Determination No. R-2018-80

SUMMARY

[1] The Agency has determined the VRCPI for the 2018–2019 crop year to be 1.4197, an increase of 2.8 percent from the 2017–2018 crop year.

[2] The Agency will use the VRCPI of 1.4197 in determining the Canadian National Railway Company (CN) and the Canadian Pacific Railway Company (CP) MREs for the 2018–2019 crop year, which the Agency must issue by December 31, 2019.

[3] Bill C-49, the Transportation Modernization Act, proposes changes to the CTA in respect of how the VRCPI is to be determined. If Bill C-49, in its current form, receives royal assent before August 1, 2018, the Agency shall re-determine the VRCPI for each of CN and CP in accordance with that Bill.

BACKGROUND

[4] The MRE is a statutory limit on the overall revenue that can be earned by a prescribed railway company for the movement of western grain over a railway line from any point west of Thunder Bay or Armstrong, Ontario, to:

1. Thunder Bay or Armstrong;
2. Churchill, Manitoba; or,
3. 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 of America for consumption in that country.

[5] If a prescribed railway company’s revenue exceeds its MRE, the company must pay out the excess amount plus a penalty to the Western Grains Research Foundation, a farmer-financed and directed organization set up to fund research that benefits Prairie farmers.

[6] There are currently two prescribed railway companies: CN and CP.

[7] Subsection 151(1) of the CTA provides the formula that the Agency is to use in determining a railway company’s MRE. One of the inputs to the formula is the VRCPI, an inflation index that reflects forecasted price changes for CN and CP with regard to labour, fuel, material and other capital items.

[8] The determination of the VRCPI includes detailed submissions from CN and CP on their historical price information for railway inputs involving labour, fuel, material and other capital items. Agency staff reviewed and verified the submitted information. In addition, Agency staff developed forecasts for future changes in the price of railway inputs.

[9] The Agency is required to determine the VRCPI on or before April 30, prior to the beginning of the crop year that it relates to. This determination is in respect of the 2018–2019 crop year.

Bill C-49

[10] On May 16, 2017, the Government introduced Bill C-49 which, among other things, proposes amendments to the CTA in respect of how the VRCPI is to be determined, including the establishment of a distinct VRCPI for each of CN and CP and changes to reflect the costs incurred by the railway companies to obtain hopper cars for the movement of grain and costs for the maintenance of those cars.

[11] Pursuant to subsection 80(3) of Bill C-49, if those amendments come into force before August 1, 2018, the Agency will re-determine the VRCPI for each of CN and CP.

PROPOSALS FOR METHODOLOGICAL OR INTERPRETIVE CHANGES

[12] In accordance with the established process for managing proposals for methodological or interpretive changes related to the VRCPI, Agency staff, by letter dated January 18, 2017, reminded CN and CP that the deadline for submitting any such proposals was August 15, 2017. No new proposals for methodological or interpretive changes were submitted by industry participants for consideration by the Agency for the 2018–2019 VRCPI.

THE LAW

[13] Subsection 151(4) of the CTA states that:

The following rules are applicable to the volume-related composite price index:

(a) in the crop year 2000–2001, the index is deemed to be 1.0;

(b) the index applies in respect of all of the prescribed railway companies; and

(c) the Agency shall make adjustments to the index to reflect the costs incurred by the prescribed railway companies for the purpose of obtaining cars as a result of the sale, lease or other disposal or withdrawal from service of government hopper cars and the costs incurred by the prescribed railway companies for the maintenance of cars that have been so obtained.

ANALYSIS AND DETERMINATIONS

[14] The Agency has determined the VRCPI for the 2018–2019 crop year to be 1.4197, an increase of 2.8 percent from the 2017–2018 crop year.

[15] The 2.8 percent increase in the VRCPI stems from:

1. i. a 0.4 percent decrease attributable to the effect of replacing last year’s forecasts of price changes for railway inputs for 2017 with actual (preliminary) data and incorporating revised forecasts for 2018 (from this year’s exercise); and,
2. a 3.2 percent increase in forecasted price changes for railway inputs for the 2018–2019 crop year.

[16] The table below provides a summary of the changes that make up the 2018–2019 VRCPI.

Major component	Effective weight (%)	% change	% weighted change
Labour	35	+0.8	+0.3
Fuel	17	+4.8	+0.8
Material	34	+0.6	+0.2
Other capital itemsFootnote 1	14	+13.5	+1.9
Total weighted price changes for 2018–2019	100		+3.2
Revision to the 2017–2018 VRCPI to reflect actual and updated forecasted price changes			-0.4
Total increase in the VRCPI			+2.8

Labour

[17] The labour price index captures price changes in wages, wage-related items (such as bonuses and stock-based compensation) and fringe benefits (such as government and railway company pensions, and employment insurance).

[18] The Agency, consistent with its practice in previous years, considered established labour contracts that extend into the future (if available) and relied on projections of historical trends for the remaining subcomponents.

[19] The Agency forecasts a 0.8 percent increase in labour for the 2018–2019 crop year, with projected increases in general wages being partially offset by projected declines for some of the wage‑related and fringe benefits (pension) components.

Fuel

[20] The railway fuel price index reflects changes in the average annual price per litre of diesel fuel.

[21] The Agency uses a long-established model based on the relationship of railway fuel prices and the price of crude oil (based on the common benchmark West Texas Intermediate) to arrive at the fuel index. The model also accounts for any known hedging practices, federal fuel excise tax and provincial fuel sales taxes. The Agency relies on forecasts of international crude oil prices and on the Canada/U.S. exchange rates from a number of expert third-party forecasters as inputs to the Agency’s fuel forecasting model.

[22] The average of the third-party forecasts for the price of crude oil used in the development of the 2018–2019 railway fuel price index is US$60.00/bbl for 2018 (an increase of 18 percent from 2017) and is forecasted to decline by -3.5 percent to US$57.90/bbl for 2019. An important element in the development of forecasts for the railway fuel price index is the Canada/U.S. exchange rate, as crude oil is purchased in US dollars. The average of the third-party forecasts for the exchange rate is US$0.785 for 2018 and US$0.797 for 2019.

[23] The Agency forecasts a 4.8 percent increase in fuel prices for the 2018–2019 crop year, with projected increases in the price of crude oil in 2018 mitigated somewhat by a projected decline in 2019.

Material

[24] The material price index reflects changes in the average annual price of a basket of railway materials, similar to the consumer price index.

[25] The Agency’s long established methodology involves a series of regressions based on the major railway material components to forecast (based on third-party data) the average material price change. The model also incorporates forecasts for the Canada/U.S. exchange rate, as an estimated 75 to 80 percent of materials purchased are affected by the exchange rate.

[26] The Agency forecasts a 0.6 percent increase in the material price index for the 2018–2019 crop year, with higher 2018 prices for steel and fabricated metals products partially mitigated by more moderate increases in 2019.

Other capital-related components

[27] Other capital-related components include items such as: the cost of capital and amortization of investments; leased hopper car rates; the net impact of replacing 1992 hopper car maintenance costs with more recent actual costs (Decision No. 67-R-2008); and adjustments made pursuant to paragraph 151(4)(c) of the CTA to reflect the cost changes incurred by CN and CP related to the replacement of withdrawn or leased back government-owned hopper cars.

[28] One of the components used in calculating the cost of capital component of the VRCPI is the cost of capital rate. This item has been dealt with separately in Decision No. LET-R-27-2018 for CN and Decision No. LET-R-28-2018 for CP.

[29] The Agency forecasts a 13.5 percent increase in the other capital-related components of the price index for the 2018–2019 crop year. A significant proportion of the forecasted increase is due to the anticipated investment in 2018 and 2019 by both CN and CP in infrastructure and rolling stock. This year’s projected cost of capital rate (CN and CP combined) is unchanged from last year’s while a strengthening Canadian dollar will lead to lower costs for leased cars (which are generally negotiated in US dollars).