Higher Fuel Costs and Lower Dollar Result in Above Average Increase in the Volume-Related Composite Price Index for Crop Year 2014-2015

OTTAWA, April 28, 2014 /CNW/ - The Canadian Transportation Agency has announced a 4.2 percent increase 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. 150-R-2014 sets the index at 1.3219 for the 2014-2015 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 1.3219 will be applied when the Agency makes its grain revenue entitlement determinations by December 31, 2015 for the 2014-2015 crop year.

The 4.2 percent increase stems from two main sources:

i) a 1.2 percent increase due to forecasted price changes for railway inputs for the 2014-2015 crop year; and,
ii) a further 3.0 percent increase correction due to the effect of replacing last year's forecasts with actual data and incorporating these changes in the 2014-2015 forecasts.

The 3.0 percent correction is largely attributable to the Agency having under-forecasted the change in railway fuel prices for the 2013-2014 crop year. The Agency's forecasting models for railway fuel prices rely heavily on expert, third-party forecasts for the price of crude oil and the Canada/US exchange rate. In addition, the 2013 forecasts for the Canadian dollar were higher than actually experienced and a lower dollar makes the cost of crude oil more expensive as it is purchased in US dollars.

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, 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 has grown at an average annual rate of 2.0 percent over the 2000-2001 to 2014-2015 period.

VRCPI and VRCPI Annual % Change from 2000-2001 to 2014-2015

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. 150-R-2014.

For more information on the Agency's revenue cap determinations since 2000-2001, please see the Western Grain Revenue Cap Statistics Backgrounder.

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SOURCE: Canadian Transportation Agency

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