Decision No. 645-R-1990

December 21, 1990

December 21, 1990

APPLICATION by CSX Transportation, Inc. and Lake Erie and Detroit River Railway Company pursuant to section 160 of the National Transportation Act, 1987, R.S.C., 1985, c. 28 (3rd Supp.) for authority to abandon the operation of the Canadian Subdivision No. 1 from Harrow (mileage 21.00) to Arner (mileage 27.68), a total distance of 6.68 miles, in the Province of Ontario.

File No. T 6125/820


INTRODUCTION

On June 22, 1990, CSX Transportation, Inc. and Lake Erie and Detroit River Railway Company (hereinafter the applicant) applied to the National Transportation Agency (hereinafter the Agency) for authority to abandon the operation of the Canadian Subdivision No. 1 from Harrow (mileage 21.00) to Arner (mileage 27.68) (hereinafter the branch line), a total distance of 6.68 miles, in the Province of Ontario.

In accordance with section 161 of the National Transportation Act, 1987 (hereinafter the NTA, 1987), any person may oppose an application for the abandonment of the operation of a branch line by filing with the Agency, not more than sixty (60) days after the date of the notice of application, a written statement setting forth the grounds on which that person opposes the application. If no opposition is received, the Agency must order the operation of the branch line abandoned.

In response to the present application, the Agency received numerous interventions. All interveners opposed the application and a few requested that a public hearing be convened to consider the application. However, having considered all of the submissions filed, the Agency has decided that a public hearing is not required in this case and that a decision can be rendered based on the information filed with the Agency.

LOCATION OF THE BRANCH LINE

This branch line commences at Walkerville, Ontario (mileage 0.00) and extends in an easterly direction to West Lorne, Ontario (mileage 102.80). Two stations, namely Harrow (mileage 21.00) and Arner (mileage 27.68), are situated on the trackage proposed for abandonment. A map of the area is attached as Appendix A.

HISTORY OF THE BRANCH LINE

Canadian Subdivision No. 1 was originally constructed by three predecessors of the present Lake Erie Detroit River Railway Company. On May 15, 1902, these three companies were amalgamated under the present name by Act of Parliament. In 1903, the property of the Lake Erie Detroit River Railway Company was leased to the former Pere Marquette Railway, which merged into what is now known as CSX Transportation Inc. The applicant operates this trackage as part of its system.

CONDITION OF THE BRANCH LINE

According to the applicant, the branch line is comprised of 105 pounds per yard rail in fair condition which was installed as new between 1940 and 1944. The branch line can accommodate cars weighing up to 278,000 pounds gross weight. The maximum permissible speed on the branch line is 10 miles per hour.

No bridges are located on the branch line proposed for abandonment. If the operation of the branch line is ordered abandoned, four public crossings will be eliminated.

DESCRIPTION OF THE SERVICE

Freight service is provided on a six day per week schedule. On Monday, Wednesday, and Friday, a local train originates out of Chatham, and on Tuesday, Thursday, and Saturday, a local train originates out of Walkerville.

CARLOAD FREIGHT TRAFFIC

The amount of carload freight traffic handled on the branch line for the prescribed financial years of 1987, 1988, and 1989 was 128, 49 and 106 respectively.

The main commodities handled on the branch line are corn and soybean.

ACTUAL LOSSES INCURRED

Since opposition to the proposed abandonment application was received, the Agency is required to determine the amount of actual loss, if any, of the railway company attributable to the operation of the branch line in each of the prescribed financial years. Section 163 of the NTA, 1987 requires the Agency to give public notice of its actual loss determination. On November 7, 1990, the Agency issued an interim actual loss determination for the years 1987 through 1989 based on the information submitted by the applicant. The determination was based on revised working papers submitted to the Agency on September 20, 1990, copies of which were sent by the applicant to all interveners to the proposed abandonment.

In determining the interim actual losses, the Agency adjusted the costs claimed by the applicant, where necessary, to conform to recent changes in costing methodologies which the Agency adopted as a result of Decision No. 45-R-1990 and Decision No. 172-R-1990 which were Canadian National Railway Company applications for authority to abandon the operation of its Chapais and Chester Subdivisions. Train crew wages were developed based on a three man crew operation, roadway depreciation and roadway property were developed to reflect the specific aging characteristics of the branch line and the determination of the Agency was based on the applicant serving the branch line as opposed to serving and traversing the branch line. In addition, disallowances were made to employee benefits to more properly reflect Canadian employee benefit plans. The determination also reflected paragraph 157(3)(e) of the NTA, 1987, and thus excluded allocated overhead costs, including general administration and supervisory costs.

The South Essex Rail Retention Committee, comprised of the Townships of South Gosfield, Harrow, Kingsville, South Colchester, the Harrow Cooperative Association Limited, and the United Co-op of Ontario and others (hereinafter the Committee) argued that the branch line was economic, that the losses claimed by the applicant were inflated and that even assuming that there were losses on the branch line, such losses were not sufficient to render the operation of the branch line uneconomic. It was further submitted by the Committee that in the unit cost development of the applicant, it overstated certain costs by using incorrect variability assumptions and it did not recognize efficiencies in average carload weights for traffic originating and terminating on the branch line as against the total Canadian operations of the applicant. Further, the Committee contends that future traffic volumes would exceed those which occurred in the prescribed financial years, thus the operation of the branch line would remain in an economic position.

In response to the Notice of Interim Actual Losses, further submissions were filed with the Agency from parties who had previously intervened. The Committee accepted the reductions of the Agency in the areas of general administration, pensions and U.I.C. and the determined amounts for on-line train crew wages, fuel, property taxes, roadway maintenance, locomotive maintenance, and traffic expenses. It was the position of the Committee that the remaining cost items contained in the interim determination of actual loss were excessive. Furthermore, as the Committee was not cognizant of the basis of the Agency for adjusting on-line roadway depreciation and cost of capital development for roadway property, the Committee developed its own amounts using its own determined cost of capital rate based upon application of costing methodology adopted by the Agency in its 1985 Cost of Capital decision.

The applicant submitted it was not a Class 1 railway and therefore was not required to fulfill the strict requirements of Class 1 railway accounting according to paragraph 11 of the Railway Costing Regulations. The applicant also stated it submitted the appropriate figures in substantial and reasonable compliance with Agency requirements. The applicant further submitted that the Agency should not accept the modifications to the interim actual losses proposed by the Committee.

The Committee contended that the applicant methodology, by virtue of its allocation procedure, included certain category 2 and 3 costs in the category 1 cost of roadway maintenance. After a review of the supporting documentation, the Agency concurs that this did occur and has accordingly adjusted the amounts. This adjustment, however, does not result in substantial changes to the final determination of actual loss.

The Committee also was of the view that in developing its category 2 and 3 service units and unit costs, the applicant deviated from Canadian costing methodology and from costing methodology adopted by the Interstate Commerce Commission for U.S. railroads. This deviation resulted in an overstatement of the variable cost estimates. In examining the service units and unit costs submitted by the Committee, the Agency noted certain deficiencies in the methodologies of the Committee. With respect to the basis for service unit development of the Committee, the Agency found that certain items which the Committee developed on the basis of gross ton miles were usage-related and not weight-related, and other items were dependent upon category 1 costs. Furthermore, the Committee used weight-related gross ton miles as a proxy for train miles, which the Agency determined not to be appropriate. In considering the variability of costs, the Agency found that in the case of the assumptions of the Committee, certain variability levels were higher and in some instances lower than those developed from other Canadian railway operations. As a result, the Agency concluded that certain costs were overstated. The costs were adjusted in the final determination of actual loss and the overstatement was found not to be significant.

With respect to on-line depreciation and cost of capital on roadway property, the Committee has acknowledged that the interim determination of the Agency revised the submission of the applicant but also pointed out that the basis for such revision was not made known to the Committee. Subsequently, the Committee submitted what it thought the amounts should be in its submission of November 22, 1990.

The Agency does not accept these amounts. As was the case with the claimed actual losses submitted by the applicant, the submission of the Committee underestimates the expected asset life of certain assets in the branch line. Of the four major cost components in this roadway property determination, (rail, ties, grading, and other track material), the Committee has estimated that the annual depreciation rates for these items should be 1.61%, 3.59%, 1.57%, and 1.61% respectively, which to the Agency implies estimated asset life of approximately 62 years, 28 years, 64 years, and 62 years. The Agency depreciated these assets over a longer period in the case at bar for regulatory costing purposes. Therefore the amount of accumulated depreciation is somewhat less than the amounts claimed by the Committee, and consequently, the determination of the Agency for depreciation and cost of capital on roadway property is higher.

As to the cost of capital rate, both the applicant and the Committee developed their respective rates before adjusting for income tax. The Agency determines that this methodology is correct. Upon further analysis, the applicant has not included in the total costs used to develop its rate, the costs associated with deferred income tax. The Agency is of the view that this amount should be included as determined in the July 31, 1985 Decision on Cost of Capital methodology. Since the Committee development of an applicable cost of capital rate includes costs associated with deferred income tax, this cost of capital rate is deemed reasonable and has been employed. This has the impact of reducing the category 4 cost of capital on roadway property amounts by approximately $10,500 in 1987 and $9,000 for 1988 and 1989.

Wheatley Elevators Limited, Orford Farmers' Co-Operative Company Limited and W.G. Thompson and Sons Limited all presented submissions. None of these interveners are situated on the section of track proposed for abandonment and none would be deprived of rail service if the Agency authorized abandonment of the operation of the branch line. Their traffic does use the branch line however and they questioned why this usage was not considered in the lines viability. The Agency treats traffic which traverses a line proposed for abandonment as overhead or "bridge" traffic. In determining the costs incurred in operating a line, the Agency removes all costs and revenues associated with overhead traffic. Subsection 157(2) of the NTA, 1987 defines actual loss attributable to a branch line as being the excess of:

The costs reasonably incurred by the company in the financial year in the efficient operation of the branch line and in the efficient movement of trafficoriginating or terminating on the branch line over the revenues of the company for the financial year from the operation of the branch line and from the movement of trafficoriginating or terminating on the branch line." (Underlined for emphasis.)

The applicant submitted its working papers correctly excluding the costs associated with the traffic moving over the branch line.

The Harrow Farmers' Co-Operative Association Limited (hereinafter the CO-OP) projected future traffic volumes based on a grain year of September to August rather than a calendar year. It was its position that carloads shipped for 1990-1991, 1991-1992, and 1992-1993 would be 148, 153, and 156 carloads respectively. Under section 8 of the Railway Lines Abandonment Regulations, SOR/87-1167 the carriers are required to submit data on a prescribed financial year basis, which is on a calendar year. In examining this submission, the Agency has re-adjusted the future traffic projections of the CO-OP to reflect the calendar year and has used the following as estimates of future traffic volumes for 1990, 1991, and 1992: 131, 165, and 147 carloads respectively.

The Brotherhood of Locomotive Engineers also filed submission of opposition to the proposed abandonment stating that the track could become economically viable if the applicant put forth some honest effort in marketing the service.

Submissions also were received from J. Pickard, M.P. for Essex-Kent, the Windsor Chamber of Commerce and the Ontario Ministry of Transportation and Communication. The evidence contained in these submissions reiterated other submissions on how abandonment would affect the area if authorized.

After consideration of the responses to the interim notice of actual loss, the Agency has revised its final determination.

In accordance with the provisions of the Railway Costing Regulations, SOR/80-940 and section 157 of the NTA, 1987, the final determination of actual loss of the Agency for the years 1987 to 1989 inclusively is as follows:

 
Year CostsNote 1 $ RevenuesNote 1 $ Actual LossNote 1 $
1987 68,107 80,574 (12,467)
1988 58,457 35,255 23,202
1989 66,548 48,325 18,223

ECONOMIC DETERMINATION

Having determined that the operation of this branch line incurred a profit in 1987, followed by two years of successive actual losses, the Agency is required to determine if the operation of the branch line is economic or uneconomic, and if uneconomic, whether there is a reasonable probability of its operation becoming economic in the foreseeable future.

In arriving at this economic/uneconomic conclusion, the Committee, in its July 12, 1990 submission made reference to page nine of Agency Decision No. 348-R-1989, In the Matter of an Application by the Canadian National Railway Company for Authority to Abandon Lines in the Provinces of Prince Edward Island and New Brunswick, where it is stated that:

...it is necessary to distinguish between the incurring of actual losses in the operation of a branch line (unprofitability) and an uneconomic branch line. The NTA, 1987 clearly contemplates, as did the Railway Act, that the finding of "economic or uneconomic" is a subsequent and more comprehensive determination than the determination of actual losses, if any. The difference between an unprofitable branch line and an uneconomic one is aptly described on page 398 of the Reasons for Order No. R-6313 in the second and fourth paragraphs. The CTC's determination in this regard was "... that the expression "uneconomic", as used in reference to branch lines ... means the line must not only be unprofitable, but it must be incapable of being rendered profitable within the scope of all feasible alterations in the operating practices of the railway, the scheduling and routing of traffic, or the restructuring of the branch lines themselves.

From the determination of actual loss, the operation of the branch line is unprofitable. In considering whether the operation of this branch line is uneconomic, the Agency considered feasible alterations in the operating practices of the applicant including: (1) scheduling of service, and (2) routing of traffic.

(1) Scheduling of Service
Presently, the applicant provides service to its customers six times per week. The Agency analyzed what effect a reduction in frequency of service would have on the actual losses, and concluded that a reduction would have a minimal effect on the actual losses being incurred in operating the branch line.
(2) Routing of Traffic
As previously referenced, freight service is provided by a local train which originates out of Chatham on Monday, Wednesday, and Friday, and by a local train which originates out of Walkerville on Tuesday, Thursday, and Saturday. From the application submitted by the applicant, it is clear that the majority of the traffic out of Harrow is destined to Chatham with lesser volumes terminating at Detroit, Buffalo and Sarnia whereas the Arner traffic is terminating at Detroit and Chatham. The Agency considered alternative routings including operating over the Caso Subdivision as one option and serving the branch line from both ends as a further alternative and concluded that the present routing of traffic is the only feasible method of operating the branch line.
Thus after examining changes in service frequency and all reasonable routing changes, the Agency concludes that the branch line is unprofitable, and it is incapable of being rendered profitable within the scope of all feasible alterations in the operating practices of the railway company and is therefore, at present, an uneconomic branch line.

PROBABILITY OF THE BRANCH LINE BECOMING ECONOMIC IN THE FORESEEABLE FUTURE

Having determined the branch line to be uneconomic, the NTA, 1987 requires the Agency to consider whether there is any reasonable probability of the branch line becoming economic in the foreseeable future.

As previously indicated, carload traffic has varied on the branch line from a high of 128 carloads in 1987 to a low of 49 carloads in 1988 increasing to 106 carloads in 1989. From the evidence presented, this variation was attributable to droughts, floods, and to the value of the Canadian dollar relative to the American dollar. With respect to the station at Harrow, before the issuance of the interim actual loss determination, the original submission of the Committee with respect to future traffic volumes was that they should approximate 100-125 carloads annually. The November 22, 1990 submission of the Committee indicates without substantiation that future traffic volumes at Harrow alone should be 152 carloads in 1990, 157 carloads in 1991, and 160 carloads in 1992. However, by the CO-OP own evidence after adjusting for a calendar year basis, future Harrow traffic would amount to 131, 165, and 147 carloads for these three years. Thus, it is apparent that discrepancies exist as to projected future traffic volumes. As a result, the Agency has accepted the submission of the CO-OP that the traffic originating at Harrow will be in the order of 130 to 160 carloads annually.

At Arner, two-thirds of the traffic was being handled by highway transport to Windsor for furtherance to Quebec and Maritime markets by water transport. The remaining volumes handled by rail amounted to 1, 3, and 13 carloads for the years 1987, 1988, and 1989. Carload traffic volumes are low in relation to the service being offered and revenues being realized by the applicant in handling this traffic amounts to about $6,000 annually in 1989. Furthermore, the point was raised by the Committee that an agreement whereby the majority of the Arner traffic was trucked to Windsor to the Archer Daniels Midland water terminal for furtherance expires in October 1991, and that rail service could be required after this date. By the own admission of the Committee, it was not possible tospeculate(underlined for emphasis) whether this agreement will be renewed after October 1991. As indicated in the NTA, 1987 and the notice of interim actual loss of the Agency, the Agency is required to determine whether a branch line is economic or uneconomic and, if uneconomic, documented evidence must be provided to the Agency to indicate whether there is reasonable probability of the branch line becoming economic in the foreseeable future. From the evidence submitted, the prospects for future traffic being handled at Arner are limited.

Although the evidence suggests that carloads being offered in the foreseeable future will increase, this would not mean that the operation was economic. The Agency must assess the foreseeable future and decide if these projected traffic levels would be sufficient to offset the operating costs of the branch line in the future. In its application, the applicant submitted that the condition of the track was only fair with a maximum allowable operating speed of ten miles per hour which would necessitate rehabilitation and future maintenance expenditures of $60,933 in U.S. dollars. As previously stated, carload traffic at the projected levels might come close to covering the costs of operating the branch line against the 1989 determined costs. However, the Agency has determined that the submitted future carload levels will not be sufficient to eradicate the actual losses which will continue to be incurred in the future as a result of the rehabilitation and maintenance costs which will be necessary.

Consequently, the Agency determines that there is no reasonable probability of the operation of the branch line becoming economic in the foreseeable future. Once the Agency has made such a finding, section 165 of the NTA, 1987 requires the Agency to authorize abandonment of the operation of the branch line. The Agency is not obligated under the law to consider public interest issues once the economic tests have been met.

AWARDING OF COSTS

In its submission of July 12, 1990, the Committee recommended to the Agency that it should award costs in its favour against the applicant pursuant to section 43 of the NTA, 1987.

Section 43 of the NTA, 1987 states:

  1. The costs of and incidental to any proceeding before the Agency are in the discretion of the Agency and may be fixed in any case at a sum certain or may be taxed.
  2. The Agency may direct by whom and to whom any costs are to be paid and by whom they are to be taxed and allowed.
  3. The Agency may, with the approval of the Governor in Council, make rules prescribing a scale under which costs are to be taxed.

With respect to the issue of awarding of costs, the Agency has complete discretion to deal with the matter. Furthermore, each case is decided on its own merits.

In further submissions, the Committee contended that the unusual costing approach of the applicant, lack of adequate supporting documentation and substantial revisions of calculations put the Committee to substantial expense to understand the submission of the applicant in order to provide an acceptable response. It was the belief of the Committee that its submissions were of substantial assistance to the Agency and that an awarding of costs was reasonable.

The applicant stated that it supplied at its own time and expense significant information to the Committee at its request and that the Agency should not punish a railway company which must seek Agency approval before undertaking any actions by awarding costs. The applicant added that its application was not brought frivolously or in bad faith and any party opposing an application should be required to prove its case on the basis of public interest without the incentive of costs. The applicant submitted that the objections of the Committee were not substantial in nature or of great assistance to the Agency in its determination.

In considering whether costs should be awarded, the Agency has considered whether the submission of the Committee was of substantial aid to the Agency. The Agency recognizes that as a result of the Committee submission, revisions were made to the interim actual loss determination. However, the Agency also determines that these revisions were of a minor nature in that the operation of the branch line still continued to incur actual losses in the last two prescribed financial years of approximately $23,202 and $18,233 respectively, which was contrary to the submission of the Committee. Therefore, the Agency concludes that the Committee submission was not of substantial assistance to the Agency and that it will not be awarding costs in the case at hand.

CONCLUSIONS

Pursuant to sections 164 and 165 of the NTA, 1987, the Agency determines that the operation of the applicant Canadian Subdivision No. 1 between Harrow (mileage 21.00) and Arner (mileage 27.68) is uneconomic, there is no reasonable probability of its operation becoming economic in the foreseeable future and that the operation thereof shall be abandoned.

Section 168 of the NTA, 1987 provides that the Agency shall fix the date of abandonment of operations on a branch line not less than thirty (30) days or more than one (1) year from the date of the abandonment Order. As the Agency is of the view that the shippers may require some time to adjust to the abandonment of the operation of the branch line, it fixes the abandonment date at six (6) months from the date of the Order effecting this Decision.

Notes

Note 1

Based on U.S. currency

Return to reference 1

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