Lower Fuel Costs Result in Above Average Decrease in the Volume-Related Composite Price Index for Crop Year 2015-2016
OTTAWA – April 30, 2015 – The Canadian Transportation Agency has announced a 5.6 percent decrease in the Volume-Related Composite Price Index (VRCPI), which is used in determining the maximum revenue entitlement for the Canadian National Railway Company (CN) and the Canadian Pacific Railway Company (CP) for the movement of western grain. Decision No. 120-R-2015 sets the index at 1.2517 for the 2015-2016 crop year beginning August 1.
Essentially an inflation factor, the VRCPI reflects a composite of the forecasted prices for railway labour, fuel, material and capital purchases. The VRCPI is one of the numerous factors included in the formula used to calculate the grain revenue entitlement. In determining the annual VRCPI, the Agency examines and verifies detailed railway submissions and collects and analyzes various data to develop the forecasts. The VRCPI of 1.2517 will be applied when the Agency makes its grain revenue entitlement determinations by December 31, 2016 for the 2015-2016 crop year.
The 5.6 percent decrease stems from two main sources:
- a 4.1 percent decrease attributable to the effect of replacing last year’s forecasts of price changes for railway inputs for 2014 with actual data and incorporating revised forecasts for 2015; and,
- a further 1.5 percent decrease due to forecasted price changes for railway inputs for the 2015‑2016 crop year.
The 4.1 percent decrease is largely attributable to the Agency having over-forecasted the change in railway fuel prices for the 2014-2015 crop year. The Agency’s forecasting models for railway fuel prices rely on third-party forecasts for the price of crude oil and the Canada/US exchange rate.
The 2014 third-party forecasts for the price of crude oil last year were higher than the actual 2014 price, and the 2014 forecasts for the Canadian dollar were lower than actually experienced—a lower dollar makes the cost of crude oil more expensive as it is purchased in US dollars.
As well, last year’s 2015 forecast for the price of crude oil was much lower than this year’s ($90.2 versus $52.3 in US dollars) while the 2015 forecast for the exchange rate was higher (89.8 versus 78.3 US cents), which works to partially offset the forecasted decline in the crude oil price.
In several instances in the past, year-over-year fluctuations in the VRCPI have been largely due to the volatility inherent in fuel prices. The volatility present in each of the two main components used in the Agency's fuel forecasting models, i.e., the price of crude oil and the exchange rate, render these items, and hence, the price of fuel, very difficult to predict by expert forecasters and the Agency with a high level of accuracy.
The VRCPI has tracked up and down since the beginning of the maximum revenue entitlement regime. In recent years, exceptional fluctuations have reflected the volatility of fuel prices, the one-time, hopper car adjustment in 2007-2008 and, as outlined in Agency Decision No. 149-R-2012, the application of methodologies to better recognize the cost of capital and the effect on the labour price index of the substantial payments made by CN and CP to their pension funds.
The VRCPI is expected to grow at an average annual compounded rate of 1.5 percent over the 2000-2001 to 2015-2016 period.
Agency to consult on methodology related to the withdrawal of government hopper cars
In Decision No. LET-R-17-2015, the Agency adjusted the 2014-2015 VRCPI upwards to 1.3257 (a 0.3 percent increase from 1.3219 set out in Decision No. 150-R-2014.) based on a portion of CN's application requesting that an adjustment be made to reflect the costs it incurred for the purpose of obtaining cars following the withdrawal of Government of Canada-owned hopper cars.
In the same decision, the Agency indicated that, following stakeholder consultation, it would be prepared to consider an adjustment to the VRCPI for the use of cars obtained through lease agreements where the lessee is a US subsidiary, once an appropriate methodology is established.
About the Agency
The Agency is an independent administrative body of the Government of Canada. It performs two key functions within the federal transportation system:
- As a quasi-judicial tribunal, the Agency, informally and through formal adjudication, resolves a range of commercial and consumer transportation-related disputes, including accessibility issues for persons with disabilities. It operates like a court when adjudicating disputes.
- As an economic regulator, the Agency makes determinations and issues authorities, licences and permits to transportation carriers under federal jurisdiction.
For more information, please see Decision No. 120-R-2015.
For more information on the Agency’s maximum revenue entitlement determinations since 2000-2001, please see the Statistics on the Maximum Revenue Entitlement for Western Grain.
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