Forest Appeals Commission

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1 Forest Appeals Commission Fourth Floor 747 Fort Street Victoria British Columbia Telephone: (250) Facsimile: (250) Mailing Address: PO Box 9425 Stn Prov Govt Victoria BC V8W 9V1 APPEAL NOS FA-035(a); 2004-FA-036(a); 2004-FA-037(a) In the matter of an appeal under section 147 of the Forest Act, R.S.B.C. 1996, c BETWEEN: Weyerhaeuser Company Limited APPELLANT AND: Government of British Columbia RESPONDENT BEFORE: DATE: A Panel of the Forest Appeals Commission Alan Andison, Chair Bruce Devitt, Panel Member R.A. Gorley, Panel Member Conducted by way of written submissions concluding on November 8, 2004 APPEARING: For the Appellant: Erin Badesso Wendy A King, Counsel For the Respondent: Bruce Filan, Counsel APPEALS Weyerhaeuser Company Limited ( Weyerhaeuser ) appeals against three separate stumpage appraisal determinations for cutting permit ( CP ) 175 of Tree Farm License ( TFL ) 39, CP 269 of TFL 44 and CP 866 of TFL 44. The determinations were made in three stumpage advisory notices ( SANs ) issued by Stephen Edwards, RPF, Regional Appraisals Coordinator, Coast Forest Region, Ministry of Forests ( MOF ). The SANs are dated December 2, 2003, November 5, 2003, and January 9, 2004, but apply to timber harvested over a similar period of time; namely, from mid or late October 2003 to December 31, It should be noted that, although the timelines for the three stumpage rate determinations differ slightly, the issues and the remedies sought in these appeals are the same. Weyerhaeuser requests that the stumpage rates for the CPs, and the selling price estimations for the timber in the CP areas, be calculated on the basis of log grade percentages from the cruise compilation algorithm predictions. The appeal is brought before the Forest Appeals Commission pursuant to section 146 of the Forest Act. The powers of the Commission are set out in section 149(2) of the Forest Act:

2 APPEAL NOS FA-035(a); 036(a); 037(a) Page 2 Powers of commission 149 (2) On an appeal, the commission may BACKGROUND (a) confirm, vary or rescind the determination, order or decision, or (b) refer the matter back to the person who made the initial determination, order or decision with or without directions. Weyerhaeuser holds TFL 39 and TFL 44. CP 175 was issued to Weyerhaeuser in order to facilitate harvesting operations under TFL 39. CP 269 and CP 866 were issued to Weyerhaeuser to facilitate harvesting operations under TFL 44. A licensee harvesting Crown timber in British Columbia must pay a fee known as stumpage. The stumpage rate ($ per cubic meter of timber) is determined for each cutting authority (in this case, each CP), and is influenced, in part, by the type of timber to be harvested. For the areas subject to these appeals, the stumpage rates are determined using the Coast Appraisal Manual ( CAM ), effective April 1, 2002 (with amendments to August 1, 2003). To determine the stumpage rate, licensees submit the data required to estimate the selling price (value) of the timber and operating costs for harvesting that timber. That data is submitted by licensees to the MOF in the form of Coast Appraisal Data Submissions ( CADS ). The methodology for preparing the CADS is found primarily in the CAM, and secondarily, in the Cruising Manual ( CM ). The MOF then verifies the licensee s data and determines the selling price and operating cost, and applies the stumpage formula set out in the CAM to calculate stumpage. The licensee is then notified of the stumpage determination through a SAN. When the three SANs were issued, a stumpage appraisal under the CAM required an estimate of the value of the appraised stand of timber relative to the value of timber harvested elsewhere on the Coast. To estimate a stand s relative value, the MOF would, among other things, calculate a value index, which is expressed as dollars per cubic meter (m 3 ) and is equal to the estimated selling price of the appraised stand of timber, less the estimated operating costs required to harvest that timber. Three components are used to estimate the selling price (value) of the timber: 1. Timber volume (by species) based on the timber cruise; 2. Log grade percentages based on either the timber cruise or the billing history record; and 3. The average log prices published by the MOF for both mature and second growth timber. Each of those components is dealt with separately in the CAM. In fall 2003, Weyerhaeuser sent the CADS for CP 175, CP 269 and CP 866 to the MOF. As part of those CADS, Weyerhaeuser provided log grade sheets listing log grade percentages for the CP areas based on timber cruise information (i.e. the cruise compilation algorithm predictions).

3 APPEAL NOS FA-035(a); 036(a); 037(a) Page 3 In November 2003, December 2003, and January 2004, the Regional Appraisal Coordinator issued the SANs for CPs 175, 269 and 866. In calculating the stumpage rates and selling price estimates set out in the SANs, the Regional Appraisal Coordinator derived the log grade percentages from the billing history record, rather than the timber cruise information submitted in the CADS. In these appeals, Weyerhaeuser submits that the stumpage rates for the CPs were not determined in accordance with section 3.2 of the CAM. In particular, Weyerhaeuser submits that the Regional Appraisal Coordinator should have based the log grade percentages on the cruise compilation algorithm predictions. Weyerhaeuser and the MOF do not differ on the facts of the appeal. At issue in these appeals is whether the MOF used the appropriate method to determine the log grade percentages. Selection of the appropriate method depends, in part, on each parties view of the threshold at which a CP area contains sufficient second growth coniferous timber to make the timber cruise information, rather than the historic billing record, the appropriate data for calculating the log grade percentages. Section 2.8(1) of the CAM states that In this manual, second growth coniferous timber means coniferous timber that is less than 141 years old. In these appeals, the parties agree that CPs 175, 269, and 866 contain 9 percent, 5 percent, and 1 percent, respectively, of second growth coniferous timber, based on timber volume. Weyerhaeuser asserts that, in preparing the CADS, it correctly interpreted and applied the definition of second growth coniferous timber under the CAM and the CM, and correctly completed the log grade sheets. Weyerhaeuser submits that the MOF incorrectly interpreted Weyerhaeuser s response on the log grade sheets, and inappropriately, and without any factual or legal basis, changed the source of the log grade percentages from the timber cruise information to the billing history record. The Government maintains that the stumpage rates were determined in accordance with the CAM, because the volume of second growth coniferous timber in each of the CP areas is not 80 percent or greater of the total volume of coniferous timber in those areas, and therefore, the log grade percentages must be derived from the billing history record. ISSUE Whether the stumpage rates for CPs 175, 269 and 866 should be determined using log grade percentages derived from cruise algorithms or the billing history records. RELEVANT LEGISLATION The determination of stumpage rates is addressed in section 105 of the Forest Act: 105 (1) Subject to the regulations made under subsections (6) and (7), if stumpage is payable to the government under an agreement entered into under this Act or under section 103(3), the rates of stumpage must be determined, redetermined and varied

4 APPEAL NOS FA-035(a); 036(a); 037(a) Page 4 (a) by an employee of the ministry, identified in the policies and procedures referred to in paragraph (c), (b) at the times specified by the minister, and (c) in accordance with the policies and procedures approved for the forest region by the minister. The policies and procedures approved by the minister for Coast Region are found in the CAM. The following sections of the April 1, 2002 CAM (with amendments to August 1, 2003) are relevant to this appeal: 2.8 Coniferous Timber 1. In this manual, second growth coniferous timber means coniferous timber that is less than 141 years old. 2. In this manual, mature coniferous timber mean coniferous timber that is 141 years old or older. 3. The volume of mature coniferous timber and the volume of second growth coniferous timber in a cutting authority area will each be compiled from the timber cruise of the cutting authority area on a tree by tree basis. 4. Where the volume of second growth coniferous timber in a cutting authority area is eighty percent or greater of the volume of all coniferous timber in that cutting authority area, the cutting authority area will be appraised and reappraised as if all of the coniferous timber in that cutting authority area were second growth coniferous timber using the second growth average log market values Log Grade Percentage Criteria To determine the log grade percentages to be used for the cutting authority area being appraised or reappraised, the person who determines the stumpage rate will apply the following criteria: 1. The log grade percentage is the percentage by volume that log grade is of the total net cruise volume for the species of timber being considered. 2. Except as provided in subsections (6), (7), (8) and (9) of this section and section 3.2.4, the log grade percentages for a species of timber are derived from the billing history record. 3. The source of log grade percentages may vary by species of timber. 4. Before a two year billing history record for a species of timber can be used in an appraisal or reappraisal, that two year billing history record must be at least 25 percent of the cutting authorities net cruise volume of that species or m 3 whichever is greater. For timber licences outside a tree farm licence the volume in the two-year billing history record must also be at least 25 percent or 2000 m 3 for each species that comprise at least 20% of the cutting authorities total net cruise volume.

5 APPEAL NOS FA-035(a); 036(a); 037(a) Page 5 5. Where there is not at least 25 percent of the cutting authorities' net cruise volume of that species or m3 whichever is greater, within the two year billing history record of a tree farm licence area or a timber supply area. a. the billing history record that will be used for that species of timber will be the five year billing history record, and b. where the effective date of the appraisal or reappraisal falls within the period of the year listed in Column 1 of Table 3-1 or Table 3-2, the five year billing history shall end on the corresponding date in Column 2 of Table 3-1 or Table 3-2, which immediately precedes the effective date of the appraisal or reappraisal. 6. Where the cutting authority area of a cutting authority is issued under a woodlot licence is appraised or reappraised the log grade percentages for each species of timber will be derived from the cruise compilation algorithm predictions. 7. Where the cutting authority area of a cutting authority issued under the small business forest enterprise program, or a replaceable timber sale licence that does not consist of second growth coniferous timber is appraised or reappraised, the log grade percentages for each species of timber will be derived from: a. the two year billing history record, where the two year billing history record for that cutting authority includes at least 25 percent of the cutting authorities' net cruise volume of that species or m3 whichever is greater, or b. the cruise compilation algorithm predictions, where the two year billing history record for that cutting authority does not include at least 25 percent of the cutting authorities' net cruise volume of that species or m3 whichever is greater. 8. Where the cutting authority area being appraised or reappraised contains second growth coniferous timber and is not a cutting authority area referred to in subsections (6) or (7) of this section, the log grade percentages for each species of timber will be derived from either: a. the two year billing history record, where the two year billing history record for that cutting authority includes at least 25 percent of the cutting authorities' net cruise volume of that species or m3 whichever is greater, or b. the cruise compilation algorithm predictions, where the two year billing history record for the cutting authority does not include at least 25 percent of the cutting authorities' net cruise volume of that species or m3 whichever is greater. 9. Where the entire net cruise volume of the cutting authority area being appraised or reappraised will be harvested by single tree selection, the

6 APPEAL NOS FA-035(a); 036(a); 037(a) Page 6 log grade percentage for each species of timber will be derived from the cruise compilation algorithm predictions. 10. a. For cruises compiled before April 1, 2002, the cruise summary log grade data for cedar grades D and K, F and L, and I and M must be separated by using the proportional grade percentages from the first appropriate level in section b. For cruises compiled on and after April 1, 2002 the cedar grades will be separated by the cruise compilation program. DISCUSSION AND ANALYSIS Whether the stumpage rates for CPs 175, 269 and 866 should be determined using log grade percentages derived from cruise algorithms or the billing history records. Weyerhaeuser submits that the MOF incorrectly calculated the stumpage rates by basing the selling price estimation on log grade percentages from the billing history record rather than from the cruise compilation algorithm predictions. Weyerhaeuser submits that the language in section 2.8 of the CAM directs licensees to use the log market values for mature timber, and not second growth timber. Weyerhaeuser notes that there is no reference in section 2.8 to log grade percentages. Weyerhaeuser argues that the condition imposed by section 2.8(4) of the CAM describes when the second growth average log market values are to be applied, and that the MOF erred in applying this same condition to choosing the method for which log grade percentages are determined. Weyerhaeuser says that those are two separate and distinct aspects of determining the value. Weyerhaeuser argues that the CPs in question qualify for exception from section 3.2.2(2) of the CAM because they contain second growth coniferous timber, and therefore, meet the criteria in section 3.2.2(8). Weyerhaeuser submits that the language in section 3.2.2(8) of the CAM is clear and unambiguous, and that therefore a literal interpretation should be used. Weyerhaeuser notes that section 3.2.2(8) of the CAM states that where the cutting authority area being appraised or reappraised contains second growth coniferous timber [emphasis added] the log grade percentages for each species of timber are to be determined by either: (a) the two year billing history record, where the two year billing history record for that cutting authority includes at least 25 percent of the cutting authorities net cruise volume of that species or 2000m 3 whichever is greater; or, (b) the cruise compilation algorithm predictions, where the two year billing history for the cutting authority does not include at least 25 percent. Weyerhaeuser maintains that the CP areas in question contain at least some second growth coniferous timber, and therefore, section 3.2.2(8) applies. Weyerhaeuser further submits that subsection 3.2.2(8)(b) is applicable. Weyerhaeuser says, therefore, that based on the plain language of the CAM, it correctly used the cruise algorithm predictions to derive the log grade percentages for each species of timber. The Government submits that section 3.2.2(2) of the CAM requires log grade percentages to be derived from the billing history record, except as provided in

7 APPEAL NOS FA-035(a); 036(a); 037(a) Page 7 subsection (8). Further, the Government submits that in the context of the CAM, log grade percentages are derived under section 3.2.2(8) of the CAM only when the volume of second growth timber in a cutting authority area is 80 percent or greater of the volume of all the coniferous timber in that cutting authority area [emphasis added]. The Government submits that section 2.8(4) plainly means that where the volume of second growth coniferous timber in a cutting authority is 80 percent or greater, not only must second growth log market values be used in the appraisal, but also the cutting authority area must be appraised as if all of the timber in that area were second growth coniferous timber. The Government maintains that, despite the second growth coniferous timber reported in the CADS, the CPs do not contain second growth coniferous timber as defined by the CAM, and therefore, section 3.2.2(8) does not apply. The Government says that, because the volume of second growth coniferous timber in each of the CP areas is less than 80 percent of the total volume of coniferous timber in the cutting authority area, the log grade percentages must be derived under section 3.2.2(2) of the CAM from the billing history record. In support of their submission, both the Government and Weyerhaeuser cited the B.C. Court of Appeal s decision in MacMillan Bloedel et al v. Ministry of Forests et al (2000), 189 D.L.R. (4 th ) 281, as authority for the proposition that the CAM is in the nature of subordinate legislation and is binding on the Crown and licensees. The parties also cited the Supreme Court of Canada s decision in Rizzo & Rizzo Shoes (Re), [1998] 1 S.C.R. 27, as authority for the proposition that the words in legislation should be read in their entire context and their grammatical and ordinary sense, harmoniously with the scheme and purpose of the legislation. The Commission must decide, first, whether the CAM provides specific direction as to when a cutting authority contains second growth coniferous timber for the purpose of determining log grade percentages. In particular, the Commission must decide whether section 2.8(4) of the CAM should be broadly interpreted, such that the 80 percent threshold it sets out applies to all appraisals, and it establishes a condition whereby section 3.2.2(8) of the CAM only applies to the determination of log grade percentages when the volume of second growth coniferous timber in a cutting authority exceeds 80 percent. If the answer to the first question is yes, as the Government argues, then the next question is whether the MOF properly applied those elements of the CAM in determining the stumpage rates for the CPs. If the answer to the first question is no and section 2.8(4) applies more narrowly to the use of second growth average log market values, as Weyerhaeuser contends, then the Commission must determine the meaning of the word contains in section 3.2.2(8) of the CAM. The Commission has considered the overall nature of the appraisal process, and the language in the relevant sections of the CAM. In particular, the Commission has considered whether section 2.8(4) of the CAM provides the condition under which second growth coniferous timber is considered to be contained in a cutting authority area for the purposes of deciding log grade percentages under section 3.2.2(8). Section 2.8(4) of the CAM says, in full: Where the volume of second growth coniferous timber in a cutting authority area is eighty percent or greater of the volume of all coniferous timber in that

8 APPEAL NOS FA-035(a); 036(a); 037(a) Page 8 cutting authority area, the cutting authority area will be appraised and reappraised as if all of the coniferous timber in that cutting authority area were second growth coniferous timber using the second growth average log market values. The Commission observes that section 2.8 and its sub-sections are silent with regard to what is to happen if the volume of second growth timber is less than 80 percent. Those sections also do not expressly state that a cutting authority is deemed to contain second growth coniferous timber if the volume is 80 percent or greater, or make any specific reference to log grade percentages. It is due to this lack of very specific direction that Weyerhaeuser makes its argument. However, the Commission finds that the meaning of section 2.8 becomes clear when that section is considered in the context of the CAM as a whole. As submitted by both the Government and Weyerhaeuser, the CAM is in the nature of subordinate legislation, and statutory provisions should be interpreted in a way that gives the words their most obvious ordinary meaning which accords with the context and purposes of the enactment in which they occur. Given that the CAM, as a whole, sets out the policies and procedures for determining stumpage in the Coast Region, it is important to interpret section 2.8 of the CAM together with other relevant sections of the CAM, including section The Commission agrees with the Government that section 2.8 provides overarching direction for conducting appraisals. In this regard, the Commission has considered the meaning of the requirement in section 2.8(4) that the area will be appraised and reappraised. In general use, an appraisal is the means by which the MOF determines the value of, and stumpage rate for, timber. An appraisal includes the review and assessment of all applicable information used to make a determination under section 105 of the Forest Act. Despite the lack of specific reference to log grade percentages in section 2.8(4), the Commission finds that the term appraisal includes the process of determining log grade percentages. Thus, the Commission finds that section 2.8(4) of the CAM should be broadly interpreted, such that the 80 percent threshold it sets out applies to all appraisals. In addition, the Commission notes that section of the CAM provides criteria for the person who determines the stumpage rate insofar as log grade percentages are concerned. In particular, section 3.2.2(2) has the effect of setting the billing history record as the default method for determining log grade percentages. It provides exceptions to the default, including as provided in subsections (8) of this section. Based on those sections of the CAM, the Commission finds that the billing history record is the default for deriving log grade percentages under the CAM, unless an exception such as that set out in subsection 3.2.2(8) applies. The next question is whether an exception applies in this case. The Commission finds that, when sections 2.8(4) and 3.2.2(8) of the CAM are read together, the words contains second growth coniferous timber in section 3.2.2(8) mean consists of 80 percent or greater of the second growth coniferous timber by volume. In other words, the Commission finds that section 2.8(4) establishes a condition whereby section 3.2.2(8) of the CAM only applies to the determination of log grade percentages when the volume of second growth coniferous timber in a cutting authority exceeds 80 percent. Thus, if the volume of second growth coniferous timber in a cutting authority area is less than 80 percent, then log grade

9 APPEAL NOS FA-035(a); 036(a); 037(a) Page 9 percentages must be derived under section 3.2.2(2) based on the billing history record. In this case, the CPs in question to not qualify for the exception set out in section 3.2.2(8) of the CAM because they do not contain at least 80 percent second growth coniferous timber by volume. In summary, the Commission finds that section 2.8(4) of the CAM provides a threshold for using second growth coniferous timber as a criteria for determining log grade percentages in appraisals, and that section 3.2.2(2) of the CAM applies in this case, such that the log grade percentages for the CPs must be derived based on the billing history record, because the CP areas do not contain at least 80 percent second growth coniferous timber by volume. DECISION The Commission has carefully considered all of the submissions of the parties and the documents and evidence before it, whether or not specifically reiterated herein. For the reasons set out above, the Commission confirms the Regional Appraisal Coordinator s stumpage determinations. Accordingly, the appeals are dismissed. "Alan Andison" Alan Andison, Chair Forest Appeals Commission "R. A. Gorley" R. A. Gorley, Panel Member Forest Appeals Commission "Bruce Devitt" Bruce Devitt, Panel Member Forest Appeals Commission December 17, 2004