[Federal Register: March 10, 2003 (Volume 68, Number 46)]
[Notices]
[Page 11374-11382]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10mr03-32]
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DEPARTMENT OF COMMERCE
International Trade Administration
[C-122-846 and C-122-848]
Preliminary Affirmative Countervailing Duty Determinations and
Alignment of Final Countervailing Duty Determinations With Final
Antidumping Duty Determinations: Certain Durum Wheat and Hard Red
Spring Wheat From Canada
AGENCY: Import Administration, International Trade Administration,
Department of Commerce.
ACTION: Notice of preliminary affirmative countervailing duty
determinations
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SUMMARY: The Department of Commerce preliminarily determines that
countervailable subsidies are being provided to producers or exporters
of certain durum wheat and hard red spring wheat from Canada. For
information on the estimated countervailing duty rates, see infra
section on ``Suspension of Liquidation.''
EFFECTIVE DATE: March 10, 2003.
FOR FURTHER INFORMATION CONTACT: Craig Matney, Audrey Twyman, Stephen
Cho, or Geoffrey Craig, Office of Antidumping/Countervailing Duty
Enforcement, Group 1, Import Administration, U.S. Department of
Commerce, Room 3099, 14th Street and Constitution Avenue, NW.,
Washington, DC 20230; telephone (202) 482-1778, (202) 482-3534, (202)
482-3798 and (202) 482-5256, respectively.
Petitioners
The petitioners in these investigations are the North Dakota Wheat
Commission (hard red spring wheat), United States Durum Growers
Association (durum wheat), and the Durum Growers Trade Action Committee
(durum wheat) (collectively, the ``petitioners'').
Case History
Since the publication of the notice of initiation in the Federal
Register (see Notice of Initiation of Countervailing Duty
Investigations: Durum Wheat and Hard Red Spring Wheat from Canada, 67
FR 65951 (October 29, 2002) (``Initiation Notice'')), the following
events have occurred:
[[Page 11375]]
On November 4, 2002, the Department of Commerce (``Department'')
issued the countervailing duty (``CVD'') questionnaire to the
Government of Canada (``GOC''). The questionnaire informed the GOC that
it was responsible for forwarding the questionnaire to the appropriate
provincial governments (e.g., the Government of Alberta (``GOA'') and
the Government of Saskatchewan (``GOS'')) and to producers/exporters
(e.g., the Canadian Wheat Board (``CWB'')) of the hard red spring wheat
and durum wheat (collectively, ``subject merchandise''). The Department
also provided courtesy copies of the questionnaire to the GOA, GOS, and
CWB on the same day.
On November 18, 2002, the GOC submitted two scope exclusion
requests. See ``Scope Comments'' section, below.
On December 3, 2002, the Department postponed the preliminary
determinations of these investigations until March 3, 2003. See Certain
Durum Wheat and Hard Red Spring Wheat: Extension of Time Limit for
Preliminary Determinations in Countervailing Duty Investigations, 67 FR
72918.
The Department received responses to its countervailing duty
questionnaires from the GOC, GOA, GOS and CWB on January 13, 2003. On
January 31, 2003, we issued supplemental questionnaires to the GOC,
GOA, GOS and CWB. On February 6, 2003, we issued a second supplemental
questionnaire to the GOC, GOA and GOS. Responses to these supplemental
questionnaires were received between February 11 and February 14, 2003.
On December 23, 2002, the petitioners submitted a new subsidy
allegation regarding the GOC's guarantee of the CWB's initial payment
to producers. On February 11, 2003, we initiated on this alleged
program. See February 11, 2003, Memorandum to Acting Deputy Assistant
Secretary Susan H. Kuhbach (``New Subsidy Allegation Memo'') on file in
the Central Records Unit (``CRU'') in room B-099 of the main Department
building. We issued questionnaires to the GOC and CWB regarding this
program on February 13, 2003, and received their responses on February
25, 2003.
Alignment With Final Antidumping Duty Determinations
On February 24, 2003, the petitioners submitted a letter requesting
alignment of the final determinations in these investigations with the
final determinations in the companion antidumping duty (``AD'')
investigations. See Notice of Initiation of Antidumping Duty
Investigations: Certain Durum Wheat and Hard Red Spring Wheat from
Canada, 67 FR 65947 (October 29, 2002). Therefore, in accordance with
section 705(a)(1) of the Act, we are aligning the final determinations
in these investigations with the final determinations in the
antidumping investigations of certain durum wheat and hard red spring
wheat from Canada.
Period of Investigation (``POI'')
The period for which we are measuring subsidies is August 1, 2001
to July 31, 2002, which coincides with the fiscal year of the CWB, the
sole responding exporter. See 19 CFR 351.204(b)(2).
Scope of Investigation
For purposes of these investigations, the products covered are (1)
durum wheat and (2) hard red spring wheat.
A. Durum Wheat
Imports covered by this investigation are all varieties of durum
wheat from Canada. This includes, but is not limited to, a variety
commonly referred to as Canada Western Amber Durum. The merchandise
subject to this investigation is typically classified in the following
Harmonized Tariff Schedule of the United States (``HTSUS'')
subheadings: 1001.10.00.10, 1001.10.00.91, 1001.10.00.92,
1001.10.00.95, 1001.10.00.96, and 1001.10.00.99.
B. Hard Red Spring Wheat
Imports covered by this investigation are all varieties of hard red
spring wheat from Canada. This includes, but is not limited to,
varieties commonly referred to as Canada Western Red Spring, Canada
Western Extra Strong, and Canada Prairie Spring Red. The merchandise
subject to this investigation is typically classified in the following
HTSUS subheadings: 1001.90.10.00, 1001.90.20.05, 1001.90.20.11,
1001.90.20.12, 1001.90.20.13, 1001.90.20.14, 1001.90.20.16,
1001.90.20.19, 1001.90.20.21, 1001.90.20.22, 1001.90.20.23,
1001.90.20.24, 1001.90.20.26, 1001.90.20.29, 1001.90.20.35, and
1001.90.20.96.
Although the HTSUS subheadings provided for durum wheat and hard
red spring wheat are for convenience and customs purposes, our written
description of the scope of these proceedings is dispositive.
Scope Comments
In the Initiation Notice, we invited comments on the scope of these
proceedings. On November 18, 2002, we received a request from the GOC
to amend the scope of these investigations and the companion AD
investigations of hard red spring wheat and durum wheat. Specifically,
the GOC requested that the scope be amended to exclude those areas of
Canada where the CWB does not have jurisdiction, and to remove
Harmonized Tariff Schedule number 1001.90.20.96 from the scope of the
AD and CVD investigations of certain hard red spring wheat.
On December 12, 2002, the petitioners submitted their rebuttal
comments. On February 4, 2003, the GOC responded to those comments, and
on February 11, 2003, the petitioners commented on the GOC's February
4, 2003 comments.
The Department preliminarily determines that the requested
exclusions are not warranted. For further discussion, see March 3, 2003
memorandum to Acting Deputy Assistant Secretary Susan H. Kuhbach,
``Scope Exclusion Requests: Non-Canadian Wheat Board Areas and HTSUS
1001.90.20.96'' on file in the CRU.
Injury Test
Because Canada is a ``Subsidies Agreement Country'' within the
meaning of section 701(b) of the Tariff Act of 1930, as amended (``the
Act''), the International Trade Commission (``ITC'') is required to
determine whether imports of the subject merchandise from Canada
materially injure, or threaten material injury to, a U.S. industry. On
November 25, 2002, the ITC transmitted to the Department its
preliminary determinations finding that there is a reasonable
indication that an industry in the United States is being materially
injured by reason of imports from Canada of hard red spring wheat and
durum wheat. See Durum and Hard Red Spring Wheat from Canada, 67 FR
71589 (December 2, 2002).
Subsidies Valuation Information
Allocation Period
Pursuant to 19 CFR 351.524(b), non-recurring subsidies are
allocated over a period corresponding to the average useful life
(``AUL'') of the renewable physical assets used to produce the subject
merchandise. 19 CFR 351.524(d)(2) creates a rebuttable presumption that
the AUL will be taken from the U.S. Internal Revenue Service's 1977
Class Life Asset Depreciation Range System (the ``IRS Tables''). For
the wheat products industry, the IRS Tables prescribe an AUL of 10
years.
In order to rebut the presumption in favor of the IRS tables, the
Department must find that the IRS tables do not reasonably reflect the
company-specific
[[Page 11376]]
AUL or the country-wide AUL for the industry in question, and that the
difference between the company-specific or country-wide AUL and the IRS
tables is significant. See 19 CFR 351.524(d)(2)(i). For this difference
to be considered significant, it must be one year or greater. See 19
CFR 351.524(d)(2)(ii).
Neither the petitioners, CWB, GOC, GOA, or GOS have contested using
the AUL reported for the wheat products industry in the IRS tables.
Therefore, we preliminarily determine that any non-recurring benefits
should be allocated over 10 years.
Attribution of Subsidies
19 CFR 351.525(b)(6)(ii) states that the Department will attribute
subsidies received by corporations with ``cross-ownership'' that
produce the subject merchandise to the combined sales of those
companies. Based on our review of the responses, we preliminarily find
no ``cross-ownership'' between the CWB and any other parties, and we
have attributed countervailable subsidies received by the CWB to the
CWB's sales.
Benchmark Interest Rates
Pursuant to 19 CFR 351.505(a) and 19 CFR 351.524(d)(3)(i), the
Department will use as a long-term loan benchmark and as a discount
rate the actual cost of comparable long-term borrowing by the company,
when available. 19 CFR 351.505(a)(2) defines a comparable commercial
loan as one that, when compared to the government-provided loan in
question, has similarities in the structure of the loan (e.g., fixed
interest rate v. variable interest rate), the maturity of the loan
(e.g., short-term v. long-term), and the currency in which the loan is
denominated. In instances where no applicable company-specific
comparable commercial loans are available, 19 CFR 351.505(a)(3)(ii)
permits the Department to use a national average interest rate for
comparable commercial loans.
In 1999, the Red Coat Road and Rail Ltd. short line railway was
approved for and received a long-term loan from the GOS under the Short
Line Financial Assistance Program, described in the ``Analysis of
Programs'' section, below. The petitioners have alleged that any
railways receiving benefits under this program were entrusted and/or
directed to provide a financial contribution to the CWB through this
program. There is no information on the record as to whether the Red
Coat Road and Rail Ltd. had comparable long-term borrowings of its own
during 1999. Accordingly, we compared the effective interest rate on
the loan received by the Red Coat and Rail Ltd. to the 1999 national
average annual long-term interest rate, represented by the weighted
average yield on long-term bonds.
A. CWB Borrowing
The CWB had a large quantity of outstanding short-term borrowing
during the POI, all of which was guaranteed by the GOC. The CWB
borrowed using four different instrument types: (1) Commercial paper
issued in the United States in U.S. dollars (``USCP program''); (2)
notes issued in Canada in Canadian dollars (``WBN program''); (3)
commercial paper issued in the euromarkets (i.e., international
markets) in U.S. dollars and certain other foreign currencies (however,
all foreign currency borrowings were swapped to U.S. dollar debts)
(``ECP program''); and (4) Euro Medium Term Notes issued in U.S.
dollars and Japanese Yen (however, all the Japanese Yen borrowings were
swapped to U.S. dollar debts and all the borrowings swapped to variable
rates) (``EMTN program''). 19 CFR 351.505(a)(2) states that the
Department normally will select a benchmark interest rate reflecting
the structure, maturity and currency in which a firm's loans are
denominated. However, for purposes of these preliminary determinations,
for the non-U.S. or Canadian dollar borrowings under the ECP and EMTN
programs, we have used the U.S. dollar, variable rate terms applicable
under the swap agreements (rather than on the underlying loans) in
determining whether a benefit exists. We intend to examine these
borrowings further, including any additional possible benchmarks, to
determine whether there is another, more appropriate methodology for
the final determinations.
19 CFR 351.506(a) states that ``{i{time} n the case of a loan
guarantee, a benefit exists to the extent that the total amount a firm
pays for the loan with the government-provided guarantee is less than
the total amount the firm would pay for a comparable commercial loan
that the firm could actually obtain on the market absent the
government-provided guarantee,'' and that the Department ``will select
a comparable commercial loan in accordance with section 351.505(a) {of
the Department's regulations{time} .'' 19 CFR 351.505(a)(3)(i) states
that in selecting a benchmark loan, the Department ``normally will rely
on the actual experience of the firm in question in obtaining
comparable commercial loans,'' but 19 CFR 351.505(a)(3)(ii) explains
that ``if the firm did not take out any comparable commercial loans * *
* {the Department{time} may use a national average interest rate for
comparable commercial loans.'' Because all of the CWB's borrowings are
guaranteed by the GOC, no company-specific benchmark exists for ``a
comparable commercial loan that the firm could actually obtain on the
market absent the government-provided guarantee.'' Accordingly, we
reviewed the information on the record to determine the appropriate
national average interest rates, both for U.S. dollar and Canadian
dollar borrowings.
B. Comparable Short-Term Borrowing
The GOC and CWB argue that the U.S. and Canadian dollar prime rates
are inappropriate benchmarks for the CWB's commercial paper \1\
borrowings because the prime rate ``is not relevant to the CWB or any
similar-size corporation operating in the same business segments and
international markets as the CWB.'' As an alternative to the prime
rates, the GOC provided interest rate information on the Canadian
Bankers' Acceptance rates (CBA rates) for 1 and 3 month borrowings (for
Canadian dollars), and the U.S. dollar LIBOR rate for 1, 3, and 6 month
borrowings, as these rates typically serve as a reference rate for top-
rated commercial paper borrowing. Furthermore, in response to the
Department's inquiry about why the LIBOR/CBA rates would be appropriate
benchmarks for CWB borrowings in the absence of the guarantee, the CWB
stated that its borrowing terms ``are not materially different from the
borrowing terms * * * that apply to highly rated, non-guaranteed
issuers in the United States and Canada.''
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\1\ ``Commercial paper'' is a short-term unsecured promissory
note representing the obligation of the issuing corporation that is
issued in the open market and sold at a discount from its face
value. This discount represents the effective interest rate on the
notes. Commercial paper is typically purchased by money market
mutual funds.
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We do not believe that this response addresses the crucial question
of what interest rate the CWB would pay on its borrowings in the
absence of the GOC's guarantee. Based on our research, the interest
rate the CWB would pay would depend on whether the CWB had access to
the commercial paper market, which, in turn, would depend on the CWB's
credit rating in the absence of the GOC guarantee. For example,
according to Fabozzi and Modigliani, in Capital Markets: Institutions
and Instruments, ``commercial paper is an alternative * * * for large
corporations with strong credit ratings,'' (emphasis added). Similarly,
according to the U.S. Federal Reserve, ``the overwhelming majority of
[[Page 11377]]
{commercial paper{time} issuers are extremely creditworthy.'' See The
Commercial Paper Market: Who's Minding the Shop at www.stls.frb.org/
publications/re/1998/b/re1998b3.html.
Based on the CWB's own statement, its credit rating would be less
favorable in the absence of the GOC's guarantee. This is reflected in
the CWB's 2000-2001 Annual Report, at 31, which states that ``{a{time}
borrowings of the {CWB{time} are unconditionally and irrevocably
guaranteed by the Minister of Finance, resulting in the top credit
ratings from Moody's * * *, Standard and Poor's * * *, and Dominion
Bond * * *`` (emphasis added).
Indeed, it may be the case that the CWB's ability to borrow in the
commercial paper market is due entirely to the GOC's guarantee. Sources
show that companies with lower credit ratings can still have access to
the commercial paper market, so long as their borrowings are supported
or guaranteed by parties with higher credit ratings. Fabozzi and
Modigliani, at 473-4, describe how companies with lower credit ratings
have been able to issue commercial paper ``by means of credit support
from a firm with a high credit rating,'' issuing so-called ``credit
supported commercial paper'' or ``letter of credit paper.'' Clearly,
the GOC's backing is an important feature of the GOC's borrowing. In
reviewing the sample placement documents submitted by the CWB, all
place great emphasis on the fact that underlying debt instruments are
guaranteed by the GOC, in essence making these issues credit supported
commercial paper-supported by the full faith and credit of the GOC. See
Exhibit 3 of the February 13, 2003 CWB supplemental response.
Furthermore, a search on the Moody's internet site reveals that this
credit rating agency considers the CWB to be a ``sovereign'' borrower.
While this evidence leads us to question whether the CWB would have
access to the commercial paper market in the absence of the GOC's
guarantee, we do not believe it is sufficient to support a preliminary
determination that the CWB could not access that market. Instead, the
evidence currently on the record supports the conclusion that the GOC's
guarantee ensures that the CWB has the top credit rating. Thus, the
issue is what rate the CWB would pay without the top credit rating it
currently enjoys by virtue of the GOC's guarantee.
Based on our research, companies with the highest credit rating
(i.e., P-1 (Moody's), A-1/A-1+ (S&P)) are able to borrow in the
commercial paper market at LIBOR/CBA. Because the evidence indicates
that the CWB's high credit rating is due to the GOC guarantee, we
preliminarily determine that in the absence of the guarantee, the CWB
would have a credit rating less favorable than P-1/A-1 and, therefore,
the LIBOR/CBA rates are not the appropriate benchmark.
Fabozzi and Modigliani, at 474-5, indicate that there are two tiers
of investment grade commercial paper. To be able to use the first tier,
the borrower must have a credit rating of P-1/A-1, as described above.
The second tier is available to issuers with P-2/A-2 credit ratings.
Commercial paper is sold in this market at a greater discount (i.e., it
has a higher effective interest rate). Thus, the second tier commercial
paper market might be a source of funds for the CWB in the absence of
the GOC's guarantee.
A second alternative would be for the CWB to borrow from banks at
the prime rate. According to Fabozzi and Modigliani, at 471-2,
borrowing from a bank is an alternative to the commercial paper
markets, albeit a higher cost alternative, and one that would be used
by firms with lower credit ratings. Also, according to the U.S. Federal
Reserve, the prime rate is ``one of several base rates used by banks to
price short-term business loans.'' See http://www.federalreserve.gov/
price short-term business loans.'' See http://www.federalreserve.gov/
releases/h15/update/.
In reviewing the record, we find no information that clearly
indicates, based on a presumed credit rating of P-2/A-2 or below,
whether the CWB would be able to borrow in the second-tier commercial
paper market or whether it would be required to raise funds through
banks. Accordingly, lacking such information for these preliminary
determinations, we have calculated an average of the rates applicable
to second-tier commercial paper and the prime rates in order to derive
a benchmark rate. For purposes of the final determinations, we
encourage parties to submit further information that would allow us to
more accurately estimate the credit rating of the CWB in the absence of
the GOC guarantee, and the benchmark rates that would be applicable to
the CWB with such a credit rating.
19 CFR 351.505(a)(2)(iv) states that the Department ``normally will
use an annual average of the interest rates on comparable commercial
loans.'' However, if the Department ``finds that interest rates
fluctuated significantly during the period of investigation or review,
the {Department{time} will use the most appropriate interest rate
based on the circumstances presented.'' A review of the interest rates
on the underlying loans and the benchmarks selected indicate that there
was a substantial and sustained decrease in interest rates over the
POI. For example, the prime rate went from 5.95 percent in August 2001,
to a low of 3.75 percent in February and March, and then to 4.4 percent
in July 2002. A similar pattern exists on the CWB's actual loans.
Accordingly, we have used monthly average benchmark interest rates in
our benefit calculations.
Analysis of Programs
Unless otherwise specified, these programs encompass both hard red
spring wheat and durum wheat. Accordingly, the countervailable subsidy
rate applies equally to both products.
Based upon our analysis of the petition and the responses to our
questionnaires, we determine the following:
I. Programs Preliminarily Determined To Be Countervailable
A. Provision of Government-Owned and Leased Railcars
The GOC, GOA, and GOS purchased railway hopper cars (``hopper
cars'') and provided them to the Canadian Pacific Railway (``CP'') and
the Canadian National Railway (``CN'') (collectively referred to as the
``railway companies'') for the transportation of grain, including
subject merchandise. During the POI, the GOC, GOA, and GOS provided a
total of 14,414 hopper cars to the railway companies for transporting
grain. The provision of these railcars to the railway companies is
governed by operating and alternate use agreements between the federal
and provincial governments and the railway companies. The GOC provided
12,510 hopper cars and the GOA and GOS provided 951 and 953 hopper
cars, respectively.
Under the operating agreement, the railway companies are permitted
to use and operate the hopper cars as part of the railway companies'
common railcar fleet, subject to certain specified alternate use
restrictions. The railway companies, in turn, have to repair, maintain,
and service the hopper cars and to transport Western Division grain
included in Schedule II of the Canada Transportation Act (``Schedule
II''). Hard red spring wheat and durum wheat are included in Schedule
II. According to the Canada Transportation Act, Western Division means
the part of Canada lying west of the meridian passing through the
eastern boundary of the City of Thunder Bay, including the whole of the
Province of Manitoba.
[[Page 11378]]
The agreements also permit alternate uses of the cars.
Specifically, the railway companies may use the government hopper cars
to transport any grain not listed in Schedule II or for transporting
other commodities. Also, the railway companies may use the cars to move
grain into eastern Canada, through eastern Canada into the United
States, and southbound for export into the United States. For any of
these alternate uses, the railway companies must pay a fixed rate per
day, the ``alternate use'' fee.
In addition to the government-owned hopper cars provided to the
railway companies by the federal and provincial governments, the GOC
also provided 1,675 leased hopper cars to the CP through the CWB during
the POI. Specifically, in March 1981, the GOC entered into a
contribution agreement with the CWB directing the CWB to lease, on
behalf of the GOC, hopper cars designed for the transportation of
grain, including subject merchandise. The agreement also directs the
CWB to provide the leased hopper cars to the railway companies for the
transportation of Western Division grain. Pursuant to the terms of the
contribution agreement, the CWB is obliged to make lease payments for
the leased hopper cars in a timely manner and to invoice the GOC for
costs that the CWB incurs. The GOC, in turn, fully reimburses the CWB
for the lease costs.
Similar to the various operating agreements for the government-
owned hopper cars, the operating agreement between the CWB and the CP
provides the CP with the day-to-day operation and use of the hopper
cars. The CP, in turn, has to repair, maintain, and service the hopper
cars and to transport grain as listed in Schedule II. The CP is also
required to pay alternate use fees for transporting grain not listed in
Schedule II or for transporting other commodities, and for transporting
grain to destination ports other than Vancouver, Prince Rupert,
Churchill, Thunder Bay, and Armstrong, including the transportation of
grain to the United States. Under the alternate use agreement, the CP
is required to pay a fixed alternate use fee to the CWB. The CWB
reduces the reimbursement amount it requests from the GOC by the amount
of alternate use fees it collected.
According to the GOC, it acquired hopper cars ``to cover the
railways'' inability to make the investment with their own resources.''
The GOC also stated that the regulated railway rates in effect at the
time ``did not fully compensate the railways for all of their costs.''
The GOA and GOS stated that they acquired their hopper cars because, at
the time, the railway companies were not willing to invest in hopper
cars because the regulated railway rates were not compensatory.
For these preliminary determinations, we are treating the railcars
provided by the CWB to the CP as if they were provided directly by the
government. This is because, with respect to these railcars, the CWB is
acting as an agent of the GOC, leasing the cars on GOC's behalf and
receiving full reimbursement of the lease fees. Therefore, for both the
CWB- and government-provided railcars we have analyzed whether the
railway companies have been entrusted or directed (within the meaning
of section 771(5)(B)(iii) of the Act) to make a financial contribution
(provision of services under section 771(5)(D)(iii) of the Act) by
means of the provision of railway services to the CWB for less than
adequate remuneration (within the meaning of section 771(5)(E)(iv) of
the Act).
First, we preliminarily determine that the operating and alternate
use agreements entered into between the governments (including the CWB)
and railway companies, require the railway companies to transport
Western Grain.\2\ Through the operating and alternate use agreements,
the governments are directing the railway companies to provide
transport services for Western Grain. Therefore, we preliminarily
determine that the CP and CN have been entrusted or directed to provide
rail service for the movement of Western Division grain, including
grain shipped by the CWB.
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\2\ See Memorandum to Susan H. Kuhbach, dated March 3, 2003,
``Analysis of Provision of Government-Owned and Leased Railcars as
Indirect Subsidies,'' which is on file in the CRU.
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Second, we preliminarily determine that the provision of this rail
service is a financial contribution within the meaning of section
771(5)(D)(iii) of the Act, that is, provision of services other than
general infrastructure. Moreover, the services are being provided to a
specific group, the CWB and other users of hopper car services, within
the meaning of section 771(5A)(D)(iii)(I) of the Act.
Finally, we preliminarily determine that the CN and CP are
providing these rail services for less than adequate remuneration
within the meaning of section 771(5)(E)(iv) of the Act. Pursuant to the
Canada Transportation Act, the railway companies determine the prices
they charge for railway services by way of published tariffs,
confidential contracts negotiated between the railway company and the
shipper, or by a combination of the two. The CWB negotiates with the
railway companies with respect to the published tariffs and other
factors affecting freight rates.
In determining whether adequate remuneration has been paid, Sec.
351.511(a)(2)(i) of the Department's regulations states that the
Department will normally compare the prices in question to market-
determined prices in the country where the service is being provided.
There is no information on the record of these investigations about
prices charged by other railways in Canada for hopper car service.
Section 351.511(a)(2)(ii) directs that where no market-determined
prices are available in the country where the service is being
provided, the Department should look to world market prices as a
measure of adequate remuneration, if such prices are available to the
purchasers of the service. There is no information about world market
prices for hopper car service, or the availability of such prices to
Canadian hopper car users. Therefore, to determine whether the CN and
CP have received adequate remuneration for their provision of hopper
car services, we have examined whether their prices are consistent with
market principles. See section 351.511(a)(2)(iii).
In 2000, a study was prepared for Transport Canada, the government
agency that administers the GOC-owned hopper cars, by the Sparks
Company Inc. (the ``Sparks Study''). This study concluded that disposal
of the government-owned hopper cars and termination of the provision of
these hopper cars by the federal and provincial governments to the
railway companies would have the effect of adding ownership costs for
these cars to the railway companies' and/or shippers' costs. The Sparks
Study estimated the ownership costs for these cars to be between C$2.00
and C$3.00 per ton of grain transported.
Based on the conclusions of the Sparks Study, we preliminarily
determine that the rates charged by the CN and CP for hopper car
service do not reflect the ownership costs of these cars and,
consequently, the rates are not consistent with market principles. As a
result, we preliminarily determine that the CN and CP are providing
these railcar services for less than adequate remuneration.
To calculate the benefit to the CWB, we multiplied the total volume
of grain the CWB shipped during the POI by the added ownership costs
(modified as described below) to arrive at the total benefit the CWB
received from the subsidy. As a starting point, we used the mid-point
(i.e., C$2.50 per tonne) of the Sparks Study's estimate of C$2.00 to
[[Page 11379]]
C$3.00 per tonne. However, the GOC provided information to support its
claim that the lease rates used in the Sparks Study to calculate
estimated ownership costs were substantially higher than the range of
lease rates quoted by Canadian hopper car leasing companies during the
POI. Thus, we have preliminarily reduced the $2.50 per tonne estimate
of ownership costs by the percentage difference between the average
lease rate used in the Sparks Study and the average of the lease rates
quoted by Canadian hopper car leasing companies during the POI.
Finally, we divided the benefit received by the CWB in the POI by
CWB's total sales during the POI. On this basis, we preliminarily
determine the countervailable subsidy from the federal and provincial
governments' provision of railway hopper cars to be 0.35 percent ad
valorem for the CWB.
The GOC, GOA and GOS have argued that the benefit from the
governments' provision of railcars, if any, is tied to east/west
shipments of grain because for other shipments, including shipments to
the United States, the railway companies must pay commercially
determined alternate use fees. We have not adopted this position in our
preliminary determinations because we have focused our analysis on
whether the railway companies receive adequate remuneration when they
provide hopper car service. No information has been provided to show
that the rates charged by the railway companies for service to
particular destinations varies because they pay (or don't pay) an
alternate use fee for the government-provided hopper cars.
B. GOC Guarantee of CWB Borrowing
Until 1998, the CWB was an agent Crown Corporation of Canada, and
CWB borrowings were guaranteed by virtue of this agency relationship.
At the end of 1998, the CWB lost its agency status, and the Canadian
Wheat Board Act was amended to its current form, which requires the CWB
to submit an annual borrowing plan to the Minister of Finance, and seek
approval of terms and conditions of the proposed borrowing plans.
Section 19(5) of the Canadian Wheat Board Act provides that borrowings
under an approved borrowing plan are guaranteed by the GOC. All CWB
borrowings must be consistent with the time, terms and conditions
authorized pursuant to the borrowing plan and, accordingly, all CWB
borrowings are guaranteed by the GOC.
During the POI, the CWB engaged in short-term borrowing by
accessing the money markets in Canada, the United States, and the
global money market. The CWB also had outstanding borrowings using Euro
Medium Term Notes (``EMTNs''). The CWB has issued a variety of EMTNs in
different currencies, having maturities ranging from 5 to 15 years.
However, the CWB has swapped all of these EMTNs to U.S. dollars and
floating rates of interest.
The CWB borrows to finance its initial payments to farmers,
operating expenses, and credit sales to sovereign and private buyers
(see, also, GOC Guarantee of CWB Lending section, below). The CWB
opened the POI with approximately C$7.6 billion in outstanding
borrowings.
We preliminarily determine that the GOC's guarantee of the CWB's
borrowing is a countervailable subsidy. By providing this guarantee,
the GOC has provided a financial contribution in the form of a
potential direct transfer of funds, within the meaning of section
771(5)(D)(i) of the Act. This guarantee is limited to the CWB and,
therefore, specific within the meaning of section 771(5A)(D)(iii)(I) of
the Act. We calculated the benefit to the CWB by comparing the amounts
that the CWB paid on its borrowings with what it would have paid absent
the government guarantee. See, ``Subsidies Valuation Information,
Benchmark Interest Rates'' section, above, for further discussion of
the benchmark rates used in this calculation. To calculate the
countervailable subsidy, we divided the total benefit received by the
CWB on all its borrowings by the CWB's total sales in the POI. On this
basis, we preliminarily determine the countervailable subsidy from the
GOC's guarantee of CWB borrowing to be 3.59 percent ad valorem.
II. Programs Preliminarily Determined To Be Not Countervailable
A. GOC Guarantee of CWB Lending
The CWB has two types of credit grain sales programs which are
guaranteed by GOC, the Credit Grain Sales Program (``CGSP'') and the
Agri-Food Credit Facility (``ACF''). The CGSP was established in 1952,
and allows the CWB to sell grain on credit to customers who can provide
a sovereign guarantee of repayment. Repayment terms under the CGSP
cannot exceed 36 months. As of the beginning of the POI, the CWB had
approximately C$7.1 billion in outstanding credit under the CGSP.
Approximately 84 percent of this total consisted of debt that had been
rescheduled or subject to rescheduling pursuant to Paris Club
agreements,\3\ and an additional 12 percent represents overdue debt
from the Government of Iraq. The ACF was established in 1995 to support
sales of grain on credit to private sector customers. CWB lendings
under the ACF are short-term, with repayment periods of one year or
less. At the start of the POI, the CWB had approximately C$85 million
in outstanding credit under the ACF. All of the debts under this
program are current.
---------------------------------------------------------------------------
\3\ The Paris Club is a forum where the GOC and other sovereign
creditors have periodically agreed to extend repayment terms beyond
original maturity dates and/or reduce the principal owed by a debtor
country.
---------------------------------------------------------------------------
The CWB states that neither of these programs has been used to
support sales to the United States, and that the United States is not
on the GOC-approved list of countries to which export credits can be
extended under the CGSP. In addition, the CWB states that all of its
credit customers, with the exception of Iraq, are paying the CWB
according to the terms of their most recent lending agreement (original
or restructured), and that the net cash flows to the CWB on
restructured debt are the same both before and after the rescheduling.
However, the CWB and GOC have stated that the GOC made portions of the
rescheduled payments for Poland, Ethiopia, Zambia, Egypt and Haiti.
The petitioners allege that this program provides a benefit to the
CWB because the CWB is able to earn interest income (i.e., the
difference between the rate at which it lends to its customers and the
rate at which it borrows in order to disburse this revenue to
producers) on debts that are uncollectible. However, as stated above,
all the debts, with the exception of Iraq, are, in fact, performing in
accordance with their debt agreements. While a benefit arises as a
result of the fact that the CWB is borrowing at a rate less than it
would otherwise be able to borrow but for its borrowing guarantee, we
have already countervailed this benefit on all of the CWB's borrowings.
(See ``GOC Guarantee of CWB Borrowing'' section, above.)
However, although we have preliminarily found that the benefit
alleged by petitioners under this program is already countervailable
under the GOC guarantee of CWB borrowing program, we note that the GOC
payments to the CWB may give rise to an additional or alternative
benefit in the amount of these payments. We preliminarily determine
that such payments would be export subsidies. 19 CFR 351.514(a) states
that the Department will consider a subsidy to be an export subsidy if
``eligibility for, approval of, or the amount of, a
[[Page 11380]]
subsidy is contingent upon export performance.'' The GOC payments under
this guarantee are contingent upon sales to the eligible foreign
markets.
We further preliminarily determine that any subsidies conferred as
a result of these lending guarantees are tied to the markets that
received the guarantees. Consequently, in accordance with 19 CFR
351.525(b)(5)(i), any benefits would be attributed to export sales to
those markets. Because sales to the United States do not benefit from
these guarantees, we find no countervailable subsidies on the subject
merchandise under this program.
B. Rail Freight Revenue Cap
In August 2000, the GOC implemented an annual cap on the revenues
(the ``revenue cap'') that the CN and CP can earn from the
transportation of certain Western Division grains. The grains subject
to the revenue cap are set out in Schedule II and include the subject
merchandise. The revenue cap only applies to grain movements on CN or
CP lines from ``a point on any line west of Thunder Bay or Armstrong,
Ontario, to (a) Thunder Bay or Armstrong, Ontario, or (b) Churchill,
Manitoba, or a port in British Columbia for export, but does not
include the carriage of grain to a port in British Columbia for export
to the United States for consumption in that country (the ``capped
routes'').'' (See Canada Transportation Act, Division VI,
Transportation of Western Grain, Section 147.)
The revenue cap is calculated using a formula that takes into
consideration the following: the railway's revenue for the movement of
grain in the base year (crop year 2000-2001); the number of tons of
grain moved in the base year and the actual year; the average length of
haul in miles for the base year and actual year; and the volume-related
composite price index. (See Canada Transportation Act, Division VI,
Transportation of Western Grain, Section 151.) If CN's or CP's revenues
for the movement of grain on capped routes in a crop year exceed the
railway's maximum revenue cap entitlement, the railway must pay refunds
according to a specified formula.
Under section 771(5)(B)(iii) of the Act, a subsidy exists when,
inter alia, a government entrusts or directs a private entity to make a
financial contribution that confers a benefit. As discussed in the
``Provision of Government-Owned and Leased Railcars'' section, above,
we preliminarily find that the GOC is entrusting or directing the
railways to provide a financial contribution, specifically rail
transportation services, to the CWB. See sections 771(5)(B)(iii) and
771(5)(D)(iii) of the Act.
Further, we find that the revenue cap is limited to the
transportation of Western Division grain and, therefore, specific
within the meaning of section 771(5A)(D)(i) of the Act.
We preliminarily determine, however, that the CWB did not receive
any benefits from the revenue cap within the meaning of section
771(5)(E)(iv) of the Act. This is because, as discussed below, there is
no evidence that, as a result of the revenue cap, the railways are
providing the rail services to the CWB for less than adequate
remuneration. Accordingly, we preliminarily determine that the rail
freight revenue cap is not a countervailable subsidy.
Our reasons for preliminarily determining that the revenue cap does
not confer a benefit to the CWB are threefold. First, in the two crop
years that the revenue cap has been in place, CN's and CP's earnings
subject to the revenue cap have fallen significantly short of their
respective revenue caps. In 2000/01 and 2001/02, respectively, CN
earned C$3 million and C$13.5 million less than the cap, while CP
earned C$2.6 million and C$8.7 million less. Second, the railways are
allowed to increase or create fees for services that are not subject to
the revenue cap. This allows the railways to increase revenue from
Western grain movements, irrespective of the revenue cap. Examples of
these exempted service fees are demurrage, storage, performance
penalties, additional switching and staging. Lastly, on behalf of the
GOC, the Canadian Transportation Agency (``CTA'') conducted a study to
compare per ton revenue for capped and non-capped movements. In the
study, the CTA used three methods to compare non-revenue cap to revenue
cap movements. The CTA compared revenue per ton mile for (1) Eastern
Canada non-cap movements versus Western Canada revenue cap movements,
(2) Western Canada non-cap movements versus Western Canada revenue cap
movements, and (3) Eastern Canada versus Western Canada movements which
originate as a revenue cap movement, but continue east and become non-
cap movements. This generated nine different comparisons, eight of
which showed that the revenue cap did not affect the rates per ton mile
that CP and CN charged for the transportation of grain.
The petitioners have asserted that the revenue cap conferred a
benefit on the CWB based on two sources which state that the August 1,
2000 revenue cap would be set at a level leading to ``an estimated 18
per cent reduction in grain freight rates from 2000-2001 levels,'' and
an ``immediate 18 per cent reduction in railway revenues.'' Petitioners
acknowledge that the actual rail rates did not decrease by the full 18
percent. Even if they did, we preliminarily find that the 18 percent
figure is not a useful measure of whether the revenue cap constituted a
countervailable benefit. The pre-revenue cap freight rates were
regulated by the GOC and, therefore, do not provide an accurate
benchmark for adequate remuneration. Also, the comparison cited by the
petitioners predates our POI. For these reasons, and in light of the
CTA study, we do not believe the 18 percent reduction is a useful
benchmark for determining whether the revenue cap conferred a benefit
upon the CWB.
C. Maintenance of Uneconomic Branch Lines
Effective August 2000, under the Canada Transportation Act, as
amended, a railway company that discontinues a grain-dependent branch
line must provide compensation to the municipality or district through
whose territory the grain-dependent branch line passes in the amount of
C$10,000 per mile for each mile of line within the municipality or
district, for three years.
We preliminarily determine that the payment for discontinuance of a
grain-dependent branch line (``GDBL payment'') does not constitute a
countervailable subsidy. Under section 771(5)(B)(iii) of the Act, a
subsidy exists when, inter alia, a government entrusts or directs a
private entity to make a financial contribution that confers a benefit.
With respect to GDBL payments, evidence provided by the GOC, as
discussed below, indicates that the cost of maintaining a grain-
dependent branch line far outweighs the cost of closure. Decisions on
whether to maintain or close such lines are made irrespective of GDBL
payments. Hence, we find that the GOC is not directing and/or
entrusting the railways to provide continued rail transportation
services over grain-dependent branch lines.
The GOC cites to the 1999 Branch Line Review that studied the
economic costs to the grain handling and transportation system of
discontinuing the operation of 22 branch lines totaling 698.9 miles and
affecting the delivery of 1,367,560 tons of grain. The study examined
several grain handling and transportation scenarios and, ``[i]n each of
the twenty-two cases substantial savings will result when the operation
of all of these lines are discontinued and
[[Page 11381]]
the grain is transferred to the alternative delivery points.'' While
this review did not consider the income the railways earned from
transporting grain over the grain-dependent branch lines, the GOC
claims that the railways would experience very little loss of revenue,
if any, from the closure of a branch line because the farmer will truck
the grain to the next closest elevator and the railway would still
receive payment for the transportation of the grain to the final
destination, only on a slightly different route.
The GOC also explains that the reason for grain-dependent branch
lines' closures is the rationalization of grain elevators and the move
to multi-car block loading, which is dependent on high volume, larger
elevators. This has led to a closure of older, smaller capacity wooden
elevators on branch lines as large capacity non-wooden elevators have
been built on main lines to take advantage of multi-car discounts.
The petitioners argue that the payment is causing the railways to
keep open grain-dependent branch lines that were slated for closure and
cite to an article reporting that CN imposed a moratorium on grain-
dependent branch lines' closures. However, the Department notes that CN
closed two grain-dependent branch lines in Saskatchewan after the GDBL
payments were initiated and before the moratorium was announced. This
suggests that the GDBL payments were not the reason for CN issuing the
moratorium. As further proof that the GDBL payments did not deter the
railways from closing grain-dependent branch lines, the GOC has
reported that 78.1 miles of grain-dependent branch lines were closed in
crop year 1999/00; 33.8 miles were closed and 75.4 miles were
transferred in crop year 2000/01; and 97 miles were closed in crop year
2001/02 (the POI). These statistics demonstrate that the railways
continued to close grain-dependent branch lines after the GDBL payments
went into effect. Further, the Quorum Corporation, the third party
entity appointed by the GOC to monitor the Grain Handling and
Transportation System, issued a report which states that ``of the 384.3
route-miles of infrastructure abandoned in the 2000-01 crop year, 289.9
(or 75.4 percent) were grain dependent branch lines.'' These closures
were in the crop year just after the GDBL payments came into effect.
As the evidence supports the finding that the GDBL payments did not
deter the railways from abandoning grain-dependent branch lines, we
preliminarily find that the GOC is not directing and/or entrusting CP
and CN to continue to provide rail service on grain-dependent branch
lines that would normally be abandoned.
D. Short Line Financial Assistance Program
Under the Short Line Financial Assistance Program, short line
operators are eligible to receive a percentage of the capital required
to purchase rail lines slated for abandonment within Saskatchewan.
Funding for the program was provided by the GOC, through the Canadian
Agri-Infrastructure Program (CAIP), and the GOS. The program was in
effect from July 2, 1996, to December 31, 2001, during which time only
one application was presented and approved, all within 1999. For the
one project, a 15-year loan from the GOS was disbursed on May 1, 1999
and a one-time non-repayable cash grant from the GOC was disbursed on
July 20, 1999. (See ``Program Preliminarily Determined to be Not Used
During the POI,'' below, for a discussion of the grant.)
a. GOS Loan
We preliminarily determine that the 15-year loan from the GOS as
part of the Short Line Financial Assistance Program is not a
countervailable subsidy.
Consistent with section 771(5)(E)(ii) of the Act there is no
benefit conferred by this loan, because the benchmark interest rate,
the 1999 national average annual long-term interest rate represented by
the weighted average yield on long-term industrial bonds, is lower than
the interest rate charged on the underlying loan.
Both the CWB and the GOC further argue that since no subject
merchandise was shipped to the United States on this short line, any
benefit would be tied to non-U.S. sales. Because we found no benefit
conferred by the GOS loan, the Department did not reach this question.
III. Program Preliminarily Determined To Be Not Used During the POI
Based on the information provided in the responses, we
preliminarily determine that no benefits were applied for or received
under the following program during the POI:
Short Line Financial Assistance Program
For a general description of this program, please see the
description under ``Programs Preliminarily Determined to be Not
Countervailable.''
a. GOC Grant
For non-recurring subsidies, we apply the ``0.5 percent expense
test,'' described in section 351.524(b)(2) of the Department's
regulations, in which we compare the amount of subsidies approved under
a given program in a particular year to sales (total or export, as
appropriate) in that year. If the amount of subsidies is less than 0.5
percent of sales, the benefits are expensed in their entirety in the
year of receipt rather than allocated over the AUL period. In the case
of this GOC grant made under the Short Line Financial Assistance
Program, the resulting percentage was significantly below 0.5 percent.
Accordingly, any countervailable benefit from this grant would be
completely expensed in 1999 and would not provide a benefit to the CWB
during the POI.
IV. Program for Which We Need More Information
Guarantee of the Initial Payment
The Canadian Wheat Board Act requires that the GOC cover any
shortfall if the CWB's initial payment to producers (plus operating
costs) exceeds the total pool receipts during the pool period. The
petitioners maintain that this guarantee effectively provides an
insurance policy against losses, for which the CWB does not pay. The
petitioners state that payments under this guarantee have been made
seven times during the history of the CWB, the last time for the 1990-
91 marketing year. The petitioners argue that a commercial firm would
need to buy insurance (in the form of a put option) to guarantee
against losses in a similar fashion, and there would be an identifiable
cost in all years for such insurance, not just those in which the CWB
receipts fell short of the initial payments. The petitioners estimated
the value of such put options using the Black-Scholes options valuation
formula.
As described above, the Department initiated on this program on
February 11, sent out its questionnaires on February 13, and received
responses on February 25, 2003. The Department has not had the
opportunity to analyze thoroughly the information received or issue any
necessary supplemental questionnaires. Accordingly, we are not making
preliminary determinations with regard to this program at this time.
After we collect, review and analyze the necessary information, we will
prepare an analysis memorandum addressing the countervailability of
this program, and provide all parties an opportunity to comment on our
analysis.
[[Page 11382]]
Verification
In accordance with section 782(i)(1) of the Act, we will verify the
information submitted in these investigations prior to making our final
determinations.
Suspension of Liquidation
In accordance with section 703(d)(1)(A)(i) of the Act, we
calculated an individual rate for each exporter/manufacturer of the
subject merchandise. We preliminarily determine the total estimated net
countervailable subsidy rates to be:
------------------------------------------------------------------------
Net subsidy Net subsidy
rate (hard rate
Exporter/manufacturer red spring (durum
wheat) wheat)
(percent) (percent)
------------------------------------------------------------------------
Canadian Wheat Board.......................... 3.94 3.94
All Others.................................... 3.94 3.94
------------------------------------------------------------------------
In accordance with sections 777A(e)(2)(B) and 705(c)(5)(A) of the
Act, we have set the ``all others'' rate as CWB's rate because it is
the only exporter/manufacturer investigated.
In accordance with section 703(d) of the Act, we are directing the
Customs Service to suspend liquidation of all entries of certain durum
wheat and hard red spring wheat from Canada which are entered, or
withdrawn from warehouse, for consumption on or after the date of the
publication of this notice in the Federal Register, and to require a
cash deposit or bond for such entries of the merchandise in the amounts
indicated above.
ITC Notification
In accordance with section 703(f) of the Act, we will notify the
ITC of our determinations. In addition, we are making available to the
ITC all nonprivileged and nonproprietary information relating to these
investigations. We will allow the ITC access to all privileged and
business proprietary information in our files, provided the ITC
confirms that it will not disclose such information, either publicly or
under an administrative protective order, without the written consent
of the Assistant Secretary for Import Administration.
In accordance with section 705(b)(2) of the Act, if our final
determinations are affirmative, the ITC will make its final
determinations within 45 days after the Department makes its final
determinations.
Public Comment
Case briefs for these investigations must be submitted no later
than one week after the issuance of the last verification report.
Rebuttal briefs must be filed within five days after the deadline for
submission of case briefs. A list of authorities relied upon, a table
of contents, and an executive summary of issues should accompany any
briefs submitted to the Department. Executive summaries should be
limited to five pages total, including footnotes.
Section 774 of the Act provides that the Department will hold a
public hearing to afford interested parties an opportunity to comment
on arguments raised in case or rebuttal briefs, provided that such a
hearing is requested by an interested party. If a request for a hearing
is made in this investigation, the hearing will tentatively be held two
days after the deadline for submission of the rebuttal briefs at the
U.S. Department of Commerce, 14th Street and Constitution Avenue, NW.,
Washington, DC 20230. Parties should confirm by telephone the time,
date, and place of the hearing 48 hours before the scheduled time.
Interested parties who wish to request a hearing, or to participate
if one is requested, must submit a written request to the Assistant
Secretary for Import Administration, U.S. Department of Commerce, Room
1870, within 30 days of the publication of this notice. Requests should
contain: (1) The party's name, address, and telephone number; (2) the
number of participants; and (3) a list of the issues to be discussed.
Oral presentations will be limited to issues raised in the briefs.
These determinations are published pursuant to sections 703(f) and
777(i) of the Act.
Dated: March 3, 2003.
Faryar Shirzad,
Assistant Secretary for Import Administration.
[FR Doc. 03-5633 Filed 3-7-03; 8:45 am]