destinations on the WHR were reduced by approximately 40 percent.

This rate analysis has been limited to a review of published tariffs. The Agency recognizes that a portion of the traffic may have been routed under confidential contracts.

Traffic

HGEL suggested that the introduction of the reduced rail feed grain rates to certain Nova Scotia destinations points has resulted in HGEL's loss of traffic to these points. In considering this claim by HGEL, the Agency reviewed the feed grain data supplied by CN, HGEL and WHR. However, as discussed previously in the "Final Pleadings" section of this Decision, there were some inconsistencies in the figures submitted due to the different frames of reference utilized by the various parties in assembling their statistics. The Agency confirms that the outbound volume data supplied by HGEL on August 6, 1996 is consistent with statistics supplied by HGEL on June 25, 1996, in response to the Agency's interrogatories.

The Agency's data analysis focused on traffic volumes to Nova Scotia destinations, and confirms that the rail routing increased its traffic volumes by approximately 37 000 tonnes (or 42 percent) in 1995. Concurrently, WHR's traffic volumes increased by 600 cars in 1995 (or approximately 50 000 tonnes). Since all of WHR's feed grain traffic is received from CN, CN's traffic destined to points outside the Annapolis Valley declined.

While the rail routing gained considerable volumes in 1995, HGEL's outbound volumes declined by 65 000 tonnes. This lost tonnage would be split between Annapolis Valley points and other Nova Scotia destinations served by HGEL.

The analysis of traffic volumes for 1993 through 1996, supports HGEL's contention that it offered a very competitive alternative to rail in the movement of feed grains prior to 1995. Its share of the Nova Scotia market, which approximated 52 and 59 percent in 1993 and 1994, respectively, dropped to 33 percent in 1995. Preliminary numbers for 1996 confirm similar market shares. The shift to rail was even more dramatic on movements of corn ex-southwestern Ontario, where published rates had decreased by up to 40 percent.

Based on its review of these traffic statistics, the Agency finds that there is a direct correlation between the reduction in CN's subject tariff rates and the throughput grain volumes of HGEL.

In view of the fact that the lost volumes represent in excess of 50 percent of HGEL's 1994 market, the Agency directed its staff to conduct an audit of HGEL financial results to assess the financial impact of this loss.

Audit of HGEL

HGEL contended that the CN tariff action has resulted in a loss of feed grain traffic, and added that a continuing loss of its feed grain market will result in a corresponding loss of export grain shipments through its facility. HGEL submitted that unless its former share of the market is recaptured, it will be obliged to shut down its operation.

In an effort to better assess the impact of the rate reduction and subsequent traffic loss on HGEL's viability, Agency staff conducted an on-site investigative audit of HGEL. The purpose of the audit was to verify HGEL's allegation that the ultimate result of loss of the feed grain traffic would be the termination of its operations.

The audit team interviewed HGEL's general manager and then examined and reviewed the minute books of HGEL and North American Grain Elevator Ltd. (parent company). The audit also examined and analyzed the audited financial statements of HGEL for the years 1990 through 1995 and the unaudited financial statements for the first six months of 1996. Books of account were reviewed, including the general ledger for 1993 through 1996 and the weekly inventory records for the same period.

The auditors also examined internal management documents.

All aspects of the records and business were then discussed with the general manager.

The audit concluded that for the six months ending March 31, 1996, the loss from operations was a direct result of the decrease in the volume of grain shipped through the HGEL facility.

The audit also confirmed that without an increase in the volume of grain shipped through the facility, losses would continue, HGEL would cease to be a commercially viable operation in the near future, and HGEL will be forced to discontinue operations at its elevator facility. The audit also confirmed a deteriorating financial position and increased debt level in recent years. The Agency recognizes that this financial position may impact on the viability of the company in the future and consequently, the return of a larger market share is crucial to HGEL's survival.

The Agency concludes that the decrease in the levels of the subject CN rates has directly resulted in a decrease in feed grain volumes handled by HGEL. It is therefore the finding of the Agency that based on the evidence before it in this matter, CN's rate action has had an evident and damaging effect on HGEL and the marine/truck system that serves it and will likely cause HGEL to cease operations.

Influence of short line railways

There was considerable evidence and agreement respecting the influence of the WHR on the CN rate levels at issue. Prior to WHR's entry into the Annapolis Valley, the line in question was operated by the DAR. Following CP's withdrawal of its direct link between Saint John and Halifax, the DAR line existed in isolation from the rest of the CP system. Access to the Annapolis Valley was provided via interchange with CN at Windsor Junction. WHR submitted that as CN and CP were national competitors, there was no inclination for either carrier to act cooperatively to reduce rates to Annapolis Valley destinations, and that there was no inclination for CP to attract new traffic or upgrade service.

When WHR acquired the former CP line, a new relationship with CN resulted. According to both CN and WHR, this relationship is much more cooperative than was previously the case. Throughout North America, costs for short line operators can be significantly below the costs of long haul carriers, largely because of reduced labour costs. CN and WHR agree that because of these reduced costs, because of the new cooperative spirit, and because it is now in the interests of both carriers to ambitiously attract new traffic, rate levels to the Annapolis Valley were reduced. According to CN, it is its relationship with WHR, rather than a predatory philosophy, that is the key factor in reducing the rate levels.

HGEL claimed, and demonstrated via its interrogatories to CN, that the per-car charges paid by CN to the WHR were significantly lower than the charges paid by CN for traffic moving similar distances to the other area short line, the CBCNSR. CN confirmed a rather significant difference in the per-car charges it paid to WHR vis-a-vis those paid to CBCNSR, but the Agency notes that these charges are largely established by the short lines. Further, WHR has confirmed that it charges a flat amount per car,

regardless of distance or commodity. The Agency is unable to examine costing or other relevant financial, marketing or operational material of WHR or CBCNSR, and therefore can not comment upon the pricing policies of either carrier.

The Agency confirms WHR's position that it has instituted substantial efficiencies and has improved service, and for this reason, the entry of the WHR into the market is a direct factor in CN's rate reduction for the Annapolis Valley and consequent increase in rail volumes.

HGEL pointed out, however, rates to several points beyond Moncton are at or below rates to Moncton. In percentage terms, the rate to Little Bras d'Or, on the CBCNSR, is 20 percent higher than the rate to Moncton on the through rate from Armstrong, while the rate to the WHR points from Armstrong is less than the Moncton rate.

In the Agency's view, short line efficiencies cannot, in any way, fully explain the up to 40 percent rate reductions on the through movement to WHR points. Further, in view of the significant difference between CN's rail rates to WHR points and those to points on the CBCNSR, which amount to approximately $1000 per car (i.e., $1000 higher for movements to certain points on the CBCNSR), it is clear that CN has not applied these efficiencies on rates developed for movements to CBCNSR destinations which are outside the market reach of HGEL.

The Agency finds that the dramatic reduction in CN's rail rate levels and the improved local rail service for traffic destined to points on the WHR are significant factors in the shift of traffic to the rail mode and may therefore explain a portion of the through-rate reduction and the difference in per-car charges assessed by the two short line carriers. However, the Agency is of the opinion that the discrepancy between the rates applicable to the destinations on the two Nova Scotia short lines is too significant to be based solely on forces such as market and performance. In the Agency's view, this is evidence to support HGEL's position that CN's pricing policies have been specifically targeted at HGEL and its market area.

Rail Costs

In view of HGEL's allegation that CN's rates in question were predatory in nature and set without reference to costs, the Agency performed a costing analysis of the movements in question. The Agency, in past decisions, has acknowledged the lessening impact of costs on railway pricing in the more competitive marketplace envisioned by the NTA, 1987. Nonetheless, the Agency is of the opinion that an assessment of the contribution to costs would assist in its analysis of the public interest, and staff were instructed to cost representative rail movements. The Agency studied five sample movements: wheat from Armstrong to Windsor Junction; barley from Armstrong to Windsor Junction; corn from Chatham, Ontario to Windsor Junction, wheat/barley from Saskatoon to Windsor Junction and, wheat/barley from Thunder Bay to Windsor Junction. In each case, the per-car charge that CN pays to WHR was factored into the analysis. Costing was based on the year 1994, the most recent year for which the Agency has approved CN unit costs. To provide costs representative of the year 1995, the 1994 costs were adjusted using price-productivity indices developed for use in the Agency's costing of the movements of western grain.

Further, the Agency's costing of the subject traffic was premised on the appropriate split in equipment use and does reflect the current cost to CN when using this equipment. Costs were developed assuming a 100 percent empty return ratio.

Based on the parameters utilized by the Agency, some of the sample movements were determined to be compensatory. Certain other movements were found to be marginally non-compensatory.

CN's financial history and use of Government-owned Hopper Cars

In its pleadings, HGEL argued that CN's financial history and its use of government hopper cars bear a direct relationship on its ability to set rates that do not reflect costs. With respect to CN's financial history, HGEL claims that factors such as CN's acquisition of the former CGR, the subsidies accruing to CN from the movement of western grain, and the federal funding involved in the original creation and subsequent recapitalizations of CN constitute a financial advantage to CN. According to HGEL, the sum of these 'funds' is tantamount to a massive subsidy, and CN is able to establish tariff rates that are designed to eliminate competition without concern about losses. CN responded to these allegations by stating that the issue of prior government funding is irrelevant to this matter.

With respect to CN's use of government-owned hopper cars, HGEL similarly argues that although CN paid a per diem charge and performed running repairs on government hoppers used in eastern feed grain service, the costs of major repairs are passed along to Prairie farmers through the Rate Scale. It is submitted that these are major costs which CN avoids on 72 percent of the traffic. In a subsequent submission, HGEL argued that CN has been increasing its use of these cars in the feed grain service. HGEL submitted that this was due to the fact that government cars cost CN less than the costs of its own equipment. HGEL argued that the $17 per diem charge paid on the equipment when in use outside the western territory is not representative of the current value of the cars. This arrangement with the government allows CN to unfairly and inequitably avoid the capital investment for these movements. CN is not required to make a true commitment to the traffic by taking the normal commercial risks associated with bearing the full costs of the assets necessary to serve its customers.

The Agency acknowledges the evidence of HGEL that there is a history of significant government funding of CN. The appropriateness of these historical decisions to put money into CN has been addressed by the present and former governments and is not a matter on which the Agency should make a determination. The Agency similarly observes that the agreements between the government and CN and CP, with respect to the use of per diem charges associated with the utilization of hopper cars are not a matter for the Agency to adjudicate.

However, the Agency finds the pleadings of HGEL respecting CN's recapitalizations compelling in light of the comments submitted by CN questioning HGEL's financial viability. The Agency acknowledges that CN's access to the government hopper car fleet for movements into Nova Scotia, including movements originating in southwestern Ontario, permits CN to maintain its capital investment in hopper cars required to service this eastern feed grain traffic at an artificially low level. The availability of the government fleet for eastern movements on a short term per trip basis, albeit at per diem rates, minimizes CN's hopper investment requirements. Under typical commercial leasing arrangements, carriers are required to assume longer term commercial car leases and the associated cost risk of under-utilized car capacity. Access to the government fleet, when considered in conjunction with previous government subsidization policies and recapitalizations has resulted in an artificially-created competitive imbalance facing HGEL and CSL.

Efficiencies of HGEL and the Marine/Truck Routing

CN suggested that factors contributing to inefficiencies of the water routing include limited storage capacity, unavailability of the water mode during the winter season, absence of backhaul, and costs of loading and unloading vessels. WHR notes that there are interest and storage charges while the product is in elevator storage, and that there is the requirement to transfer the product five times as compared to the two transfers by rail. It was suggested that the transfer requirements inherent in the water routing impair efficiency and product quality.

HGEL submitted that there was no evidence to support allegations that its operation was inefficient. HGEL stated that it provides customers with an assured, year-round local inventory. Deliveries to customers are also monitored for quality. HGEL maintained that the water routing is more cost effective than rail, due to the economies of scale of 25,000 tonne loadings, fuel efficiency, and lack of infrastructure costs. HGEL also noted that CSL backhauls gypsum traffic from Halifax and Little Narrows, N.S. to Quebec and Ontario on all sailings, and this has been confirmed by CSL. Both parties indicate that this backhaul represents an efficient system. In response to Agency interrogatories, CSL also indicated that water carriers are currently in a price-taking position dictated by excess capacity. In other words, carriers do not have the advantage of setting prices; rather, they are obliged to accept prices offered by shippers. Not only are costs rising due to the age of the fleet, marine carriers are unable to invest in new vessels.

On the basis of the evidence and arguments submitted, including the comments of the interveners, the Agency cannot, on balance, find inefficiencies in HGEL's operations or in the water routing that have contributed significantly to the recent traffic shift.

The Agency notes, however, that there may be opportunities for reducing total routing costs on corn shipments ex-southwestern Ontario. Specifically, opportunities may be present in the collection system at origin, to effect a reduction in handling, elevation and storage requirements. Therefore, in order to assist in maintaining the water routing ex-southwestern Ontario as a competitive long-term alternative to rail service, all participants in this routing should contribute towards encouraging and developing the most direct and cost-effective alternative.

Alternative Sources/Potential for Monopoly

If HGEL failed, the main impact for HGEL users and other interests centres on the question, "would an enterprise enter the marketplace to replace HGEL or would CN be left in a monopolist position?". Subsequent to that determination is the potential for CN to abuse any monopoly situation. HGEL and CN differed as to the potential for a monopoly situation.

HGEL asserted that no other enterprise would step in, in the immediate future, and replace HGEL should it fail. CN alleged that there are several poised alternatives both in sources of feed grains (domestic-continental-overseas) and in competitive transportation services, and that this situation precludes the possibility of a monopoly. The Agency pursued this argument, requesting further clarification from CN.

CN indicated that product could be sourced from non-CN origins and other means of transport. Grains could move via CP/CDAC/NBSRSee footnote 2 from western Canada or Ontario to Saint John for furtherance by truck/ferry or truck; U.S. corn could move by rail or truck to Albany, N.Y. or Baltimore, Maryland for

furtherance by vessel to Halifax; Eastern European feed grains could be shipped via vessel to Halifax for rail or truck furtherance (at vessel charges of $18-$20 U.S. per metric tonne); or finished products could move via truck to consuming markets from Quebec or U.S. origins.

HGEL responded by claiming that CN is merely speculating as to possible alternative sources and routings. HGEL noted that CN's suggested alternatives have been available for some time, but no traffic has moved over any of them. HGEL also argued that no company would even consider succeeding HGEL, considering CN's current price levels.

The Agency has reviewed CN's evidence respecting alternative competitive options and has concerns regarding some of CN's hypotheses. With respect to CN's suggested sourcing alternatives, the Agency finds that although these alternatives obviously exist, they do not represent poised and effective competitive options.

The Agency similarly reviewed CN's suggestions as to potential alternate routings, in order to determine whether such options embody competitive, reasonable and poised alternatives. CN's suggestion that alternate routings such as the combination of at least three short line railways comprising the former CP eastern line, plus trucking beyond, represent effective alternatives is similarly open to question. The Agency does not consider this routing to be an effective alternative, given the number of rail carriers involved and the additional costs of transshipment of the volumes carried in a rail car into at least two trucks. Similarly, the viability of the alternate water routings suggested by CN is conditional upon continued operation of an elevator at Halifax, or at least the maintenance of the facility in a moth-balled state.

As the Agency has found no direct evidence of significant operational inefficiencies at HGEL, it must conclude that a replacement enterprise would be faced with similar operating costs and traffic volume requirements. If HGEL failed, any delay in the takeover of operations would result in additional start up costs. Further, operation by another operator is unlikely, given the current rail price levels. Any new entrant in the operation of the elevator would be faced with concerns about current and future rail pricing actions. This would discourage any favourable investment decisions.

In reviewing the evidence and arguments submitted by the parties respecting alternate sources of supply or transportation modes, the Agency is not satisfied with CN's position that there are effective existing or poised sourcing options in the form of American or offshore origins. The Agency further observes that these alternative American and offshore sources are less likely to evolve if the elevator facility did not exist. While the Agency agrees with CN's statements that a global economy exists, the Agency does not agree that this far-reaching and complex economy would automatically produce timely, effective competition for this traffic.

It is thus the Agency's finding that CN would be left in a monopoly position if HGEL ceased operations. Further, due to the improbability of new entrants entering the trade in the near future, the potential for monopolistic abuse is real.

Competition and Predatory Intent

The Agency has carefully considered the issue of intent. There is a fine and difficult distinction between a policy of competition and one of predation. There is often little evidence on which to conclusively base a determination of a party's intent in these types of business dealings. In the present matter, however, the Agency notes that it is only within this Nova Scotian agricultural region that HGEL has offered effective competition for the rail mode, and it is in this product and geographical market that CN has the most significant rate reductions.

It is the finding of the Agency that CN's rate action represents a policy to attract HGEL's feed grain traffic and possibly eliminate competition. Not only is HGEL a competitor of CN for this traffic, so too is the Great Lakes marine trade, and the Agency is of the view that the marine trade is as much the target of CN's rate actions as HGEL. The Agency finds that the demise of the elevator operation would have a negative impact on the Great Lakes marine trade, with the effect of either redeployment of the subject fleet or full withdrawal from the industry. This would result in a clear competitive advantage to CN.

In the view of the Agency, the significant rate reductions implemented to destinations within the market area served by HGEL and the anomaly between CN's tariff rates to Moncton and rates to various points beyond Moncton are clearly going to put HGEL out of business, and may or may not have been so designed.

Regardless of intent, for the purpose of these proceedings it is the effect of these rates that is of fundamental importance to the Agency.

The Public Interest

In summary, the Agency finds that CN's rate action has had a negative impact on HGEL, and will ultimately result in its demise, leaving CN in a monopolistic position.

The subsequent economic harm that would befall HGEL's customers, including the area livestock/dairy industry, Dover Mills, the port of Halifax, and St. Lawrence/Great Lakes marine interests as a result, is demonstration of prejudice to the public interest.

With regards to concerns about the appropriateness of the Agency requiring rates to be raised in the public interest, the Agency appreciates that in the short term, some feed grain users would encounter higher rail charges. However, the Agency finds that in the long term, the existence of continued competition will prevent monopoly abuse and better serve the economic interests of these customers and other interests.

CONCLUSION

The Agency finds that in this matter, the maintenance of a competitive situation is an overriding public interest issue. CN's rate action has had a direct and damaging effect on HGEL and the marine/truck transportation arrangement that serves it. The subject rates will eventually result in the demise of HGEL, with a consequent impact on HGEL customers, and the collateral disruption of the Great Lakes marine fleet. The Agency does not find evidence of effective alternative sourcing or transportation arrangements should HGEL's operation be forced to close, and is therefore of the view that there would be no protection from monopoly abuse.

The Agency therefore finds that the subject rates contained in Freight Tariffs CNR 4436 and CNR 4484 and GTW 4501 are prejudicial to the public interest. An Agency Order will issue requiring CN to remove the prejudicial features by adjusting the applicable rates in Freight Tariffs CNR 4436, CNR 4484 and GTW 4501 and to forthwith increase and maintain the subject rates at a more competitive level. In respect of Tariff GTW 4501, this will apply to that portion of the routing within Canada.


DISSENTING OPINION OF KEITH PENNER

With respect to the Majority decision, I am unable to find that the CN rates in question are prejudicial to the public interest and I would, therefore, deny HGEL's application. While I may agree with some of the findings of my colleagues, I cannot, however, concur with their final decision.

Based on the evidence before the Agency in this matter, I agree that at least some of the loss in feed grain volumes handled by HGEL is attributable to the tariff actions of CN. I also concur that without increased throughput volume, HGEL will be forced to discontinue operations at its elevator facility. Further, I have no doubt that should the elevator cease operating, several parties, particularly Dover Mills, could face significant economic harm. Finally, I agree that without the existence of the elevator, customers of HGEL would have no immediate economical competitive options and CN may be left, at least in the short term, in a dominant position for the transportation of feed grain into the Annapolis Valley of Nova Scotia.

HGEL has asked the Agency to conclude that CN's rate action is a deliberate attempt to eliminate competition, become a monopolist carrier, and then take advantage of its power in the market to abuse its customers with excessive rates. I believe that the evidence does not support such an allegation or conclusion. It is my opinion that CN has simply engaged in vigorous competition to attract traffic. This is a perfectly legitimate business practice. CN's actions reflect the regulation-by-marketplace objectives of the NTA, 1987. It is unfortunate that sometimes strong competition may result in casualties.

The Applicant, in effect, in coming forward under section 59 of the NTA, 1987, is asking the Agency to force CN to increase its rates. In previous cases before the NTA, applicants requesting the Agency to examine allegedly low rates have utilized sections 112 and 113 of the NTA, 1987. Under these sections of the NTA, 1987 the NTA was required to determine whether or not the rates cited were compensatory, and if not, were they being used by the carrier to create a situation in the market which would open the door for predatory action. The expertise within the NTA had no difficulty at all in determining if rates were compensatory or not, but to impute and then prove that these rate actions were intended to be predatory was, at best, extremely difficult and in the final analysis, impossible.

This is the first, and will be the only, section 59, NTA, 1987 application in which the NTA was asked to raise rates. While it is certainly the prerogative of an applicant to utilize section 59 in this way, I have concerns about the Agency ordering rate level increases. The Agency's costing of the impugned rates revealed that most rates in question were compensatory, and no rates were significantly non-compensatory. Any Agency order requiring CN to raise its rates means directing the company to raise its profits at the immediate expense of shippers. The rationale, it seems, for such drastic action by the Agency would be to protect a competitor who apparently is having difficulty in competing with CN, due to a number of causes other than the fact that CN has succeeded in taking business away from it. This, in my opinion, the Agency should not reasonably be asked to do, but if requested to do so, should politely but directly refuse to do. In addition, there is considerable doubt and much uncertainty as to whether an increase in rail rates would ensure the viability of HGEL.

As to concerns about these CN rate actions leading it to becoming a monopolist, it is my view that these concerns are exaggerated. It may well be that there are no sure and certain competitive sourcing alternatives at this very moment, but if CN were to raise its rates with impunity, it would be acting against its own long-term interests and eventually any such escalating rates would almost certainly attract effective competition. Accordingly, I believe that the risk of abnormal or excessive rate increase is slight.

I dismiss the suggestion that CN is manoeuvring itself into a position in which it will be able to abuse its customers. Above all, the marketplace in Canada today, being part of a global one, can be exceedingly harsh on inefficiencies in either production or distribution.

I do fully agree with the submissions of both CN and WHR that their relationship is of one of mutual benefit and advantage. This was not the case in CN's relationship with the former operator. Thus, the difference in per-car rates that CN pays to WHR and to CBCNSR is likely the result of many factors: market, geography and costs. Most certainly, the lower rates are the direct result of the operating performances of the short lines. Particularly, it is due to their mutual recognition that if CN can capture the line haul for their traffic, their respective economies of scale will benefit them both and permit such sustained market presence.

In summary, I note that CN is in direct and active competition with HGEL's marine/truck arrangement. I find that CN's pricing strategy represents vigorous, competitive action in a very dynamic marketplace. I concur that the loss of HGEL would be most regrettable, but I am far from convinced that the pricing actions of CN are solely or even substantially the cause of HGEL's problems. Thus, it is simply not possible for me to conclude that these CN rates can be found to be prejudicial to that public interest. I therefore dissent with the Majority ruling in this matter.


Footnote: 11     Minutes of Proceedings and Evidence of the Standing Committee on Transport respecting the NTA Review Commission's Report entitled "Competition in Transportation - Policy and Legislation in Review," Wednesday, March 31, 1993, page 38:11)
Footnote: 2 2    Canadian and American Railroad/New Brunswick Southern Railway
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