Determination No. R-2023-91
Determination by the Canadian Transportation Agency (Agency) of the 2023–2024 Volume-Related Composite Price Indices (VRCPIs) for the Canadian National Railway Company (CN) and the Canadian Pacific Railway Company (CP) as required for the Maximum Revenue Entitlement (MRE) program pursuant to Part III, Division VI of the Canada Transportation Act, SC 1996, c 10 (CTA)
Summary
[1] The Agency has determined:
- CN’s VRCPI for the 2023–2024 crop year to be 1.8295, an increase of 12.11% from the 2022–2023 crop year.
- CP’s VRCPI for the 2023–2024 crop year to be 1.7616, an increase of 5.43% from the 2022–2023 crop year.
[2] The Agency will use these values in determining CN’s and CP’s MREs for the 2023–2024 crop year, which the Agency must issue by December 31, 2024.
Background
[3] 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:
(a) Thunder Bay or Armstrong, Ontario;
(b) Churchill, Manitoba, for export;
(c) a port in British Columbia for export, other than export to the United States for consumption in that country; or
(d) a point west of Thunder Bay or Armstrong, Ontario, if the grain is to be carried to a port in British Columbia for export, other than export to the United States for consumption in that country.
[4] 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.
[5] There are currently two prescribed railway companies: CN and CP.
[6] The Agency applies the formula set out in subsection 151(1) of the CTA to determine 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.
[7] The determination of the VRCPIs is based on detailed submissions from CN and CP on their historical price information for railway inputs involving labour, fuel, material, and other capital items. The Agency has verified the submitted information and forecasted future changes in the price of railway inputs.
[8] The Agency is required to determine the VRCPIs on or before April 30, prior to the beginning of the crop year to which they relate. This determination is in respect of the 2023–2024 crop year.
Proposals for methodological or interpretive changes
[9] In accordance with the established process for managing proposals for methodological or interpretive changes related to the VRCPIs, Agency staff, by letter dated January 7, 2022, reminded CN and CP that the deadline for submitting any such proposals was August 15, 2022. No material proposals for methodological or interpretive changes were submitted by industry participants for consideration by the Agency for the 2023–2024 VRCPIs.
The law
[10] Subsection 151(4) of the CTA states that:
The following rules are applicable to a volume-related composite price index:
(a) in the crop year 2016–2017, each prescribed railway company’s index is 1.3275;
(b) an index shall be determined in respect of each of the prescribed railway companies; and
(c) the Agency shall make adjustments to each prescribed railway company’s index to reflect the costs incurred by the prescribed railway company to obtain hopper cars for the movement of grain and the costs incurred by the prescribed railway company for the maintenance of those hopper cars.
Analysis and determinations
[11] In determining the annual VRCPI for CN and CP, the Agency calculates the following: i) actual historical price increases experienced by the railways in the past year (in this case 2022); and, ii) forecasted price increases for the upcoming two calendar years (2023 and 2024).
[12] As further detailed below, the majority of this year’s price increases are attributable to replacing previous Agency forecasted price changes for 2022 with actual price changes and incorporating revised forecasts for 2023.
CN
[12] The Agency has determined CN’s VRCPI for the 2023–2024 crop year to be 1.8295, an increase of 12.11% from the 2022–2023 crop year.
[13] The 12.11% increase in CN’s VRCPI stems from:
i. a 12.19% increase attributable to updating previous Agency forecasted price changes for 2022 with actual price changes and incorporating revised forecasts for 2023 (the nature of this increase is addressed further in paragraph 18 below); and,
ii. a 0.08% decrease in forecasted price changes for the 2023–2024 crop year as detailed in the table below.
[14] The following table summarizes the changes that make up CN’s 2023–2024 VRCPI:
CN's 2023-2024 VRCPI | Weight % A |
% Change B |
% Weighted Change C = A x B |
---|---|---|---|
Price Component: Labour | 32.18 | 2.57 | 0.83 |
Price Component: Fuel | 16.07 | -8.87 | -1.43 |
Price Component: Material | 34.64 | -2.96 | -1.03 |
Price Component: Investment (leased cars, amortization, cost of capital) | 17.11 | 8.55 | 1.46 |
Total of price components | 100.00 | -0.16 | |
Total of cost components Footnote 1 | 0.08 | ||
Total Price changes for 2023-2024 (price components and cost components) | -0.08 | ||
Revisions to the 2022-2023 VRCPI to reflect actual and updated - forecasted price and cost changes | 12.19 | ||
Total increase of CN's 2023-2024 VRCPI | 12.11 |
CP
[15] The Agency has determined CP’s VRCPI for the 2023–2024 crop year to be 1.7616, an increase of 5.43% from the 2022–2023 crop year.
[16] The 5.43% increase in CP’s VRCPI stems from:
i. a 7.26% increase attributable to updating previous Agency forecasted price changes for 2022 with actual price changes and incorporating revised forecasts for 2023 (the nature of this increase is addressed further in paragraph 18 below); and
ii. a 1.83% decrease in forecasted price changes for the 2023–2024 crop year.
[17] The following table summarizes the changes that make up CP’s 2023–2024 VRCPI:
CP's 2023-2024 VRCPI | Weight % A |
% Change B |
% Weighted change C = A x B |
---|---|---|---|
Price Component: Labour | 33.16 | 3.04 | 1.01 |
Price Component: Fuel | 15.09 | -8.73 | -1.32 |
Price Component: Material | 31.72 | -2.80 | -0.89 |
Price Component: Investment (leased cars, amortization, cost of capital) | 20.03 | 8.72 | 1.75 |
Total of price components | 100.00 | 0.55 | |
Total of cost components Footnote 2 | -2.38 | ||
Total Price changes for 2023-2024 (price components and cost components) | -1.83 | ||
Revisions to the 2022-2023 VRCPI to reflect actual and updated - forecasted price and cost changes | 7.26 | ||
Total increase of CP's 2023-2024 VRCPI | 5.43 |
[18] Much of this year’s price differential (the difference between the forecasted and actual price increases) is directly linked to unexpectedly high fuel and related material costs in 2022. For example, last year, the Agency’s fuel model projected just over 30%Footnote 3 increases for railway fuel costs using third party forecasts available at that time. However, actual railway fuel costs in 2022 rose by more than 63%3 in the wake of a notable shortage in the supply of diesel fuel in North America and increased global demand. The net difference 63% (actual) versus 30% (forecast) has now been incorporated into this year’s calculations and contributes to the overall net increase. Adjustments were also made for other components, including the material component for each of CN and CP.
[19] The following provides further information on the individual price components used in developing the 2023–2024 VRCPIs.
Labour
[20] 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 pension, and employment insurance contributions).
[21] The Agency, consistent with its practice in previous years, considered established labour contracts that extend into the future and relied on projections of historical trends for the remaining subcomponents.
[22] For CN, the Agency forecasts a 2.57% increase in labour for the 2023–2024 crop year. Projected increases in general wages were modestly offset by projected declines in wage‑related items, such as bonuses and stock-based compensation, and a decline in fringe benefits which includes benefit plans and pensions.
[23] For CP, the Agency forecasts a 3.04% increase in labour for the 2023–2024 crop year. Projected increases in general wages and in wage-related items such as bonuses and stock-based compensation were offset by relatively flat gains in fringe benefits.
Fuel
[24] The railway fuel price index reflects changes in the average annual price per litre of diesel fuel.
[25] The Agency uses a model based on the relationship of railway fuel prices and the price of crude oil, using the common benchmark West Texas Intermediate, to arrive at the projected fuel index. The model also accounts for any known hedging practices, federal fuel excise tax, provincial fuel sales taxes, and carbon taxes. The Agency relies on forecasts of international crude oil prices and on the Canada/U.S. exchange rate from a number of expert third-party forecasters as inputs to the Agency’s fuel forecasting model.
[26] The average of the third-party forecasts for the price of crude oil is USD 80.10/bbl for 2023 (a decrease of 15.1% from 2022), which is forecasted to decrease by 2.0% to USD 78.5/bbl for 2024. 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 U.S. dollars. The average of the third-party forecasts for the exchange rate is USD 0.740 for 2023 (a decline of 3.7% from 2022) which is forecasted to increase by 3.9% to USD 0.769 for 2024.
[27] The Agency forecasts an 8.87% decrease for CN and an 8.73% decrease for CP in fuel prices for the 2023–2024 crop year, after taking into account the projected decrease in the price of crude oil in 2023 and 2024 as compared to 2022 and 2023 respectively, the associated fluctuations in the Canada/U.S. exchange rate, and increases in fuel-related taxes in the Canadian jurisdictions where the respective railways purchase their fuel.
Material
[28] The material price index reflects changes in the average annual price of a basket of railway materials.
[29] 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 Canadian/U.S. exchange rate, as approximately 70 to 85% of materials purchased are affected by the exchange rate.
[30] The Agency forecasts a 2.96% decrease for CN and a 2.80% decrease for CP in their respective material price indices for the 2023–2024 crop year. The significant increases experienced in key railway material inputs (fabricated metals and petroleum-related products) in 2022 are projected to return to more normal levels throughout the 2023‑2024 crop year, resulting in overall declines in the material price index. A projected slight increase in the Canada/U.S. exchange rate contributes to the projected decline in material prices. Since railway companies purchase a large percentage of materials in U.S. dollars, a stronger Canadian dollar provides more buying power and decreases the railway companies’ overall material prices.
Investment components
[31] Investment components include cost of capital and amortization of investments, and leased hopper car costs.
[32] One of the elements used in calculating the cost of capital component of the VRCPIs is the cost of capital rate. The Agency determined the Western Grain cost of capital rates for CN and CP in Determination R-2023-87 and Determination R-2023-86, respectively. This crop year, the projected cost of capital rate for CN is 5.98% up from 5.30% last year, and CP’s projected cost of capital rate is 7.46% up from 6.33% a year ago.
[33 For the 2023–2024 crop year, the Agency forecasts an 8.55% increase for CN and an 8.72% increase for CP in their respective overall investment component indices. These increases are largely attributable to increasing infrastructure and equipment investment, and to increases in the cost of capital rates for both CN and CP.
Cost components
[34] For the cost component portion of the VRCPI, the Agency forecasts a 0.08% increase for CN primarily attributable to the acquisition of hopper cars and a 2.38% decline for CP largely due to a decline in the usage of U.S. subsidiary cars in moving western grain in the 2022-2023 crop year.
Member(s)
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