Decision No. 650-NC-A-2003

November 19, 2003

November 19, 2003

IN THE MATTER OF an appeal by Air Canada pursuant to section 42 of the Civil Air Navigation Services Commercialization Act, S.C., 1996, c. 20, of the revised charges for air navigation services implemented by NAV CANADA on August 1, 2003.

File No. M4250-1/3233


TABLE OF CONTENTS


APPEAL

On August 20, 2003, Air Canada filed with the Canadian Transportation Agency (hereinafter the Agency) the appeal set out in the title. On August 28, 2003, in accordance with Agency Decision No. LET-A-173-2003 dated August 21, 2003, Air Canada's written representations in support of its appeal were filed with the Agency, and served on NAV CANADA.

By Decision No. LET-A-180-2003 dated September 5, 2003, the Agency denied NAV CANADA's request to require Air Canada to address the issue of the relevance of a particular agreement entered into between Air Canada and NAV CANADA on April 25, 2003 prior to the filing of NAV CANADA's answer.

On September 9, 2003, NAV CANADA filed its answer to the appeal.

On September 9, 2003, Air Canada resubmitted the appendices to its August 28, 2003 submission. By Decision No. LET-A-190-2003 dated September 25, 2003, the Agency accepted Air Canada's resubmitted appendices and advised the parties that it would remove from its public record all texts reproduced from bilateral air transport agreements that have merely been initialled ad referendum.

On September 12, 2003, Air Canada filed its reply to NAV CANADA's answer.

On September 18, 19 and 22, 2003, respectively, the International Air Transport Association (hereinafter IATA), the Air Transport Association of Canada (hereinafter ATAC) and the Air Transport Association (hereinafter ATA) filed letters purporting to be interventions in support of the appeal. By Decision Nos. LET-A-186-2003 to ATA, LET-A-187-2003 to ATAC and LET-A-188-2003 to IATA, all dated September 24, 2003, the Agency advised the associations that as the process for hearing the appeal set out in the Civil Air Navigation Services Commercialization Act (hereinafter the CANSCA) does not contemplate interventions, rather than treating their letters as interventions in the appeal, it would accept their letters as submissions in support of Air Canada's appeal and take them into consideration in its final determination of the appeal. The Agency also advised the associations that they would not be entitled to any further notice or participation in the appeal. On September 25, 2003, NAV CANADA replied to the associations' submissions.

On September 25, 2003, the Agency published a notice advising that it was prepared to accept similar submissions from other users, groups of users or representative organizations of users in support of or against the appeal, provided that they are filed no later than October 2, 2003. During the period from September 25 to October 2, 2003, the Agency received submissions from the Canadian Owners and Pilots Association (hereinafter COPA), United Parcel Service Canada Limited jointly with United Parcel Service of America Inc. (hereinafter UPS), the Canadian Courier and Messenger Association (hereinafter CCMA), Purolator Courier Ltd. (hereinafter Purolator), Clark & Company (on behalf of certain foreign air carriers), and CargoJet Airways Ltd. (hereinafter CargoJet). On October 8, 2003, in accordance with Agency Decision No. LET-A-203-2003 dated October 3, 2003, NAV CANADA replied to all of the submissions, except the one from COPA.

By Decision No. LET-A-210-2003 dated October 17, 2003, the Agency advised the parties that as a result of the volume of material received from the parties and other persons interested in the appeal, the number of interlocutory matters the Agency has had to deal with, the nature and complexity of the analysis required, and the fact that this is the first appeal to the Agency under section 42 of the CANSCA, it was of the opinion that there are special circumstances involved in the determination of the appeal which warrant the Agency taking an additional 30 days to render its decision, as provided for in section 48 of the CANSCA. The Agency, therefore, advised the parties that it would issue its decision in respect of the appeal by no later than November 19, 2003.

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PRELIMINARY MATTER

In the notice given on September 25, 2003, the Agency indicated that although it is of the opinion that the process for hearing an appeal under the CANSCA does not contemplate interventions, it was prepared to accept submissions from other "users, groups of users or representative organizations of users". This is consistent with section 44 of the CANSCA which provides that an appeal may be made by any "user, group of users or representative organization of users".

Pursuant to section 2 of the CANSCA, a "user" is defined as an aircraft operator. The Agency notes that Purolator is not an aircraft operator. Accordingly, the Agency is of the opinion that it would not be appropriate to consider Purolator's submission as part of this appeal.

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BACKGROUND

This appeal has been brought to the Agency pursuant to section 42 of the CANSCA on the grounds that NAV CANADA failed to observe two of the charging principles set out in section 35 of the CANSCA in establishing its revised charges effective August 1, 2003 (hereinafter the Revised Charges). The relief requested is that the Agency order NAV CANADA to cancel the Revised Charges, re-establish the previous charges and refund to Air Canada, and all other users who paid the Revised Charges, the amounts collected in excess of the re-established charges, pursuant to paragraph 51(1)(b) of the CANSCA.

A. THE CANSCA

The CANSCA was enacted on June 20, 1996. The "Summary" of the CANSCA prepared by the Government of Canada, which appears at the beginning of the Queen's Printer version of the Act, describes the CANSCA as an enactment which "provides the authority for the commercialization of air navigation services provided by the Minister of Transport" and identifies a number of "key components of the enactment". Some of these "key components" are:

  • the transfer of air navigation services assets under the management and control of the Minister of Transport to NAV CANADA, a corporation incorporated under Part II of the Canada Corporations Act (hereinafter the CCA);
  • the granting of certain powers to NAV CANADA, as well as the imposition of certain operating obligations;
  • the introduction by NAV CANADA of user charges;
  • the establishment of an economic regulatory framework in respect of user charges based on the principle of self-regulation;
  • the opportunity for users to appeal new or revised charges; and
  • provisions to ensure the continuing safety of air navigation services in Canada.

Part III of the CANSCA deals with all aspects of NAV CANADA's charges. More particularly, NAV CANADA is given the right to impose charges on users (defined as "aircraft operators") for the availability or provision of civil air navigation services. NAV CANADA may also introduce new charges or revise existing charges subject to the observation of a set of nine broad charging principles and after a public notice period, consultation with users and a final announcement.

Appeals to the Agency

A user, group of users or representative organization of users may appeal NAV CANADA's new or revised charges to the Agency. The time for making an appeal varies, depending on whether NAV CANADA has complied with the CANSCA in giving notice and making an announcement in respect of the charge which is the subject of the appeal. Where NAV CANADA has both given notice and made an announcement in respect of a new or revised charge, an appeal must be made within 30 days after the announcement was filed with the Agency.

The Agency's mandate in appeals of NAV CANADA's charges is specified in the CANSCA. More particularly, the CANSCA specifically prohibits the Agency from making an order preventing the charge that is the subject of the appeal from becoming effective, or preventing NAV CANADA from imposing the charge, pending the outcome of the appeal. Where an appeal is made on the ground that NAV CANADA failed to observe one of the charging principles set out in section 35 of the CANSCA in establishing the charge which is the subject of the appeal, the Agency may decide to allow the appeal only if it is satisfied, on a preponderance of the evidence, that NAV CANADA failed to observe that charging principle. In making such a decision in respect of a revised charge, the CANSCA requires the Agency to order NAV CANADA to cancel the revised charge, re-establish the previous charge and refund to each user who paid the cancelled charge the amount, if any, collected in excess of the re-established charge. The CANSCA also requires that the Agency make its decision in respect of an appeal of NAV CANADA's new or revised charges as expeditiously as possible, but no later than 60 days after the appeal is made, unless the Agency is of the opinion that there are special circumstances involved in the determination of the appeal, in which case the Agency has a further 30 days to decide the appeal. The CANSCA also specifically states that a decision of the Agency in respect of an appeal of NAV CANADA's new or revised charges is final and binding and no appeal lies from the Agency's decision.

B. NAV CANADA

NAV CANADA was incorporated, without share capital, under the CCA in 1995. According to its Letters Patent and By-Laws, NAV CANADA is a private, non-share corporation, the business of which is to own, manage and operate a safe, cost-effective and efficient civil air navigation system as an essential, national service. NAV CANADA began operating the air navigation system on November 1, 1996. NAV CANADA's corporate structure, as set out in its Letters Patent and By-Laws, is that of an economically self-regulating entity. In accordance with Part II of the CCA, there are no shareholders of NAV CANADA. Rather, there are four members--the Government of Canada, ATAC (representing air carriers), the Canadian Business Aviation Association (representing business and general aviation industries) and the NAV CANADA Bargaining Agents Association (representing NAV CANADA employees' bargaining agents). These four members appoint ten individuals to NAV CANADA's Board of Directors. These 10 directors appoint four independent directors who, together with the President and Chief Executive Officer, form NAV CANADA's Board of 15 Directors. Of the first ten directors, five are appointed by users, two are appointed by NAV CANADA's unions and three are appointed by the Government of Canada.

NAV CANADA's financial viability and self-sufficiency are derived from two sources. Firstly, under Part III of the CANSCA, NAV CANADA has the power to impose user charges to collect revenues in order to meet its financial obligations. These financial obligations are referred to as "financial requirements" in the CANSCA and are specified in subsection 35(5) of the CANSCA. Essentially, the financial requirements set out in subsection 35(5) of the CANSCA include all of the costs of running NAV CANADA's business as well as requirements arising from the need to borrow and other requirements consistent with prudent business practices.

The second source of NAV CANADA's financial viability and self-sufficiency is the Master Trust Indenture (hereinafter the MTI) under which NAV CANADA financed the $1.5 billion acquisition cost of Canada's air navigation system. The MTI secures all indebtedness incurred by NAV CANADA under its Capital Markets Platform and provides NAV CANADA with its main credit facility, which must be reduced to nil by the end of the year 2029. The MTI also establishes common security and a base of common covenants by NAV CANADA for the benefit of its lenders. The MTI rate covenant provides assurance to lenders that NAV CANADA will set rates at a level sufficient to recover operating and maintenance expenses and debt service costs and meet the reserve fund requirements set out in the MTI. If NAV CANADA is found to be in violation of any covenant of the MTI, its ability to access additional capital may be compromised.

NAV CANADA provides air navigation services to the full range of aircraft operators, from small general aviation aircraft operators to Canadian and foreign air carriers. The services provided by NAV CANADA include air traffic control services, flight information services, weather briefings, airport advisory services and electronic aids to navigation, and can be broken down into the following main categories:

  1. Terminal services--air navigation services provided or made available at or in the vicinity of an airport for the airport approach and departure phase of a flight;
  2. En route services--air navigation services, such as air traffic control, provided or made available to aircraft during the en route phase of a flight; and
  3. Oceanic services--en route services broken out from the rest of en route services that are divided into two sub-categories:
    1. North Atlantic services--air navigation services provided or made available to aircraft while over the North Atlantic in the airspace controlled by the Gander Area Control Centre; and
    2. International communication services--air/ground radio frequencies and certain other communication links typically provided or made available to North Atlantic flights.

NAV CANADA's charging system consists of three main categories for terminal and en route (other than oceanic) services:

  1. annual and quarterly charges for aircraft weighing three metric tonnes or less;
  2. daily charges for aircraft over three metric tonnes; and
  3. movement-based charges for terminal and en route services for aircraft over three metric tonnes which are applied on a per flight basis.

The movement-based charges are based on the aircraft weight for terminal services and on both the distance flown and the aircraft weight for en route services. In addition, there are two movement-based charges for oceanic services which are based on a flat fee per flight: the North Atlantic en route facilities and services charge and the international communication services charge. The international communication services charge differs according to whether data-link communication or voice communication is used by the aircraft operator to obtain position reports. The method for calculating charges is explained to users in a publication by NAV CANADA entitled Customer Guide to Charges. NAV CANADA revises this publication soon after it implements any new or revised charges or when it changes the terms and conditions of payment. As well, when NAV CANADA publishes a notice proposing to implement a new or revised charge, the notice provides information to enable any person subject to the charges to calculate the amount payable for a given flight.

In 1997, NAV CANADA established and published a methodology which set out how it compiled and allocated its costs to services provided. The methodology was approved by the Minister of Transport on September 5, 1997 as being consistent with the charging principles set out in the CANSCA. NAV CANADA produces a cost compilation report annually using actual costs. A summary of the allocation of these costs to each category of air navigation service is provided when NAV CANADA publishes a notice proposing to implement a new or revised charge.

C. THE CHARGES WHICH ARE THE SUBJECT OF THE APPEAL

On May 15, 2003, NAV CANADA published and filed with the Agency a notice detailing its proposal for a 6.9 percent average increase to its charges and a modification of its terms and conditions for payment, effective August 1, 2003. The fee increases for each relevant air navigation service were identified in the notice as follows:

  • 8.3 percent for the terminal service charge;
  • 5.2 percent for the en route charge;
  • 18.3 percent for the North Atlantic charge;
  • 3.1 percent for the international voice communication charge;
  • 3.0 percent for the international data link communication charge; and
  • 7.9 percent for the flat charges (daily, quarterly and annual).

A document entitled Details and Principles Regarding Proposed Revised Service Charges, dated May 15, 2003, which contains a justification for the Revised Charges in relation to the charging principles set out in the CANSCA, was published along with NAV CANADA's notice. That document discloses that the Revised Charges reflect two main components: 1) a 4.9 percent increase to break even for 2003/2004; and 2) a two percent increase to recover an anticipated cumulative revenue shortfall as of August 31, 2003 and replenish the rate stabilization account (hereinafter the RSA), both over five years.

The 4.9 percent increase is based on projected 2003/2004 costs, disbursements and reserves of $1,073 million less $18 million from ancillary revenues and $74 million from an anticipated cross-border technology lease transaction involving qualified technological equipment (hereinafter the QTE transaction) (i.e., $200 million expected benefit less $126 million to be applied to reduce the projected shortfall as of August 31, 2003). This results in a net amount to be recovered through customer service charges of $981 million.

The two percent increase is based on a projected cumulative shortfall of $45 million ($19 million for 2001/2002 and $157 million for 2002/2003, less an estimated $5 million in additional revenues from the Revised Charges, less the $126 million portion of the QTE transaction applied to 2002/2003) and the replenishment of the RSA in the amount of $50 million, for a total of $95 million to be recovered over a five-year period (i.e., $19 million per year).

NAV CANADA explains that the increased cost to air carriers from the Revised Charges varies depending on the aircraft weight and the length of the flight and would, typically, represent between $0.30 to $1.40 on a per passenger basis.

Following the statutory consultation period, NAV CANADA filed an announcement in respect of the Revised Charges with the Agency on July 21, 2003. The charges set out in the announcement were the same as those proposed in the notice. In accordance with section 38 of the CANSCA, the Revised Charges were implemented on August 1, 2003.

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ISSUES

Air Canada's grounds for this appeal are that NAV CANADA failed to observe the following two charging principles in establishing the Revised Charges:

  • Charges must not be set at a level that, based on reasonable and prudent projections, would generate revenues exceeding the Corporation's current and future financial requirements in relation to the provision of civil air navigation services--Paragraph 35(1)(i) of the CANSCA; and
  • Charges must be consistent with the international obligations of the Government of Canada-- Paragraph 35(1)(h) of the CANSCA.

Accordingly, the two main issues to be addressed by the Agency in this appeal are:

  1. Whether the Revised Charges are set at a level that, based on reasonable and prudent projections, would generate revenues exceeding NAV CANADA's current and future financial requirements in relation to the provision of civil air navigation services; and
  2. Whether the Revised Charges are consistent with the international obligations of the Government of Canada.

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ISSUE NO. 1

ARE THE REVISED CHARGES SET AT A LEVEL THAT, BASED ON REASONABLE AND PRUDENT PROJECTIONS, WOULD GENERATE REVENUES EXCEEDING NAV CANADA'S CURRENT AND FUTURE FINANCIAL REQUIREMENTS IN RELATION TO THE PROVISION OF CIVIL AIR NAVIGATION SERVICES?

The Agency has carefully reviewed and considered all of the pleadings and submissions and examined all of the evidence filed in respect of this issue, and is of the opinion that a determination of whether NAV CANADA observed the charging principle set out in paragraph 35(1)(i) of the CANSCA in establishing the Revised Charges is a three-step process. Firstly, the Agency must determine the meaning and purpose of the charging principle. Secondly, the Agency must determine whether NAV CANADA's projections in setting the Revised Charges were "reasonable and prudent" within the meaning of paragraph 35(1)(i) of the CANSCA. Finally, the Agency must determine whether the Revised Charges would generate revenues exceeding NAV CANADA's current and future financial requirements in relation to the provision of civil air navigation services.

A. What is the meaning and purpose of the charging principle set out in paragraph 35(1)(i) of the CANSCA?

Air Canada's position

Air Canada submits that the concepts of reasonableness and prudence included within the charging principle set out in paragraph 35(1)(i) of the CANSCA are designed to keep charges for air navigation services in check in order to ensure that NAV CANADA implements a cost structure consistent with an efficient operation. Accordingly, in Air Canada's view, when determining whether NAV CANADA observed the charging principle set out in paragraph 35(1)(i) of the CANSCA in establishing the Revised Charges, the Agency must consider whether the charges are set at the most efficient and cost-effective levels so as to ensure the continued competitiveness of the carriers served by NAV CANADA.

Air Canada also submits that, in order to fully understand the meaning of the words "reasonable" and "prudent"as they are used in paragraph 35(1)(i) of the CANSCA, the Agency must have regard to their ordinary meaning, the case law which has interpreted the words and their meaning in similar regulatory contexts. On the basis of its review of the definitions of the words "reasonable" and "prudent" found in those different contexts, Air Canada submits that the two words are often interpreted to mean circumspect, sensible, practical and moderate and suitable under the circumstances. Air Canada also submits that a determination of what is "reasonable" must involve an examination of the surrounding circumstances and, therefore, the Agency must consider the financial condition of NAV CANADA's customers and the general condition of the airline industry in determining what is "reasonable" in the context of the charging principles set out in section 35 of the CANSCA.

Air Canada further submits that the phrase "reasonable and prudent", as it is used in paragraph 35(1)(i) of the CANSCA, is not intended to refer only to NAV CANADA's traffic projections. Air Canada raises two arguments in support of this position. Firstly, Air Canada argues that had Parliament intended that NAV CANADA's charges be set at a level simply to recover NAV CANADA's costs, "without regard to the reasonableness or prudence of the quantum of those costs, it would have said so in the following terms:

"Charges must not be set at a level that would generate revenues exceeding the Corporation's current and future financial requirements in relation to the provision of air navigation services."

Secondly, Air Canada notes that there are no specific references to traffic projections in the CANSCA. Therefore, Air Canada argues that had Parliament intended that "reasonable and prudent" refer only to traffic projections, paragraph 35(1)(i) of the CANSCA would have been more explicit and would have been drafted as follows:

"Charges must not be set at a level that, based on reasonable and prudent traffic projections, would generate revenues exceeding the Corporation's current and future financial requirements in relation to the provision of civil air navigation services."

NAV CANADA's position

In NAV CANADA's view, the charging principle set out in paragraph 35(1)(i) of the CANSCA requires that NAV CANADA set its charges to meet, but not exceed, its financial requirements. In doing so, NAV CANADA must ensure that its projections as to revenues (based on air traffic volume projections) are "reasonable and prudent". NAV CANADA argues that the issue in considering this provision is whether NAV CANADA's projections as to traffic levels multiplied by the charging rates are reasonable and prudent in comparison to its financial requirements, as such requirements are defined in subsection 35(5) of the CANSCA. NAV CANADA also submits that, as revisions in charges are typically based on meeting the financial requirements for the next fiscal year, a projection of revenues is necessary to determine the level of charges required. As the projection of revenues depends on the underlying traffic forecast, in NAV CANADA's view, the charging principle set out in paragraph 35(1)(i) of the CANSCA requires revenue projections that are reasonable and prudent to ensure that traffic forecasts are not unduly low, resulting in higher charges than necessary.

NAV CANADA further submits that it is well aware of the state of the airline industry through extensive consultations with air carriers and associations of air carriers and that it has been sensitive to the difficulties of the airline industry by substantially reducing and deferring costs. However, NAV CANADA argues that neither a consideration of the state of the aviation industry nor the condition of a particular airline is part of the charging principles set out in the CANSCA, and, therefore, both issues fall outside the Agency's mandate in this appeal.

NAV CANADA also submits that the charging principles do not set requirements regarding the timing of increases in charges to meet its financial requirements and that if there were such requirements, "this would have been contrary to the rate-setting autonomy at the core of the economic regulatory model adopted by the government for the commercialization of the civil air navigation services, a model on which the financial foundation of the Corporation rests."

Positions of other users, groups of users and representative organizations of users

The submissions filed by ATA, IATA, ATAC, Clark & Company, UPS, CargoJet and CCMA support Air Canada's position in respect of the consideration of the performance and financial health of the entire airline industry.

Agency analysis and findings

The Agency is of the opinion that in interpreting a statutory provision such as paragraph 35(1)(i) of the CANSCA, the Agency must interpret the words of the provision in their grammatical and ordinary sense harmoniously with the overall scheme and purpose of the statute in which they are used as well as the intention of Parliament. As stated by M. Justice Rouleau of the Federal Court Trial Division in ECG Canada Inc. v. M.N.R., [1987] 2 F.C. 415:

There is no question that the literal approach is a well established one in statutory interpretation. Nevertheless, it is always open to the Court to look to the object or purpose of a statute, not for the purpose of changing what was said by Parliament, but in order to understand and determine what was said. The object of a statute and its factual setting are always relevant considerations and are not to be taken into account only in cases of doubt.

Accordingly, the meaning and purpose of the charging principle set out in paragraph 35(1)(i) of the CANSCA must be determined in the context of the overall purpose, object and scheme of the CANSCA.

The overall purpose, object and scheme of the CANSCA

The Agency has carefully reviewed and analyzed the CANSCA in the context of this appeal, and is of the opinion that the primary purpose of the CANSCA is the commercialization of the air navigation services previously provided by the Government of Canada. The Agency is of the further opinion that the main objects of the CANSCA, which are relevant to this appeal, are:

  • transferring air navigation services assets under the management and control of the Minister of Transport to NAV CANADA;
  • giving NAV CANADA a monopoly to provide aeronautical information services, air traffic control services and specified flight information services, except in limited circumstances;
  • establishing and delineating NAV CANADA's rights and responsibilities in the provision of civil air navigation services;
  • designating NAV CANADA as the authority in Canada responsible for aeronautical information services and air traffic control services pursuant to the Convention on International Civil Aviation;
  • establishing an economic regulatory regime in respect of user charges which
    • gives NAV CANADA the right to impose charges on users for the availability or provision of air navigation services, subject to the observation of a set of charging principles; and
    • provides users with
    • an opportunity to comment on NAV CANADA's proposals to establish new or revised charges through the public notice, consultation, and final announcement processes; and
    • a limited right to appeal NAV CANADA's new or revised charges to the Agency; and
  • ensuring the continuing provision and safety of air navigation services in Canada.

With respect to user charges, the CANSCA requires, in subsection 35(1), that NAV CANADA observe all of the following charging principles when it establishes a new charge or revises an existing charge:

  1. charges must be in accordance with a methodology established and published by the Corporation that is explicit and that also includes the terms and conditions affecting charges;
  2. charges must not be structured in such a way that a user would be encouraged to engage in practices that diminish safety for the purpose of avoiding a charge;
  3. charges for the same services must not differentiate between domestic and international flights of air carriers;
  4. charges for the same services must not differentiate among Canadian air carriers or among foreign air carriers;
  5. charges must differentiate between the provision of services in relation to the landing and take-off of aircraft and the provision of services in relation to aircraft in flight, and must reflect a reasonable allocation of the costs of providing the services in those circumstances;
  6. charges in respect of recreational and private aircraft must not be unreasonable or undue;
  7. charges for designated northern or remote services and for services directed to be provided under subsection 24(1) must not be higher than charges for similar services utilized to a similar extent elsewhere in Canada;
  8. charges must be consistent with the international obligations of the Government of Canada; and
  9. charges must not be set at a level that, based on reasonable and prudent projections, would generate revenues exceeding the Corporation's current and future financial requirements in relation to the provision of civil air navigation services.

With respect to the particular charging principle set out in paragraph 35(1)(i) of the CANSCA, the "financial requirements" referred to in that charging principle are set out in subsection 35(5) of the CANSCA as follows:

  1. costs incurred before the transfer date,
  2. operations and maintenance costs,
  3. management and administration costs,
  4. debt servicing requirements and financial requirements arising out of contractual agreements relating to the borrowing of money,
  5. depreciation costs on capital assets,
  6. financial requirements necessary for the Corporation to maintain an appropriate credit rating,
  7. tax liability,
  8. reasonable reserves for future expenditures and contingencies, and
  9. other costs determined in accordance with accounting principles recommended by the Canadian Institute of Chartered Accountants or its successor.

Subsection 35(6) of the CANSCA requires that profits from other activities, including investments, be deducted from the financial requirements and be returned to users in the form of reduced charges.

The charging principles set out in subsection 35(1) of the CANSCA are very broad, in the Agency's view, and are designed to provide NAV CANADA with the necessary scope and flexibility to develop its own commercial structure and schedule of charges. The charging principles also establish specific boundaries for NAV CANADA's charges in order to protect users from the imposition of undue or inequitable charges. The Agency is of the further opinion that these principles recognize that NAV CANADA is a not for profit, self-regulating, private corporation which cannot raise revenues to an excessive level in relation to its costs.

In addition, the Agency is of the opinion that the broad representation on NAV CANADA's Board of Directors and the notice and consultation requirements that the CANSCA imposes on NAV CANADA ensure that NAV CANADA is kept informed of the views of the airline industry on an ongoing basis, and that the airline industry is kept informed of NAV CANADA's plans to establish new charges or revise existing charges, and is given the opportunity to comment on any such proposals. Nevertheless, as any private corporation, NAV CANADA is required to act in its own best interests and not in the interests of any particular stakeholder in making its business decisions.

In the Agency's view, however, Parliament did not intend that all of NAV CANADA's decisions be free from regulatory oversight. Pursuant to subsection 42(1) of the CANSCA, persons directly affected by NAV CANADA's decisions to establish new charges or revise existing charges may challenge those decisions by filing an appeal with the Agency. However, the appeal process set out in the CANSCA is, in the Agency's opinion, circumscribed and expeditious. More particularly, an appeal must be made promptly, the basis for an appeal is strictly limited to the four grounds specified in section 43 of the CANSCA, and the Agency must deal with an appeal very quickly.

On the basis of the foregoing analysis of the overall purpose, object and scheme of the CANSCA, the Agency is of the opinion that the CANSCA is designed to provide NAV CANADA with the commercial freedoms it needs to develop and maintain a safe, efficient, financially viable and cost-effective air navigation system while, at the same time, taking the interests of the users of that system into consideration by imposing certain operating conditions on NAV CANADA and establishing a regulatory framework.

What does the phrase "reasonable and prudent" mean as it is used in paragraph 35(1)(i) of the CANSCA?

Many of the arguments raised in this appeal revolve around the meaning of the phrase "based on reasonable and prudent projections", as it is used in the charging principle set out in paragraph 35(1)(i) of the CANSCA. The Agency has reviewed and carefully considered all of those arguments in the context of the object, purpose and scheme of the CANSCA outlined above, and, for the reasons which follow, finds that:

  • the phrase "reasonable and prudent" means "having sound judgment";
  • the phrase "reasonable and prudent", as it is used in paragraph 35(1)(i) of the CANSCA applies to NAV CANADA's projections with respect to both its revenues and its financial requirements, not just NAV CANADA's traffic projections; and
  • the phrase "reasonable and prudent", as it is used in paragraph 35(1)(i) of the CANSCA does not include a consideration of either the financial condition of NAV CANADA's customers or the general condition of the industry in which NAV CANADA's customers operate, or whether NAV CANADA's charges are set at the most efficient and cost-effective levels so as to ensure the continued competitiveness of the carriers served by NAV CANADA.

Neither the phrase "reasonable and prudent" nor the individual words "reasonable" and "prudent" are defined in either the CANSCA or any other statute or regulation administered by the Agency. In Merson v. Minister of National Revenue (1988), 89 D.T.C. 22, the Tax Court of Canada noted, at page 14, that,

"prudent" is defined by The Shorter Oxford English Dictionary On Historical Principles as follows:

"...Of persons, etc.: Sagacious in adapting means to ends; having sound judgment in practical affairs; circumspect, discreet, worldly-wise. ...3. Of conduct, action, etc.: Characterized by, exhibiting, or proceeding from prudence; politic, judicious..."

The same dictionary defines "reasonable" as:

"...2. Having sound judgment; sensible... . 3. Agreeable to reason; not irrational, absurd or ridiculous.... 4. Not going beyond the limit assigned by reason; not extravagant or excessive; moderate...."

The words "reasonable" and "prudent" in some instances of use are synonymous: having sound judgment.

In the Black's Law Dictionary,"prudent" is defined as: "Sagacious in adapting means to end; circumspect in action, or in determining any line of conduct. Practically wise, judicious, careful, discreet, circumspect, sensible"; "reasonable" is defined as: "Fair, proper, just, moderate, suitable under the circumstances".

As the Agency noted in Decision No. 666-C-A-2001, the courts have consistently held that words such as "unreasonable" cannot be defined by recourse to a dictionary and that a contextual meaning must be given to such words.

The Agency is, therefore, of the opinion that there cannot be one specific definition of the word "reasonable", and the similar word "prudent", which will apply in all cases--the words can only be defined in the context within which they are used. The Agency finds that in light of the overall object, purpose and scheme of the CANSCA detailed above, the phrase "reasonable and prudent", as it is used in paragraph 35(1)(i) of the CANSCA, is best defined as "having sound judgment".

What does the phrase "reasonable and prudent" in paragraph 35(1)(i) of the CANSCA modify?

The Agency notes that the phrase "reasonable and prudent" comes immediately before the word "projections" in the parenthetical phrase, "based on reasonable and prudent projections" in the English version of paragraph 35(1)(i) of the CANSCA and that the word "raisonnables" immediately follows the word "calculs" in the parenthetical phrase, "d'après des calculs raisonnables", in the French version of that provision. Accordingly, the Agency is of the opinion that the phrase "reasonable and prudent" is used in paragraph 35(1)(i) of the CANSCA to modify the word "projections".

As a result of the nature and structure of NAV CANADA's business operations, the Agency is of the opinion that NAV CANADA's projections with respect to traffic volume and financial requirements form the basis for its revenue projections. Accordingly, NAV CANADA's revenue and financial requirements are interrelated. In the Agency's opinion, if the phrase "reasonable and prudent" in paragraph 35(1)(i) of the CANSCA were intended to refer only to traffic projections, a specific reference to traffic projections would have been included in that provision. The Agency, therefore, finds that for the purposes of paragraph 35(1)(i) of the CANSCA, NAV CANADA's projections with respect to both its revenues and its financial requirements, not just its traffic projections, must be "reasonable and prudent".

Does the phrase "reasonable and prudent", as it is used in paragraph 35(1)(i) of the CANSCA, include a consideration of either the financial condition of NAV CANADA's customers or the general condition of the industry in which NAV CANADA's customers operate, or whether NAV CANADA's charges are set at the most efficient and cost-effective levels so as to ensure the continued competitiveness of the carriers served by NAV CANADA?

The CANSCA imposes specific obligations on NAV CANADA with respect to the way in which it sets its charges and the costs, disbursements and reserves it may include in, and the amounts it must deduct from, its financial requirements. In the Agency's view, the economic regulatory regime with respect to user charges set out in the CANSCA, as well as NAV CANADA's unique structure as a not for profit, self-regulating, commercial organization, offer a great deal of protection to users of NAV CANADA's services. More particularly, one-third of NAV CANADA's directors are appointed by users, thereby ensuring the active involvement of users in the process leading to the imposition of both new and revised charges. Users are also given the opportunity to comment on all of NAV CANADA's proposals to establish new or revised charges through the public notice, consultation and final announcement processes mandated by the CANSCA.

The Agency notes that the charging principles set out in paragraphs 35(1)(c) and (d) of the CANSCA specifically provide for certain protections to foreign carriers who have no representation on NAV CANADA's Board of Directors. This suggests to the Agency that if Parliament had considered it necessary for NAV CANADA to consider the financial condition of its customers, the general condition of the industry in which NAV CANADA's customers operate, or whether NAV CANADA's charges are set at the most efficient and cost-effective levels so as to ensure the continued competitiveness of the carriers served by NAV CANADA in setting its charges, such considerations would either have been stated explicitly in one or more of the charging principles set out in subsection 35(1) of the CANSCA, or would have formed the basis of separate charging principles. Accordingly, the Agency finds that the phrase "reasonable and prudent", as it is used in paragraph 35(1)(i) of the CANSCA does not include a consideration of either the financial condition of NAV CANADA's customers or the general condition of the industry in which NAV CANADA's customers operate or whether NAV CANADA's charges are set at the most efficient and cost-effective levels so as to ensure the continued competitiveness of the carriers served by NAV CANADA.

The Agency's interpretation of the charging principle set out in paragraph 35(1)(i) of the CANSCA

On the basis of the foregoing analysis and findings, the Agency is of the opinion that the general intent and purpose of the charging principle set out in paragraph 35(1)(i) of the CANSCA is to prevent NAV CANADA from generating, through the imposition of its charges, any more revenue than it needs to meet its mandated financial requirements. More particularly, paragraph 35(1)(i) of the CANSCA requires that NAV CANADA's charges be developed using revenue and financial requirements projections which are based on sound judgment.

B. Are NAV CANADA's projections in setting the Revised Charges "reasonable and prudent" within the meaning of paragraph 35(1)(i) of the CANSCA?

Air Canada's position

Air Canada is of the view that the Revised Charges have not been based on "reasonable and prudent projections" regarding revenues expected to be generated by NAV CANADA from the provision of air navigation services and its current and future financial requirements in relation thereto. In support of its position, Air Canada argues that NAV CANADA improperly allocated fees by subsidizing services provided to general aviation using revenues obtained from charges imposed on major commercial air carriers, and by not allocating the increase in the international communication charge in the appropriate proportions between international voice communication and international data link communication. Air Canada also argues that the Revised Charges should not be used to replenish the RSA at this time, that NAV CANADA should not be using the Revised Charges to recover Air Canada's debts for services rendered prior to its filing for protection under the Companies Creditors Arrangement Act (the CCAA), and that NAV CANADA should have engaged in more aggressive cost-cutting measures, as its customers have had to do. Air Canada also provides suggestions on selected NAV CANADA capital projects that it believes should be reduced or deferred.

NAV CANADA's position

NAV CANADA submits that the reference in paragraph 35(1)(i) of the CANSCA to "reasonable and prudent projections" relates to the projection of revenues that would be generated by a set of charges. NAV CANADA states that its projected revenues are based on its traffic forecast. NAV CANADA adds that this forecast took into account the latest actual traffic data and available outlooks by other organizations, such as Transport Canada. NAV CANADA indicates that its traffic forecast was discussed with other industry representatives, has not been challenged, and was found to be reasonable by NAV CANADA's Board of Directors as late as August of 2003. NAV CANADA also indicates that its traffic assumptions and financial requirements were the subject of extensive analysis and review during the consultation period mandated by the CANSCA. Accordingly, NAV CANADA submits that its revenue projections in setting the Revised Charges are "reasonable and prudent".

In addition, NAV CANADA submits that the four specific grounds relied on by Air Canada for its claim that the Revised Charges have not been based on reasonable and prudent projections and, therefore, are inconsistent with the charging principle set out in paragraph 35(1)(i) of the CANSCA relate to NAV CANADA's charging methodology and its financial requirements. In NAV CANADA's view, these issues are the subject of other charging principles in the CANSCA, and, therefore, are outside the scope of both the charging principle set out in paragraph 35(1)(i) of the CANSCA and the appeal. More particularly, NAV CANADA argues that Air Canada's submission with respect to the improper allocation of fees is more relevant to the charging principles set out in paragraph 35(1)(a) (the charging principle regarding methodology), paragraph 35(1)(e) (the cost allocation principle) and paragraph 35(1)(f) (the principle regarding general aviation). NAV CANADA further argues that financial requirements are covered in the charging principle found in subsection 35(5) of the CANSCA and, therefore, are not part of the charging principle set out in paragraph 35(1)(i).

NAV CANADA also asserts that many of the facts alleged by Air Canada are incorrect and that it has reduced operating expenses and deferred capital expenditures, except those related to safety.

In summarizing its position, NAV CANADA submits that its revenue projection for the 2003/04 fiscal year is based on reasonable and prudent assumptions of air traffic volume and that its financial requirements are consistent with subsections 35(5) and (6) of the CANSCA.

Agency analysis and findings

The Agency has reviewed all of the arguments and evidence filed in respect of the revenue projections NAV CANADA used in setting the Revised Charges and is of the opinion that these projections are based on sound judgment. The Agency notes that Air Canada neither made any specific submissions in respect of these projections nor challenged them in any way. Accordingly, the Agency finds that the revenue projections NAV CANADA used in setting the Revised Charges are "reasonable and prudent" within the meaning of paragraph 35(1)(i) of the CANSCA.

With respect to the four specific grounds Air Canada relies on in support of its position that the Revised Charges have not been based on reasonable and prudent projections, the Agency is of the opinion that a consideration of these issues is relevant to its determination of whether NAV CANADA's projected financial requirements are reasonable and prudent within the meaning of paragraph 35(1)(i) of the CANSCA. Accordingly, the Agency will examine and analyze each of the four issues separately below.

1. Improper allocation of fees

(a) Subsidizing general aviation

Air Canada's position

Air Canada asserts that it and other major commercial air carriers pay the bulk of the charges imposed by NAV CANADA for air navigation services. As a result of NAV CANADA's cost allocation methodology, these major commercial carriers, in effect, subsidize the general aviation population for services that the major carriers seldom, if ever, use. In light of the current state of the airline industry, Air Canada is of the opinion that the major commercial carriers can no longer afford to pay for general aviation and related projects and services. Air Canada also argues that this "subsidization of general aviation" is contrary to the policy of the International Civil Aviation Organization (hereinafter ICAO) on the allocation of air navigation services costs which states that,

The proportions of costs attributable to international civil aviation and other utilization of the facilities and services (including domestic civil aviation, State or other exempted aircraft and non-aeronautical users) should be determined in a way as to ensure that no users are burdened with costs not properly allocable to them according to sound accounting principles.

Air Canada describes the various services provided by NAV CANADA across Canada and states that the major commercial air carriers pay significant charges for, but seldom use, the new web-based Flight Information Centre (FIC)/automated flight-planning programme (Pilot Information Kiosks and AWWS), the Flight Service Station (FSS) Weather Graphics System, the Flight Information Management System and the Pilot Automatic Telephone Weather Answering System. Air Canada also states that revenues earned by NAV CANADA from Air Canada and its affiliates were $184 million during the nine months ending on May 31, 2003, representing 29 percent of total NAV CANADA revenues before rate stabilization. Air Canada further states that of the $115 million budgeted by NAV CANADA for FIC/FSS facilities, approximately $30 million is paid by Air Canada through terminal and en route charges. Air Canada also contends that the costs of certain air traffic control towers that are not used by air carriers should be allocated to general aviation, the primary users of these services. Air Canada also submits that major commercial carriers are required to subsidize the cost of projects which supplement old technology, even though their aircraft are equipped with, and are using, newer technology.

NAV CANADA's position

NAV CANADA states that it provides a system of air navigation services, the availability and provision for which it may impose charges pursuant to section 32 of the CANSCA. NAV CANADA, therefore, argues that it is not required to vary its charges according to whether some parts of the system are used, or not, by certain aircraft operators. In further support of this position, NAV CANADA refers to the charging principles set out in paragraphs 35(1)(b) and 35(1)(g) of the CANSCA which state, respectively, that charges must not be imposed in a way that would encourage users to forego a service related to safety for the purpose of avoiding a charge, and that charges for designated northern or remote services must not be higher than charges for similar services at sites elsewhere in Canada where traffic levels are similar.

With respect to the allocation of costs in charges, NAV CANADA submits that the charging principle set out in paragraph 35(1)(e) of the CANSCA requires an allocation between terminal and en route services. However, in NAV CANADA's view, the CANSCA does not break costs down between user groups and the charging principles prohibit discrimination amongst carriers. NAV CANADA also notes that the role of general aviation in Canada is specifically recognized in a separate charging principle, which stipulates that charges for recreational and private aircraft must not be unreasonable or undue (paragraph 35(1)(f) of the CANSCA).

NAV CANADA further states that its charging methodology covering all user groups, including general aviation, was developed in 1997 and 1998 through extensive consultation with stakeholders. This led to the adoption of a balanced charging methodology which was approved by the Minister of Transport as being consistent with the charging principles. NAV CANADA asserts that it has maintained the same charging methodology and applied the same percentage change in charges to all fees pertaining to a particular service (i.e., terminal services or en route services). Accordingly, it contends that its charges as they relate to the full range of users, including general aviation, remain consistent with the charging principles set out in the CANSCA.

With respect to Air Canada's assertion that NAV CANADA's charges are inconsistent with ICAO's policy regarding the allocation of air navigation costs, NAV CANADA submits that the policy is not binding on States and is directed mainly at international and domestic civil aviation, rather than general aviation. NAV CANADA states that it separates oceanic services (North Atlantic and international communication) from the rest of the en route services as they serve only international flights. NAV CANADA does not allocate the cost of en route (other than oceanic) and terminal services between international and domestic flights because the services provided, or made available, are the same. This is consistent, in NAV CANADA's opinion, with the charging principle set out in paragraph 35(1)(c) of the CANSCA (domestic/international discrimination), ICAO's policy and international practice.

NAV CANADA also makes specific submissions in response to what it describes as "incorrect or incomplete" information provided by Air Canada regarding NAV CANADA's facilities and services and notes that it has delayed work on some flight information centres until 2004/2005 as part of its cost mitigation efforts.

Positions of other users, groups of users and representative organizations of users

The submission from UPS supports Air Canada's argument that major commercial carriers subsidize the general aviation population for services that the major carriers seldom, if ever, use. The submission from COPA supports the argument by NAV CANADA that the charges should not be based on whether some parts of the system are used, or not, by certain aircraft operators.

Agency analysis and findings

The Agency has reviewed all of the submissions and evidence filed in respect of Air Canada's argument that NAV CANADA has improperly allocated fees by subsidizing services provided to general aviation using revenues obtained from charges imposed on the major commercial carriers, and finds that this argument does not relate to any of the financial requirements specified in subsection 35(5) of the CANSCA. The Agency is, therefore, of the opinion that Air Canada's argument in this regard is not applicable to the charging principle set out in paragraph 35(1)(i) of the CANSCA. The Agency is also of the opinion that Air Canada's argument does not relate to the other charging principle at issue in this appeal, that is the principle set out in paragraph 35(1)(h) of the CANSCA.

However, as NAV CANADA has provided comprehensive submissions in response to Air Canada's argument, the Agency will consider Air Canada's argument in the context of this appeal but such consideration will not have a bearing on the Agency's final determination with respect to whether NAV CANADA observed the charging principle set out in paragraph 35(1)(i) of the CANSCA in establishing the Revised Charges.

The Agency is of the opinion that Air Canada's argument regarding the subsidization of general aviation may be relevant to three of the charging principles set out in subsection 35(1) of the CANSCA, i.e., paragraphs 35(1)(a), 35(1)(e) and 35(1)(f). With respect to the charging principle set out in paragraph 35(1)(a) of the CANSCA, the Agency is of the opinion that no evidence has been filed in this appeal to support a finding that the Revised Charges are not in accordance with a public and explicit methodology. The Agency notes that NAV CANADA consulted extensively with stakeholders prior to establishing its charging methodology in 1997 and 1998 and recognizes that this methodology was approved by the Minister of Transport as being consistent with the requirements of the CANSCA. The Agency has not been presented with any evidence indicating either that this methodology has changed or that NAV CANADA failed to follow it in setting the Revised Charges.

The Agency notes that the charging principle set out in paragraph 35(1)(e) of the CANSCA requires that charges for terminal services and en route services must be separately identified and reflect a reasonable allocation of the costs of providing the services, which was done in this case. The Agency also notes that neither this charging principle nor any of the other charging principles listed in subsection 35(1) of the CANSCA requires that charges reflect the fact that certain air navigation facilities or services may not be used by certain users. In addition, the Agency notes that the CANSCA specifically states, in subsection 32(1), that charges may be imposed for both the availability and the provision of air navigation services.

With respect to charges for general aviation, the Agency notes that these charges have been increased by 7.9 percent, representing a weighted average of the increases proposed for terminal services (8.3 percent) and en route services (5.2 percent) and account for roughly four percent of NAV CANADA's revenues from customer service charges. The Agency also notes that the charging principle set out in paragraph 35(1)(f) of the CANSCA is one of the stated "Objects"of NAV CANADA in its Letters Patent. The Agency is of the opinion that a charging principle which requires that charges for recreational and private aircraft not be "unreasonable" or "undue" recognizes that the ability of operators of these type of aircraft to pay for charges may be different from that of commercial air carriers. Accordingly, generating less revenues from general aviation than the cost of providing services to general aviation would not be inconsistent with the charging principle set out in paragraph 35(1)(f) of the CANSCA

(b) International communication charge

Air Canada's position

Air Canada notes that the international communications charge is for air/ground radio frequencies and certain other communication links provided or made available to an aircraft during the course of an international flight, other than a flight between Canada and the continental United States. Air Canada also notes that there are generally two types of communication--voice and data link--and that most major commercial air carriers have equipped their aircraft with data link equipment. Air Canada further notes that the Revised Charges include an increase in international voice and data link communications charges of, respectively, 3.1 and 3.0 percent. In Air Canada's view, voice communication is considerably more costly than data link communication and, therefore, the increase in the voice communication charge should be substantially higher than the increase in the data link charge. This would also provide an incentive to air carriers to invest in data link technology, in Air Canada's opinion.

NAV CANADA's position

NAV CANADA states that it introduced the difference in the charges for voice and data link communications in 2000 to encourage the use of data link technology and to avoid the need for further investment in voice communication capacity. NAV CANADA notes that the data link charge is about one-half of the voice communication charge. NAV CANADA argues that before any further change in the difference in charges is considered, several issues will need to be examined, such as the development of a plan by all providers of high frequency-voice service capacity on the North Atlantic for a reduction in this capacity and a related rationalization for the provision of the remaining high frequency-voice service. NAV CANADA also contends that even a uniform charge, without any differentiation, would be consistent with both the charging principles set out in the CANSCA, as the charges are based on the provision or availability of service, and ICAO policies.

Positions of other users, groups of users and representative organizations of users

None of the submissions specifically refer to the issue of the improper allocation of fees in respect of the international communication charge.

Agency analysis and findings

The Agency has reviewed all of the submissions and evidence filed with respect to Air Canada's argument that NAV CANADA should have increased the voice communication charge by more than the data link communication charge, and finds that this argument does not relate to any of the financial requirements specified in subsection 35(5) of the CANSCA. The Agency is, therefore, of the opinion that Air Canada's argument in this regard is not applicable to the charging principle set out in paragraph 35(1)(i) of the CANSCA. The Agency is also of the opinion that Air Canada's argument does not relate to the other charging principle at issue in this appeal, that is the principle set out in paragraph 35(1)(h) of the CANSCA.

However, as NAV CANADA has provided comprehensive submissions in response to Air Canada's argument, the Agency will consider Air Canada's argument in the context of this appeal, but such consideration will not have a bearing on the Agency's final determination with respect to whether NAV CANADA observed the charging principle set out in paragraph 35(1)(i) of the CANSCA in establishing the Revised Charges.

The Agency recognizes that charges for international communication account for only a small portion (roughly 1.5 percent, or $13 million, per year) of NAV CANADA's revenues from customer service charges. The Agency also recognizes that a difference in charges for voice and data link communication reflects the different costs associated with the use of the different communications technologies.

From its examination of NAV CANADA's document entitled Details and Principles Regarding Proposed Revised Service Charges, dated May 15, 2003, the Agency notes that the allocation of the total costs to recover from the international communication charges, which is used in determining the percentage increase in these charges necessary for NAV CANADA to break even, is consistent with NAV CANADA's cost allocation methodology and cost compilation as of August 31, 2002. The increases in the charges for each of voice communication and data link communication (3.1 and 3.0 percent, respectively) reflect the projection that 60 percent of the international flights will be voice communication and 40 percent will be data link communication. The increases also reflect the projection that approximately 75 percent of the international communication costs to recover are allocated to voice communication, and the remaining 25 pecent are allocated to data link communication. While there may be some merit to Air Canada's assertion that these charges should be higher for voice communication and lower for data link communication in future years to reflect improved systems for data link communication and greater utilization of these services, there is no specific evidence before the Agency in this appeal indicating that the costs used in developing the increases in those charges are unreasonable.

2. The rate stabilization account (RSA)

Air Canada's position

Air Canada argues that in light of the current economic climate and the state of the airline industry, it would not be reasonable and prudent for NAV CANADA to replenish the RSA at this time. Air Canada, therefore, submits that NAV CANADA should not be including amounts relating to the RSA in its projections. In Air Canada's view, NAV CANADA should wait until the airline industry recovers before it replenishes the RSA. Although Air Canada recognizes that the CANSCA provides NAV CANADA with the right to include "reasonable reserves for future expenditures and contingencies" (paragraph 35(5)(h) of the CANSCA) in its financial requirements, Air Canada is of the view that the planned recovery of $50 million over five years is not appropriate at the present time. Air Canada, therefore, suggests that NAV CANADA delay the replenishment of the RSA until the airline industry recovers or that the RSA be replenished either over a longer period of 10 to 15 years or only in the fourth and fifth years, or by way of a gradual increase over a five-year period.

NAV CANADA's position

NAV CANADA states that the allowable financial requirements set out in paragraphs 35(5)(f) and 35(5)(h) of the CANSCA authorize NAV CANADA to maintain reasonable reserves and an appropriate credit rating. NAV CANADA notes that the RSA was established in 1998 with a target balance of $50 million funded from revenues. A level of $50 million was deemed to be reasonable on the basis of an historical sensitivity analysis done at that time. NAV CANADA further states that the purpose of the RSA is to mitigate the effect on NAV CANADA of unpredictable and uncontrollable factors, primarily fluctuations in air traffic volumes resulting from the cyclical nature of the commercial air carrier industry. NAV CANADA also states that the principle of the RSA is that monies in excess of $50 million are returned to users through reductions in charges, while shortfalls are replenished through increases in charges. NAV CANADA states that the target balance of $50 million for the RSA has never been appealed, and that there are other air navigation service providers that have similar RSA's or rate over/under adjustment mechanisms.

NAV CANADA further states that as a result of the downturn in traffic following the terrorist attacks of September 11, 2001, the RSA was fully drawn down and went into a deficit position, which demonstrates that an RSA of $50 million was too low. NAV CANADA also contends that the RSA component of the increase in charges was necessary in order to avoid further erosion of its credit rating; a reduction in NAV CANADA's credit rating would increase its borrowing costs, thus increasing the costs to users, and could also have a negative impact on NAV CANADA's proposed QTE transaction. Accordingly, in order to mitigate the impact of future events on both NAV CANADA and its customers, NAV CANADA's Board of Directors determined that the RSA should be restored to its $50 million target as soon as possible within five years. NAV CANADA also notes that the RSA component of the increases represents one percent of the Revised Charges.

NAV CANADA, therefore, submits that the existence of the RSA, its targeted level and the period over which it should be restored are all reasonable and meet the requirements of paragraph 35(5)(h) of the CANSCA.

Positions of other users, groups of users and representative organizations of users

The submissions from ATA, CargoJet and CCMA generally support Air Canada's arguments in respect of the RSA. UPS supports the general proposition that replenishment should not necessarily be a financial priority at this point in time.

Agency analysis and findings

The Agency notes that paragraph 35(5)(h) of the CANSCA permits NAV CANADA to maintain reasonable reserves for future expenditures and contingencies to the extent that they relate to the provision of civil air navigation services. The Agency further notes that NAV CANADA's Board of Directors approves, from time to time, adjustments to the RSA to reflect differences between the projected amounts used in establishing customer service charges and the actual results. In the Agency's view, these adjustments enable NAV CANADA to achieve a break even financial position on an annual basis.

In principle, when actual revenues exceed NAV CANADA's current and future financial needs, such excess will be reflected positively in the RSA and will be returned to customers when establishing future customer services charges. The Agency notes that this occurred in September of 1999, when service charges were reduced by an average of 11 percent as the RSA balance exceeded $95 million as of August 31, 1999. Similarly, when NAV CANADA's actual revenues are insufficient to meet current financial requirements, such shortfalls will be reflected negatively in the RSA, and will be recovered from customers through future customer service charges. The Agency recognizes that in the process of determining future charges for its services, NAV CANADA takes into account the accumulated balance in the RSA.

The Agency also notes that NAV CANADA's 2002 Annual Report indicates that during fiscal years 1999/2000 and 2000/2001, the RSA accumulated to a total positive balance of approximately $75 million as a result of higher air traffic volumes and lower expenses than anticipated when charges were established. Following the decline in air traffic after September 11, 2001, NAV CANADA fully utilized the balance in the RSA and reflected a net revenue shortfall of $19 million in that account as evidenced in NAV CANADA's audited financial statements for the period ending August 31, 2002. The Agency notes that NAV CANADA anticipates a further shortfall of $26 million in 2003 assuming that non-aeronautical revenues amounting to $126 million are realized from the QTE transaction. Of the 6.9 percent average increase in charges, two percent is to provide revenues, in the amount of $19 million per year, sufficient to recover the cumulative shortfall of $45 million, and to replenish the RSA to a balance of $50 million, both over a period of five years. In calculating this two percent increase, the Agency notes that NAV CANADA has reduced its financial requirements by the anticipated non-aeronautical revenues from the QTE transaction, in conformity with paragraph 35(6)(d) of the CANSCA.

Having reviewed and carefully considered the positions of both Air Canada and NAV CANADA in respect of the issues relating to the RSA raised in the appeal, as well as all of the submissions and evidence filed, the Agency finds that NAV CANADA's projections with respect to the RSA, its targeted level and the period over which it should be restored are all based on sound judgment and, therefore, are "reasonable and prudent" within the meaning of paragraph 35(1)(i) of the CANSCA.

3. Recovery of Air Canada's bad debts through increased charges

Air Canada's position

Air Canada submits that, through the Revised Charges, NAV CANADA is attempting to recover debts owed by Air Canada for unpaid charges incurred before the carrier filed for protection under the CCAA. The recovery of this bad debt expense indirectly through an increased service charge is not reasonable and prudent, in Air Canada's view, given the current economic climate and the state of the worldwide aviation industry. Air Canada is also of the view that this indirect recovery of past debts through the Revised Charges, which will be paid in large part by Air Canada, circumvents the CCAA proceedings, is to the detriment of the other CCAA creditors' interests, as well as other users of the air navigation system, and violates paragraph 35(1)(i) of the CANSCA.

NAV CANADA's position

NAV CANADA submits that Air Canada's position with respect to the recovery of its bad debts is directly contrary to Air Canada's written agreement with NAV CANADA which was entered into during the CCAA proceedings. That agreement, according to NAV CANADA, was entered into in order to clarify that the Initial Order of Mr. Justice Farley did not stay the rights of airports and NAV CANADA to raise their generally applicable fees, which would apply to Air Canada. In NAV CANADA's opinion, the agreement was entered into by Air Canada with full knowledge of the pre-CCAA filing receivable of NAV CANADA and, presumably, with a full understanding of the charging principles. NAV CANADA also notes that past increases in NAV CANADA's charges have reflected bad debts arising out of an air carrier's bankruptcy (e.g., Canada 3000 Airlines Limited), and Air Canada did not object at that time.

NAV CANADA further submits that any concern with the impact of NAV CANADA's Revised Charges on the CCAA proceedings should be raised in those proceedings and that the Agency does not have the jurisdiction to make decisions about the CCAA proceedings and the impact of the Revised Charges on other Air Canada creditors.

NAV CANADA asserts that bad debts are a cost of doing business and that generally accepted accounting principles specifically require NAV CANADA to include provisions for bad debt as expenses. Therefore, NAV CANADA argues, taking Air Canada's bad debt into account in setting the Revised Charges is consistent with paragraph 35(5)(i) of the CANSCA. NAV CANADA also states that even though it could have included the entire Air Canada debt in its financial requirements for the 2003/04 fiscal year, only one-fifth of the bad debt was taken into account in the Revised Charges, the plan being to recover the total amount over five years. NAV CANADA further states that any recovery of Air Canada's bad debt through the CCAA proceedings will be taken into account favourably when adjusting fees in the future.

Positions of other users, groups of users and representative organizations of users

The submissions from ATA, Clark & Company and UPS support Air Canada's arguments in respect of the recovery of bad debt.

Agency analysis and findings

Pursuant to paragraph 35(5)(i) of the CANSCA, NAV CANADA's financial requirements include "other costs determined in accordance with accounting principles recommended by the Canadian Institute of Chartered Accountants" (hereinafter the CICA). The Agency acknowledges that the CICA makes accounting recommendations that it publishes in its Handbook. The Agency also notes that section 3020 of the CICA Handbook recognizes bad debt as a legitimate expense.

The Agency, therefore, finds that NAV CANADA's projections with respect to Air Canada's bad debt are based on sound judgment and, as such, are "reasonable and prudent" within the meaning of paragraph 35(1)(i) of the CANSCA.

4. Cost reduction measures

Air Canada's position

Air Canada submits that the Revised Charges do not meet the requirements of paragraph 35(1)(i) of the CANSCA because NAV CANADA has not done enough to reduce labour and capital costs. Air Canada refers to NAV CANADA wage settlements with employees, where wages are increasing, and to the hiring of additional employees. Air Canada is of the view that the increase in NAV CANADA's salary and benefits expense to $402 million for the nine-month period which ended May 31, 2003, from $387 million for the same period in 2002, exceeds what is reasonable and prudent in the current industry climate. Air Canada also voices its concern over the level of administrative expenses.

With respect to capital projects, Air Canada is of the opinion that due to decreased traffic and reduced profitability of the airline industry, it would be reasonable and prudent for NAV CANADA to delay, reduce or eliminate its non-essential capital projects in order to decrease its costs. According to Air Canada, NAV CANADA has not provided any indication or evidence demonstrating that proposed capital spending by NAV CANADA will generate efficiencies or cost savings. Air Canada argues that NAV CANADA should demonstrate that it has budgeted for an optimal capital spending level in order for its projections to be considered reasonable and prudent. Air Canada further argues that NAV CANADA should delay the implementation of several capital projects (three Northern Flight Information Centres, the new web-based Flight Information Centre/automated flight-planning programme, the Flight Service Station Weather Graphics System, the Flight Information Management System and the Pilot Automatic Telephone Weather Answering System) and should consider a reduction in certain facilities (air traffic control towers, flight service stations, flight information centres).

Air Canada's primary concern with respect to the issue of cost reduction measures is that although NAV CANADA states that it is deferring expenditures, it is not reducing the absolute cost of its capital expenditures. Similarly, Air Canada's concern with respect to overhead and administration costs is their current decrease in absolute terms, not the relative decrease in these costs as a portion of operating costs over the period from November 1996 to August 2002.

NAV CANADA's position

NAV CANADA submits that, as noted by Air Canada, it implemented a mitigation plan following the terrorist attacks of September 11, 2001 which was designed to reduce NAV CANADA's operating costs and otherwise assist carriers in distress. NAV CANADA also submits that it has taken every reasonable step to reduce and control costs, and that the expenses included in its financial requirements reflect only necessary increases in costs, including the cost of recent collective agreements, increased pension and insurance costs, other contractually committed costs and increased depreciation expenses as new facilities become operational. NAV CANADA states that it has, and will, continue to reduce costs, wherever possible, while maintaining the safety and efficiency of service to customers, and recognizing the largely fixed cost nature of the air navigation system. NAV CANADA states that with respect to salary costs, following September 11, 2001, management salaries were cut for one year and then frozen for an additional two years. There was also a hiring freeze for non-operational staff. NAV CANADA asserts that while there was an increase in hiring relating to operational employees, this was mainly in respect of air traffic controllers where NAV CANADA is short-staffed.

NAV CANADA also provides the following examples of cost reduction and controlled spending:

  • Cumulative cost savings from restructuring since acquiring the air navigation system from the federal government in 1996 totalled over $400 million to the end of the 2002 fiscal year, and continue at over $100 million per year;
  • Overhead and administrative costs have been reduced from 22 to 9 percent of operating costs over the same period;
  • Further cost reductions totalling an anticipated $75 million at the end of the 2003 fiscal year have been achieved through cost mitigation efforts since September 11, 2001;
  • Capital expenditures of $25 million were deferred in the 2002 fiscal year, $38 million for the 2003 fiscal year and $37 million planned for 2003/2004. New capital expenditures are limited to those required for safety or those providing significant net savings to customers. The process includes industry consultation; and
  • NAV CANADA is conducting a level of service review to determine if modifications to further reduce costs or investment in capital projects may be warranted, while maintaining safety.

With respect to Air Canada's suggestion to consider a reduction in the number of air traffic control towers, FSSs and FICs, NAV CANADA submits that its level of service review will consider whether such changes are warranted. With respect to the projects that Air Canada suggests be delayed, NAV CANADA advises that the three Northern FICs projects have, in fact, been delayed. Concerning the other four projects identified by Air Canada, NAV CANADA contends that the annual costs for these projects, that form part of the rate base and will be included in the charges going forward, represent a small fraction of one percent of the total rate-base. In NAV CANADA's view, as these projects involve automation, thereby reducing workload on staff, there would be future savings in avoided new staff requirements to offset the costs of these projects. NAV CANADA also asserts that its capital program is lower than both major European states with smaller air space and less traffic than NAV CANADA, and the Federal Aviation Authority's capital program, even after taking into consideration the higher traffic volumes in the United States.

Positions of other users, groups of users and representative organizations of users

The submissions from CargoJet, UPS, ATA and CCMA generally support Air Canada's arguments in respect of cost reduction measures.

Agency analysis and findings

The Agency is of the opinion that the issues raised by Air Canada in respect of NAV CANADA's labour costs and capital expenditures relate to the following three financial requirements specified in subsection 35(5) of the CANSCA:

  • operations and maintenance costs (paragraph 35(5)(b));
  • management and administration costs (paragraph 35(5)(c)); and
  • depreciation costs on capital assets (paragraph 35(5)(e));

Notwithstanding that a detailed breakdown of these costs is not included in NAV CANADA's document entitled Details and Principles Regarding Proposed Revised Service Charges, dated May 15, 2003, which was published along with NAV CANADA's notice in respect of the Revised Charges, the Agency finds that sufficient information is contained in the parties' pleadings as well as NAV CANADA's yearly audited financial statements from 1998 to 2002 in order to enable it to properly consider the issues raised by Air Canada.

Having carefully reviewed and considered all of the pleadings and submissions, and examined all of the evidence, filed in respect of the issue of NAV CANADA's cost reduction measures, the Agency is of the opinion that the main argument raised by Air Canada in this regard is that NAV CANADA should be further reducing its costs in light of the financial difficulties Air Canada and the worldwide airline industry are currently facing. The Agency is also of the opinion that NAV CANADA has exercised effective control of its costs during the period from November of 1996, when the air navigation system was transferred from the federal government, to August of 2002. This is reflected in the cumulative cost savings, the reduction in overhead and administration costs, the reduction in the number of non-operational employees, and in the further cost reductions achieved since September 11, 2001 referred to by NAV CANADA in its answer. In addition, the Agency notes that NAV CANADA's audited financial statements indicate that during the four-year period from 1998 to 2002 (fiscal years), total operating expenses increased by only 1.4 percent (from $715 million to $725 million), while salaries and benefits, which accounted for more than 72 percent of operating expenses in 2002, increased by only 3.5 percent over the same period. The Agency notes that these increases are well below inflation during that period.

Regarding the issue of cost-cutting and control as it relates to the period since August of 2002, the Agency notes NAV CANADA's comment that the expenses included in the financial requirements reflect the cost of recent collective agreements, as well as increased pension and insurance costs and other contractually committed costs and increased depreciation expenses as new facilities become operational. Regarding the collective agreements and salary expenses, the Agency notes that 90 percent of NAV CANADA's staff is unionized and, of the unionized staff, air traffic controllers account for 64 percent. While NAV CANADA attempted to negotiate wage freezes with its union groups, it was unable to do so for all but one of the groups. Arbitration resulted in a settlement with NAV CANADA's clerical and administrative staff. Subsequently, a mediated agreement was reached with the air traffic controllers resulting in a cumulative salary increase of 11.2 percent over a four-year contract retroactive to 2001. While these settlements will unquestionably result in a significant increase in salaries and benefits for 2003/2004, the Agency is of the opinion that NAV CANADA, through the collective bargaining process, can only exercise limited control over wage rates and salaries of its workforce.

With respect to cost-cutting and control as they relate to capital projects and expenditures in current and future periods, the Agency notes Air Canada's concern that there appears to be little evidence that these expenditures are declining in terms of absolute dollars, despite comments by NAV CANADA that certain projects are being deferred. The Agency notes that capital expenditures for 2002, while higher than those for 2001, are at about the same level as in 1998. The Agency is cognizant of the importance of technology to the effective operations of NAV CANADA and notes that the industry is consulted in regard to major capital projects. The Agency notes that NAV CANADA has either taken action or is in the process of reviewing the level of service provided by certain of its facilities to assess whether reductions may be warranted. The Agency is of the opinion that the strong representation of users on NAV CANADA's Board of Directors provides considerable pressure on NAV CANADA to ensure that it exercises effective control with respect to operating expenses and capital expenditures, while at the same time, not jeopardizing safety.

The Agency also notes that the Dominion Bond Rating Service, in its report dated September 25, 2003 which downgraded the long-term ratings of NAV CANADA's bonds and notes from AA (high) to AA, referred to "the Company's somewhat reduced ability to further cut costs to address unforeseen events, given the numerous rounds of cost reductions and containments implemented over the past five years."

In light of the foregoing, and as there is no specific evidence indicating that NAV CANADA's projections in respect of operations, maintenance, management, administration and depreciation costs are not based on sound judgement, the Agency finds that NAV CANADA's projections are "reasonable and prudent" within the meaning of paragraph 35(1)(i) of the CANSCA.

C. Will the Revised Charges generate revenues exceeding NAV CANADA's current and future financial requirements in relation to the provision of civil air navigation services?

The Agency notes that NAV CANADA estimates that $1,000 million in revenues will be generated by the Revised Charges in 2003/04. The Agency also notes that NAV CANADA estimates that its current and future financial requirements for that period will be $1,000 million, as detailed on page 6 above and summarized in the following table.

NAV CANADA's Current and Future Financial Requirements for 2003/2004 ($ Millions)
Total financial requirements 1,000
2001/2002 actual shortfall 19
Add 2002/2003 estimated shortfall 157
Less additional revenues expected in 2002/2003 from increased charges implemented on August 1, 2003 (5)
Less amount of the revenue expected from the QTE transaction applied to 2002/2003 (126)
Add replenishment of the RSA 50
Financial requirements related to the two percent component of the increase (to be recovered over five years at a rate of 20 percent per year) 95
Subtotal of the financial requirements related to the two percent component of the increase (amount to be recovered in 2003/2004: 20 percent of $95 million) 19
Estimated financial requirements in respect of 2003/2004 1,073
Less ancillary revenue projected for 2003/2004 (18)
Less amount of the revenue expected from the QTE transaction applied to 2003/2004 (74)
Subtotal of the financial requirements related to the 4.9 percent component of the increase 981

The Agency, therefore, finds that the Revised Charges will not generate revenues exceeding NAV CANADA's current and future financial requirements in relation to the provision of civil air navigation services.

D. Conclusion with respect to Issue No. 1

In light of the foregoing, the Agency is satisfied, on a preponderance of the evidence, that the Revised Charges are set at a level that, based on reasonable and prudent projections, would not generate revenues exceeding NAV CANADA's current and future financial requirements in relation to the provision of civil air navigation services. Accordingly, the Agency has determined that NAV CANADA observed the charging principle set out in paragraph 35(1)(i) of the CANSCA in establishing the Revised Charges.

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ISSUE NO. 2

ARE NAV CANADA'S REVISED CHARGES CONSISTENT WITH THE INTERNATIONAL OBLIGATIONS OF THE GOVERNMENT OF CANADA?

Air Canada's position

Air Canada submits that many of Canada's bilateral air transport agreements require that user charges for air navigation services be "just and reasonable". By way of example, Air Canada refers to Article 8 of the Air Transport Agreement between the Government of Canada and the Government of the United States of America (hereinafter the Canada/US Agreement) which states that:

User charges that may be imposed by the competent charging authorities or bodies of each Party on the airlines of the other Party for the use of air navigation and air traffic control services shall be just and reasonable; provided that any such charges shall be assessed on the airlines of the other Party on terms not less favourable than the most favourable terms available to any other airline in providing similar international air transportation.

On the basis of the ordinary meanings of the words "just" and "reasonable", the case law which has interpreted the words and their meanings in similar regulatory contexts, Air Canada submits that the inclusion of the phrase "just and reasonable" in Articles such as Article 8 of the Canada/US Agreement means that charges for air navigation services "must be lawful, moderate and suitable under the circumstances". In Air Canada's view, such circumstances "would include the objectives of Canada's bilateral air transport agreements, the state of the airline industry and the financial health of NAV CANADA's customers. They must also result from an economic and efficient air navigation system." Given the current economic situation of the airline industry, it is not "just and reasonable", according to Air Canada, for NAV CANADA to implement the Revised Charges, representing a 6.9 percent increase over the previous charges when airlines require all available financial resources for their operations.

Air Canada also submits that one of the primary objectives of Canada's bilateral air transport agreements is to promote a fair and efficient aviation system between the two countries in question. Given this and the other objectives of the agreements, airlines have the right to insist on just and reasonable charges which will allow them to develop and implement innovative and competitive prices and promote opportunities to participate in the marketplace, despite the very difficult industry circumstances.

NAV CANADA's position

NAV CANADA submits that the "international obligations of the Government of Canada" referred to in paragraph 35(1)(h) of the CANSCA are the Convention on International Civil Aviation signed at Chicago on December 7, 1944 (hereinafter the Chicago Convention), and the bilateral air transport agreements entered into by Canada and various other sovereign States. These obligations do not include recommendations or guidelines in documents such as the ICAO Guidelines which are not binding on Canada. In NAV CANADA's view, the Revised Charges are entirely consistent with each of these obligations. With respect to Air Canada's argument that the Revised Charges must, as a result of Canada's obligations to certain States, be "just and reasonable", NAV CANADA submits that the combination of the CANSCA regime and NAV CANADA's corporate structure meets any requirement of just and reasonableness. More particularly, NAV CANADA states that both the Government of Canada--sponsor of the CANSCA and signatory to the bilateral agreements--and Parliament knew of, and understood, the nature of those bilateral air transport agreements that pre-dated the CANSCA, and the commercialization of the air navigation system, when the CANSCA regime was established. NAV CANADA submits that as part of this regime, Parliament determined, for the purpose of Canadian domestic law, that recovery of the categories of costs in subsection 35(5) of the CANSCA is, by definition, just and reasonable.

In further support of its position, NAV CANADA notes that, of the categories of costs to be included in its financial requirements pursuant to subsection 35(5) of the CANSCA, only two of the categories contain qualifying words such as "necessary", "appropriate" or "reasonable". The absence of such words in a cost category indicates, in NAV CANADA's view, that all of the costs falling within that category, without qualification, are to be included in its financial requirements. This is entirely consistent with the self-regulating regime that lies at the heart of the CANSCA, according to NAV CANADA.

NAV CANADA also disagrees with Air Canada's argument that the Revised Charges cannot be "just and reasonable" unless they recognize the financial difficulties currently being suffered by Air Canada and the rest of the aviation industry. In NAV CANADA's view, the charging principles set out in subsection 35(1) of the CANSCA expressly address those situations in which there is to be due regard for certain sectors of the industry, such as general aviation and northern and remote sites. Neither the overall state of the industry nor the condition of a particular carrier such as Air Canada, notes NAV CANADA, is listed as a relevant principle and, therefore, a consideration of both issues falls outside the mandate of the Agency. Furthermore, interpreting section 35 of the CANSCA to imply that those issues are relevant would be "contrary to the focus on recovery of NAV CANADA's costs through its rate-setting autonomy which is at the core of the economic regulatory model adopted by the government for the commercialization of civil air navigation services, a model on which the financial foundation of NAV CANADA rests."

NAV CANADA also submits that the various bilateral air transport agreements Canada has entered into generally contain a dispute resolution mechanism. According to NAV CANADA, this mechanism has never been invoked in order to challenge NAV CANADA's charges on the basis that they are not "just and reasonable".

With respect to Canada's international obligations themselves, NAV CANADA notes that Article 15 of the Chicago Convention requires that charges imposed by a contracting State for the use of airports and air navigation facilities by the aircraft operator of any other contracting State not be higher than those that would be paid by its national aircraft operator engaged in similar international air services. In NAV CANADA's opinion, as the Revised Charges did not introduce any differential between Canadian and foreign air carriers, they are consistent with this requirement of the Chicago Convention.

NAV CANADA also notes that Article 15 of the Chicago Convention enables interested contracting States to request a council review of charges imposed for the use of airport and other facilities. According to NAV CANADA, no such review of any of its charge revisions has been requested.

NAV CANADA also notes that Article 15 of the Chicago Convention provides that,

...no fees, dues or other charges shall be imposed by any contracting State in respect solely of the right of transit over or entry into or exit from its territory of any aircraft of a contracting State or persons or property thereon.

In NAV CANADA's view, as the Revised Charges are imposed solely in order to meet the financial requirements of providing or making air navigation services available, they are consistent with this requirement.

With respect to Canada's obligations under the various bilateral air transport agreements to which it is a party, NAV CANADA submits that the Revised Charges are consistent with the charging articles contained in those agreements, such as Article 8 of the Canada/US Agreement. More particularly, NAV CANADA submits that as the Revised Charges did not introduce a rate differential between air carriers, they are consistent with the non-discrimination requirement of the charging articles; the Revised Charges are, by definition, just and reasonable; NAV CANADA's compliance with the notice, consultation and announcement requirements of the CANSCA satisfies the notice requirement contained in the charging articles; and, the dispute resolution procedures provided for in the charging articles have not been invoked in respect of any of NAV CANADA's revisions in charges, including the Revised Charges. NAV CANADA also argues that the objectives of the bilateral air transport agreements to which Canada is a party have been successfully achieved through the creation and performance of NAV CANADA.

Although NAV CANADA argues that ICAO's policies on charges for air navigation services do not form part of Canada's international obligations, NAV CANADA submits that both its charging structure, the development of which considered these policies, and the Revised Charges are consistent with ICAO's policies.

Position of other users, groups of users and representative organizations of users

The submissions from IATA, ATA and Clark & Company generally support Air Canada's position in respect of this issue.

Agency analysis and findings

The Agency has carefully reviewed and considered all of the pleadings and submissions, and examined all of the evidence, filed in respect of this issue and is of the opinion that the "international obligations of the Government of Canada" referred to in paragraph 35(1)(h) of the CANSCA which are relevant to this appeal are Canada's obligations contained in the Chicago Convention and in the charging clauses of the various bilateral air transport agreements to which Canada is a party. The Agency is also of the opinion that the purpose of paragraph 35(1)(h) of the CANSCA is to ensure that the commercialization of Canada's civil air navigation services does not affect Canada's responsibility to meet its international obligations, whether those obligations arose before or after the enactment of the CANSCA.

The Agency is the aeronautical authority for Canada under the bilateral air transport agreements to which Canada is a party and, as such, it participates in the negotiation of those agreements. Pursuant to the Canada Transportation Act, S.C., 1996, c. 10, and the Air Transportation Regulations, SOR/88-58, as amended, the Agency is also responsible for administering and implementing Canada's bilateral air transport agreements. Consequently, the Agency has developed an expertise in interpreting bilateral air transport agreements.

The Agency also notes that NAV CANADA is designated pursuant to section 11 of the CANSCA as the authority in Canada responsible for providing air traffic control and information services in accordance with the Chicago Convention. In this regard, the provisions of the Chicago Convention which are relevant to this appeal, most of which are also reiterated in the bilateral air transport agreements to which Canada is a party, are those related to user charges for air navigation services. These provisions may be summarized as follows:

  • no charges may be levied for the right of transit over a state;
  • charges for international flights shall not be higher than for domestic flights;
  • air navigation services shall be provided to international flights on no less favourable terms than the most favourable terms provided to any other airline engaged in similar transportation;
  • charges imposed for air navigation services shall be just and reasonable;
  • notice of proposed changes to charges shall be given to users to encourage discussion; and
  • disputes with respect to user charges must be resolved through the use of a specific procedure.

The Agency further notes that most of these provisions have been recognized under domestic law through the enactment of the CANSCA. In particular, subsection 32(1) of the CANSCA provides that NAV CANADA may impose charges for the availability or provision of air navigation services; paragraph 35(1)(c) of the CANSCA prohibits NAV CANADA from discriminating between Canadian and foreign carriers; paragraph 35(1)(d) of the CANSCA provides that charges for the same services must not differentiate among Canadian air carriers or among foreign air carriers; paragraph 35(1)(f) of the CANSCA requires that charges for recreational and private aircraft must not be unreasonable or undue; paragraph 35(1)(i) of the CANSCA requires that NAV CANADA develop its charges using reasonable and prudent projections; pursuant to sections 36 and 37 of the CANSCA, NAV CANADA must comply with certain notice, consultation and announcement requirements; and NAV CANADA's new or revised charges may be appealed to the Agency, who may order remedial action in certain cases.

With respect to the international obligation that charges imposed for air navigation services be "just and reasonable", the Agency notes that the phrase "just and reasonable" is frequently used in charging articles of bilateral air transport agreements to indicate that there is some economic oversight of the charges established by air navigation service providers and imposed on airlines. Although the phrase is not defined in any of the bilateral air transport agreements to which Canada is a party, the Agency is of the opinion that the use of the phrase establishes the general objective that the charges should be justifiable in relation to the service and its competitive circumstances. This objective is reflected in clauses such as Article 8, paragraph B1, of the Canada/US Agreement which states that,

User charges imposed on the airlines of the other Party may reflect, but shall not exceed, the full cost to the competent charging authorities or bodies of providing the appropriate airport, aviation security, and related facilities and services and may provide for a reasonable return on assets, after depreciation.

In the Agency's view, neither the state of the airline industry nor the financial health of NAV CANADA's customers is recognized as a consideration in this regard.

The Agency is of the further opinion that, as a result of the dispute resolution mechanisms set out in the Chicago Convention and most bilateral air transport agreements to which Canada is a party, user charges for air navigation services may be considered to be "just and reasonable" until certain specified action has been taken. On the one hand, pursuant to the Chicago Convention, that action involves a request by an interested contracting State for the ICAO Council to review the user charges, Council's recommendation, based on its review, for the consideration of the States concerned and the ordering of corrective action by the applicable aeronautical authority if warranted. On the other hand, Article 8 of the Canada/US Agreement, for example, provides in paragraph C3 that:

Neither Party shall be held, in dispute resolution procedures pursuant to Article 17, to be in breach of a provision of this Article, unless (i) it fails to undertake a review of the charge or practice that is the subject of complaint by the other Party within a reasonable amount of time; or (ii) following such a review it fails to take all steps within its power to remedy any charge or practice that is inconsistent with this Article.

The Agency notes that no such action has been taken in respect of the Revised Charges.

The Agency is also of the opinion that certain aspects of the international obligation that user charges be just and reasonable are embedded in the charging principles set out in paragraphs 35(1)(f) and (i) of the CANSCA and are satisfied by the overall scheme of the CANSCA regime.

In light of the foregoing and its previous determination that the Revised Charges were developed using reasonable and prudent projections, the Agency finds that the Revised Charges are compatible with the international obligation that user charges be just and reasonable. As there are presently no other relevant international obligations of the Government of Canada, the Agency finds that the Revised Charges are not inconsistent with the international obligations referred to in paragraph 35(1)(h) of the CANSCA.

Conclusion with respect to Issue No. 2

In light of the foregoing, the Agency is satisfied, on a preponderance of the evidence, that NAV CANADA did not fail to observe the charging principle set out in paragraph 35(1)(h) of the CANSCA in establishing the Revised Charges.

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AGENCY OBSERVATION

The Agency recognizes that the worldwide airline industry has suffered and has been negatively impacted economically by a variety of shocks since 2001. The Agency has observed that, in establishing the Revised Charges, NAV CANADA appears to have been sensitive to the resulting financial difficulties faced by its customers by reducing and deferring a number of its costs, operating at a deficit for the past two years, and by choosing to recover certain costs identified as financial requirements in the CANSCA over five years instead of a shorter period.

CONCLUSION

Based on the above findings, the Agency hereby dismisses the appeal.

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