April 1, 1965, Vol. 55, No. 10 Judgments, orders, regulations and rulings (Ottawa) Page 175

In the matter of the application of the Canadian National Railway Company for an Order authorizing it to abandon that portion of its Hickson Subdivision between Woodstock, mile 2.10 and Hickson, mile 8.95, a total distance of 6.85 miles, all in the Province of Ontario.

39310.93

April 15, 1965

Before:
H.H. Griffin, Assistant Chief Commissioner.
J.M. Woodard, Commissioner.
Appearances:
H.J.G. Pye, for Canadian National Railways.
J.R. Farlow for S.T. Loveys Ltd. and L.C. Currah Mills Limited
Wallace B. Nesbitt, Q.C., M.P., Oxford.
Gordon Pittock, M.P.P., Oxford.
Percey Wettlaufer, representing Township of East Zorra.

Heard at Woodstock, Ontario, on January 19th and 20th, 1965.

Judgment

Griffin, A.C.C.:

The application before the Board is one to abandon the Hickson Subdivision of Canadian National Railway Company from Woodstock to Hickson, Ontario. The Railway Company intends to retain that portion of the Subdivision between mile 0.0 (at Woodstock) and mile 2.10. This portion serves certain industries and also the Ontario Provincial Hospital.

Port Dover and Lake Huron Railway Company was incorporated in 1871 to build a line of railway from Port Dover through Woodstock to Tavistock Junction near Tavistock, and thence to Stratford, all in Ontario. The portion of the line from Hickson to Tavistock Junction was abandoned in 1935, pursuant to an Order of the Board.

Hickson has a population of approximately 160. There is no longer an open agency thereRemoval of agency at Hickson was authorized by B.T.C Order No. 107281.. There are no other stations and no industries on the line between mile 2.10 and Hickson.

Provincial Highway No. 59 runs parallel to the line from Woodstock to an tntersection with Highway No. 97, which runs east and west through Hickson. Both highways are paved all-weather roads.

There is no scheduled passenger or freight service on the line. There is no express service.

Service on this line for the handling of carload traffic is provided if and when required by the Woodstock switcher. Such less-than-carload freight as there is is handled at Woodstock, but the quantity of this traffic is very small.

There are two commercial motor carriers serving Hickson, both of which have Class A licences. They are Inter-City Truck Lines Ltd., of Toronto, and Overland Express Ltd. of Woodstock.

Woodstock is served by Canadian Pacific Railway Company as well as by Canadian National. The former also maintains an agency at Woodstock. The Canadian National Drumbo Subdivision (running between Stratford and Paris) passes in a northwesterly direction some 7 miles, north of Hickson, the nearest station being Tavistock, some 7 miles distant. The Canadian National Brampton Subdivision passes approximately 9 miles north of Hickson.

There are two commercial undertakings that would be materially affected by abandonment of the line. They are S.T. Loveys Ltd. and L.C. Currah Mills Limited, both of Hickson. Both opposed the application as did the Township of East Zorra. Mr. J.R. Farlow appeared as Counsel for both commercial firms. Mr. Wallace B. Nesbitt, Q.C., M.P., participated on behalf of his constituents.

S.T. Loveys Ltd.

Evidence was given on behalf of this firm by Mr. Eric Loveys, President and Manager of the Company.

The Company is in the business of farm supplies, lumber, coal, gasoline and oil, and the export of turnips waxed for market.

The business was originally developed on the rail facilities of the line and, according to Mr. Loveys' evidence, the line is still required for the coal, lumber, gasoline and oil business. Turnips move to domestic markets by truck. They had always moved to the market at Chicago by rail. This had an added advantage in that the turnips could be moved from car to retail outlets without the necessity of warehousing. However, after learning that the line might be abandoned, the Company made trial shipments of turnips to Chicago by truck. The freight rate is higher but there are certain compensating advantages from this method of shipment. As I understand the evidence, it has proved a satisfactory means of moving turnips to this market. However, there is no export market for turnips at the present time but, should it be revived, the rail facilities might again be used.

As mentioned, the testimony is that there is still a need for rail facilities in respect of coal, lumber, gasoline and oil. Further, should the line be abandoned, the extra cost of haulage would, in Mr. Loveys' opinion, necessitate his Company discontinuing its coal business.

In addition, should the line be abandoned, it would mean increased costs in bringing in lumber. It might entail the additional time and pay of two men for two days to unload a car at Tavistock as well as the additional cost of road haulage from Tavistock to Hickson, a return journey of some 16 miles. Some lumber would stand the increase in cost, some would not, but it would mean an average increase in price to the customers of S.T. Loveys Ltd.

The evidence is that there were the following cars moved out over the line in the years:

Year Carloads
1959 74
1960 62
1961 36
1962 29
1963 4

These shipments were all of turnips.

No cars moved out in 1964.

As Hickson is the only shipping point on the line, I need not, I think, consider the needs of shippers in respect of traffic moving out of the area unless it be the possibility of the resumption of turnip shipments or other potential traffic. This I will refer to again later.

As to coal, there were the following shipments in:

Year Carloads
1959 18
1960 14
1961 11
1962 11
1963 12
1964 10

Of lumber, there were the following shipments in:

Year Carloads
1959 10
1960 9
1961 4
1962 5
1963 2
1964 4

The above extracts are taken from Exhibits 12 and 13. These show the movements of all commodities in and out from 1959 to 1964, inclusive, and are reproduced below.

When the 1964 operating results were furnished (as later referred to) the revised figures for the year 1964 showed 7 carloads of coal and 5 carloads of lumber.

12

Proposed abandonment of the Hickson Subdivision
from Woodstock (MP 2.10) to Hickson (MP 8.95)
Statement No. 6 (Revised)
Comparison of revenue carload traffic
Inbound and outbound
Years 1959 1960 1961 1962 1963
Stations Commodities Revenue carloads
1959 1960 1961 1962 1963
In Out In Out In Out In Out In Out
Hickson Turnips 74 62 36 29 4
Gas & Oil Prod. 46 50 53 51 48
Coal 18 14 11 11 12
Lumber 10 9 4 5 2
Oyster Shell 4 4 3 3 1
Feed 4 2
Beet Pulp 1 1 2 1 1
Peat Moss 1
Tractors 1 2 1 1
Fish Meal 1 1 1
Shavings 1 2 1 1
Bran 1 1
Wheat Shorts 2
Wheat 1
Machinery 1
Soya Beans
Total 85 74 85 62 81 36 73 29 67 4
Total inbound & outbound 159 147 117 102 71

13

Proposed abandonment of the Hickson Subdivision
from Woodstock (MP 2.10) to Hickson (MP 8.95)
Statement No. 6B
Comparison of revenue carload traffic
Inbound and outbound
Year 1964
Station Commodities Revenue carloads
In Out
Hickson Gas & Oil Products 49(48)
Coal 10(7)
Lumber 4(5)
Beet Pulp 1
Fish Meal (Soya Beans) 1
Agricultural Implements 2
Cattle 2
Total 69(66)

Note: The figures and words in brackets above have been added to the Exhibit, and are amendments filed with the 1964 operating results.

L.C. Curroh Mills Limited:

Evidence on behalf of this firm was given by Mr. Fraser Currah, Vice-President and Manager.

The Company began its operation at Hickson in 1947 and used the services of the Canadian National to bring its grain from Goderich. However, as it could not get a competitive freight rate, it changed its shipping method and brought the grain by Canadian National from Goderich to Stratford and from Stratford to Hickson by truck. It now trucks its grain directly from Goderich to Hickson.

It will be seen from Exhibits 12 and 13 above that the movement in of grain and grain products had virtually ceased by 1962 and that there was none in 1964.

However, Mr. Currah's plea for the retention of the line is based rather on traffic he hopes to develop. His Company has plans for a fertilizer establishment to bring in potash from Esterhazy, Saskatchewan, and nitrogen products (anhydrous ammonia) via Port Robinson on the Welland Canal. Included in this plan is the possible establishment of a distribution centre for anhydrous ammonia for other dealers in the area; in other words, a small tank farm. Mr. Currah's evidence is that both the potash and anhydrous ammonia would have to come by rail in order to be competitive.

Mr. Currah proposes, in the Autumn of 1965, to bring in five cars of potash and one tank car of anhydrous ammonia. He cannot predict, however, how much potash will be required in the years ahead.

Mr. Currah also proposes to establish a corn dryer at Hickson to process corn. There is a market for corn at Montréal, and should his firm develop business with that market it will be necessary for the corn to move by rail.

As the average traffic given by L.C. Currah Mills Limited to Canadian National over the last five years has been not more than an average of four to five cars per year inbound, with no cars moving out, it appears to me that there is no present need by Currah's for rail services but only possibly a potential one.

As I have said, there are only two commercial undertakings affected by the application. However, Mr. Wallace Nesbitt, Member of Parliament for the constituency since 1953, gave evidence as to the interest of the area in the retention of the line. His testimony dealt with the developments that might be expected to flow from the Gordon Pittock Dam. It also dealt with the purchase of land by Republic Steel Corporation in the Township of West Zorra. These purchases were for the purpose of ensuring to the Steel Company a source of limestone; they extended over a period of some two years from 1955 and the Company expended for such purchases approximately $250,000. Mr. Nesbitt understands, however, that it is the Company's intention not to develop these deposits for some 10 to 15 years. Normally, the product would move by Canadian National to Port BurwellThe Canadian Pacific not the Canadian National serves Port Burwell. and not over this line. However, in the opinion of Mr. Nesbitt, the low water levels of the Great Lakes have so impaired the efficiency of Port Burwell as a port that it might be necessary for the product to move to Port Dover, necessitating the use of the Hickson Subdivision. Mr. Nesbitt also made an able plea on behalf of his constituents for the retention of the line.

However, when the evidence in opposition to the application is sifted, it appears to consist largely of testimony as to the possible future use of the line.

The Railway Company has alleged a past, present and continuing loss. It is necessary, then, to consider how substantial is such loss.

Turning first to revenues, Exhibit 9, which is reproduced hereunder, was filed to show the sources and the amount of the revenue which accrued to the Company from operation of the 6.85 miles of line during 1963.

Proposed abandonment of the Hickson Subdivision
from Woodstock (MP 2.10) to Hickson (MP 8.95)
Year 1963
Statement No. 3A
CN Revenues, Tons and Carloads by
Commodities
Stations C.N. (System) revenue Carload traffic
Pass. Freight Exp. Misc. Total Commodity Cars Tons
$ $ $ $ $ In Out In Out
Hickson Turnips 4 61
Gas & Oil Prod. 48 1422
Coal 12 593
Lumber 2 53
Oyster Shells 1 30
Beet Pulp 1 20
Tractors 1 12
Fish Meal 1 30
Shavings 1 18
9,348 9,348 67 4 2178 61
Total 9,348 9,348 67 4 2178 61
Leases 223 223
Total 9,348 223 9,571 67 4 2178 61

The total revenue of $9,571 was earned mainly from the transportation of carload freight. This freight moved between various stations in Canada and Hickson, and the 6.85 miles of branch line was credited with the freight charges for the full movement over Company lines in Canada. Most of the carload freight mileage occurred off-line, the variable cost of this off-line movement being estimated at $5,065; the variable cost of the on-line movement was $86.

If the off-line expense of $5,065 is deducted from the system freight revenue, there is a balance of some $4,500 to defray the expenses of operating the 6.85 miles of line which is proposed for abandonment. The total on-line expenses in 1963 were estimated to be $9,698. They consisted mainly of fixed expenses which could be avoided only if the line were abandoned. These expenses and the annual operating loss of $5,192 are shown in Exhibit 17 hereunder.

17

Proposed abandonment of the Hickson Subdivision
from Woodstock (MP 2.10) to Hickson (MP 8.95)
Year 1963
Statement No. 9A
Summary of revenues and expenses
System revenues
Freight — Carload 9,348
Freight — L.C.L.
Express
Passenger —-
Miscellaneous 223
Total revenues 9,571
System Avoidable Expenses
Fixed on-line
Maintenance of Way & Structure 3,446
Indirect — M. of W. 734
Depreciation Road Property 4,797
Station and General
Property Taxes 635
Variable On-Line 86
Total on-line 9,698
Variable Off-Line 5,065
Total avoidable expenses 14,763
Annual operating loss 5,192
Annual Net Salvage Value
(6.23% of $48,520)
3,023
Annual Financial Improvement 8,215
Additional Expenses if Line Retained
Maintenance of Way Structures 12,330
Average Annual Net Depreciated
Cost of Replacement - 6.23% of
(1/2×$124,125)
3,866
Annual Salvage Value
6.23% of ($44,700 - $48,520)
-238
Total additional expenses 15,958
Annual long term betterment 24,173

The preceding Exhibit shows that in addition to avoiding the estimated annual operating loss of $5,192, the Company could, if the line were abandoned, salvage track materials which, at 6.23%, would have an annual value of $3,023. The annual, financial improvement represented by these two amounts is estimated to be $8,215. In addition there would be some further long-term financial benefit if it were not necessary to perform the deferred roadway maintenance.

At the hearing the Company did not have the operating results for the year 1964. The Board asked the Company to file a statement to show the 1964 freight traffic, the system revenues from such traffic and the estimated expenses, when such figures became available. While these figures show a decline of five cars, there was an increase in revenue of $1,217, and the annual operating loss was reduced by $1,260 to an amount of $3,932. The Company has stated that the major factor was a reduction of $1,075 in the direct and indirect maintenance of way and structure expense. I note also, however, that the variable off-line expense has increased. The figure of loss is unadjusted, but I will consider it generally in the measure of the burden to the Railway Company of continued operation.

Continuing with the examination of the 1963 results, the main items of expense which were challenged by the respondents, and those which have received particular scrutiny by the Board, are Maintenance of Way and Structures, including Depreciation of Road Property, Allowances for Overhead and the value of Net Salvage in the event of abandonment.

Maintenance of way and structure expense, including depreciation of road property, constitutes a major part of the operating expenses and may equal or exceed the revenue in the case of lines proposed for abandonment. This is inherent in most abandonment cases because the cost of maintaining a line of railway, even to the minimum standards required for safe operation, is relatively high per mile of track even though traffic moves on an "as-and-when" basis and in limited volume. When traffic declines it may be possible to discontinue regular section forces, but still be necessary to send in mobile maintenance gangs in order to maintain the track to minimum safe operating standards.

Mr. White, Special Projects Engineer of the Company, testified that $5,707 was expended in the twelve months November, 1960 to October, 1961 in maintaining the track between mile 2.1, Woodstock, and Hickson. This was reduced to $3,446 for the calendar year 1963. To this amount was added $734 for Superintendence, General and Communications expense incurred in conjunction with the $3,446 expenditure on roadway maintenance.

In cross-examination the following exchange took place between Mr. Nesbitt and Mr. White:

Q. Was this spent in replacing ties and in the road bed and that sort of thing?

A. No, I think, sir, if you recall Mr. Morris mentioned this morning that this amount of money was just what was required for the actual housekeeping, that we had not replaced any ties up there. Certain emergency repairs had been made before trains are run up or before the snowplow goes up, the section crew has to go in and clean out the flangeways at road crossings, weeds have to be cut, brush has to be cut.

Q. If you had had to replace ties though or a piece of rail that was damaged or broken, would that be charged to that account, maintenance of way?

A. The labour of replacing them if they were done by our section forces, the labour of replacing them would be put into that account, yes.

Q. And the material?

A. The material is a charge to capital.

It became apparent, during further cross-examination of Mr. White, and when Mr. Winlaw later gave evidence for the respondents, that there was some misapprehension about railway accounting for track elements because of differences between the more usual standard accounting practices and those employed by railways. The following is an outline of the method used in accounting for track elements.

The Board, as directed by amendments to the Railway Act, prescribed accounting for Canadian railways effective January 1, 1956. At that time a change was made in the accounting for track elements in order to reduce fluctuations in maintenance expense which could occur from year to year due to accelerated or reduced maintenance programmes.

While it had been the practice prior to 1956 to charge to maintenance expense both labour and material costs of replacing ties, rails and other track elements, the new accounting regulations required that the cost of material in track maintenance programmes be capitalized. The cost of units of property, including ties and rails, removed from service was to be written out of the property accounts, and the cost of new units was to be written into the property accounts and recovered through depreciation. This was in contrast to previous accounting practices under which the cost of material had been charged directly to maintenance expense.

The charges to maintenance of way and structures, after January 1, 1956, were made up of maintenance labour, depreciation on roadway property accounts at rates approved by the Board, and the cost of material used in non-programmed maintenance including that arising from washouts, slides and derailments.

Under the new accounting for track elements, a line of railway which is being considered for abandonment may have reduced maintenance expense for labour due to the fact that only the minimum standard of maintenance required for safe operation is performed. The depreciation charges on a straight line basis in respect of material will not be immediately reduced and will continue to reflect a normal level of maintenance. The Board has regarded it as proper in determining the annual operating loss to allow for normal road maintenance through depreciation charges since deferred maintenance must be performed at a later time if the line continues in operation. If abandonment should be authorized, the labour portion of deferred maintenance becomes an item of long-term betterment.

In the case involving the Alvinston Subdivision which was heard in London following the hearing of this case, Mr. White, when testifying in respect of depreciation charges on road property, stated that such depreciation was based on the replacement cost at today's prices of the depreciable materials in the line.

The following exchange took place between Mr, White and me:

The Witness: And in lieu of having historic data on the cost of building this line when it was first built and having valid figures going back that far, we have developed an investment cost on the replacement at today's prices.

The Assistant Chief: I realize that.

The Witness: Which is the figure which we are working to.

The Assistant Chief: Q. And historic cost might be greatly different, but you say you have not got historic costs?

A. We have not got the historic cost.

Q. And therefore you endeavoured to establish a replacement cost?

A. Yes, sir, which takes the place of that historic cost. We have also on one or two occasions established on the basis of the materials in the track today and where we know some of the historic costs, through a lot of digging and through a lot of effort, we have been able to find some of these things, and I might say the difference between what we have used as a replacement cost and what the historic cost was on those we could develop, there was so little difference that we felt this was a reasonable method of arriving at investment on which to base depreciation.

Since the hearing of this case, the Board's Accounting Staff has examined the Company records, and a comparison has been made between depreciation figures based on the present day replacement cost of depreciable track elements and depreciation figures based on the historic cost where such costs were known, or where they had been estimated and shown on retirement authorizations. This examination has shown that the method of calculating road property depreciation based on present day replacement costs of depreciable track elements, even when grading and track laying and surfacing are excluded, can result in an overstatement of depreciation vis-a-vis the use of historic cost figures. For the purpose of the Judgment in this case I will reduce by one-third the estimate of depreciation on road property, i.e., I will reduce the estimate by $1,600.

I will also make a reduction in the estimate of $734 for indirect Maintenance of Way and Structures. While there could be some saving in this overhead item as a result of abandonment, I am not satisfied from the evidence in this case that it would amount to $734, and for purposes of this Judgment I will reduce the estimate by $500.

The Company also included allowances for a saving in overhead in other expense items representing a further overhead estimate of some $1,100. For purposes of this Judgment I will make a reduction of $500 in this estimate.

In estimating the annual value of net salvage, the Company applied a rate of 6.23%, which I would reduce to 5%, as has been the Board's practice in past cases. This results in a disallowance of some $600 in this item.

The disallowances in expenses which I have noted above total $2,600 and result in a reduction of the annual operating loss to $2,592. The disallowance in respect of the rate on net salvage reduces the annual value of net salvage to $2,423. The total annual operating loss, plus net salvage, is therefore $5,015, which represents an annual financial improvement of about $700 per mile of line.

In addition to an annual financial improvement if this line were abandoned, the Board has also been asked to consider additional expenses which would be incurred if the line were retained. These appear at the bottom of Exhibit 17 and consist of three items with a total annual value of $15,958.

Two of the additional items, namely Average Annual Net Depreciated Cost of Replacement, $3,866, and Annual Salvage Value, ($238), represent the cost of money on the investment which would be needed to replace depreciable property if the line were to continue in operation. It has not been the Board's practice in abandonment cases to give weight to such cost of money on replacements, and I will not do so in this instance.

The other item of additional expense, if the line were retained, involves deferred maintenance. The Company has estimated that the annual value of additional Maintenance of Way and Structures required to maintain a normal level of maintenance on this line would be $12,330, or some $1,800 per mile. The evidence in this respect was subject to extensive cross-examination, and it was suggested in argument that if the line were retained and replacements were made it would not require the estimated amount of maintenance in the future.

It is a matter of judgment as to whether an additional $1,800 per mile or a lesser amount of additional maintenance would be required in future years if this line were retained. The evidence indicates, in my opinion, that a large increase in annual maintenance would be required. It is not, however, necessary, for purposes of this Judgment, that I establish with any precision the amount of an allowance for additional maintenance.

The annual operating loss, in itself, is not large. If there appeared to be any reasonable prospect that the traffic on the line would increase, I might be justified in deferring a decision. The evidence does not support such an assumption. I must also bear in mind the relief that would result to the Railway Company if abandonment were permitted. The evidence shows, after the disallowances made above, that the Company could expect to benefit from an anticipated financial improvement of some $5,000 per annum. Moreover, it has demonstrated to my reasonable satisfaction that, if the line remains, a large increase in annual maintenance would be required. Whether or not this would amount to as much as $1,800 per mile, it is unnecessary to decide, but it has been shown that it would be a very substantial annual sum.

I must also consider that, apart from gasoline and oil products (which can be moved by highway) there were, in 1964, only 18 cars inbound and none outbound.

Bearing all these factors in mind and assessing all evidence as to the use of the line both present and prospective, I can see no justification for requiring the Railway Company to sustain such continuing loss without, in my view, any reasonable expectation of further confining its losses.

I would grant the application and authorize the Railway Company to abandon that portion of its Hickson Subdivision between Woodstock, mile 2.10, and Hickson, mile 8.95, a total distance of 6.85 miles. Such abandonment shall not take place before the 30th day of June, 1965, upon thirty days prior notice filed with the Board and to be posted in the railway station at Woodstock. Notice in writing thereof shall also be given to the two commercial firms of S.T. Loveys Ltd. and L.C. Currah Mills Limited.

The Railway Company shall notify the Board when abandonment of operation has taken place, such notification to be given to the Board within one week of the date of such abandonment.

An Order is to issue accordingly.

(SGD) H.H. GRIFFIN.

Ottawa, Ont., April 15, 1965.

I concur:

(SGD) JOHN M. Woodard

Railways: C.N.Rys.

Stations: Hickson

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