Decision No. 159-R-2010
April 30, 2010
DETERMINATION by the Canadian Transportation Agency of the 2010-2011 volume-related composite price index required for Western Grain Revenue Caps established pursuant to Part III, Division VI of the Canada Transportation Act, S.C., 1996, c. 10, as amended.
File No. T6650-2
 The Canadian Transportation Agency (Agency) is required to determine by April 30, 2010 the Volume-Related Composite Price Index (VRCPI) for the crop year 2010-2011 commencing August 1, 2010 and ending July 31, 2011.
 The "revenue cap" program, established August 1, 2000 for the movement of western grain by prescribed railway companies, requires the Agency to annually determine a revenue cap for each railway company and to subsequently determine whether each railway company has exceeded its cap.
 Subsection 151(1) of the Canada Transportation Act (CTA) provides the formula that the Agency is to use in determining the revenue caps. One of the inputs to the formula is the VRCPI.
 As in previous years, the development of the VRCPI for 2010-2011 involved detailed submissions of historical price information of railway inputs (labour, fuel, material and capital) from the prescribed railway companies, currently the Canadian National Railway Company (CN) and the Canadian Pacific Railway Company (CP). The submitted information was reviewed and verified by Agency staff. In addition, the railway companies and Agency staff developed forecasts for future changes in the price of railway inputs. The historical and forecasted information was summarized in an Agency staff report shared for consultation purposes with grain industry participants, including producer organizations, the Canadian Wheat Board, shipper organizations, grain companies, railway companies, and federal, provincial and municipal governments.
Major components of the VRCPI
 The development of 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). Previously, the Agency determined that wage-related and fringe benefit price changes are to be developed based on five-year moving averages, with the exception of railway company pensions, which are to be based on ten-year moving averages. For crop year 2010-2011, the Agency employed the same methodology as last year and the resulting forecast for labour prices is an increase of 2.7 percent.
 Predicting changes in fuel prices has been challenging for forecasters in recent years. The Agency continues to use a long established model based on the relationship of railway fuel prices and the price of crude oil. This model has proven to be quite accurate when forecasted data has been replaced with actual data. The objective is to incorporate the best possible crude oil price forecast. To that end, the Agency draws on expert third-party forecasters and evaluates the range of these forecasts. Routinely, the Agency analyzes the track record of the various forecasters and, when appropriate, drops those that are less accurate in predicting the price of crude oil. For this year's determination, the Agency removed two of the forecasters and will be looking for acceptable alternative forecasters for future determinations. The Agency model predicts a 10.6-percent increase in fuel prices for crop year 2010-2011.
 Railway companies purchase thousands of different material items each year, far too numerous to track individually. Therefore, the material price index reflects changes in the average annual price of a basket of railway materials, similar to the consumer price index. The Agency continues to use its long-established methodology of a series of regressions based on the major railway material components to forecast (based on third-party data) the average material price change. For crop year 2010-2011 the Agency is forecasting a 1.6-percent increase in the material price index.
 One of the components in this group is the cost of capital rate which is applied to the capital indices. This item has been dealt with separately in Agency Decision Nos. LET-R-70-2010 and LET-R-72-2010. Other components in this group include leased hopper car rates, amortization of investments and the net impact of replacing 1992 hopper car maintenance costs with more recent actual costs as determined and implemented pursuant to Clause 57 of Bill C-11 passed in June 2007. The Agency employed the same methodology as last year for each of these other components. The combined impact of changes determined by the Agency for this group of all other inputs results in a price reduction of 2.6 percent for crop year 2010-2011.
Issues raised by participants
Multi-year averaging methodology
 CN does not agree with the current method the Agency uses to incorporate the multi-year averaging for certain labour components and suggests that the Agency revert back to the multi-year method adopted by the Agency for crop years 2006-2007 to 2008-2009. Last year the Agency stated that,
 In this Decision, as well as in recent years, the Agency has reviewed and approved methodologies relating to the establishment of historical and forecasted price indices. The Agency finds that it is important to be consistent in using particular methodologies, once selected, and intends that the chosen and approved methodologies only be reviewed every five years, unless there are substantive changes in circumstances. For example, new, more accurate, verifiable data becomes available which permits the use of a superior methodology.
 The Agency acknowledges that it did make a minor modification, after the consultative process last year, to address a technical issue surrounding the general principles of labour price indexation. Time constraints this year did not permit the Agency to review this revised methodology with participants. The Agency plans to revisit this complex issue before next year's determination and allow all participants to comment.
 CP reiterated its concerns expressed last year that the Agency material models do not account for some of CP's contracts with vendors where prices are fixed for the length of the contract. This issue was addressed last year in a confidential letter.
Weights used in the VRCPI
 The Manitoba government suggested that the Agency revisit the relative weight of the fuel index on the overall VRCPI, especially given that fuel prices have been so volatile in recent years and have been the major influence on the larger than normal swings in the overall index. The Agency is planning to update the weights of the major components of the index before the 2011-2012 VRCPI determination.
 The table below highlights the price changes for the major components discussed above, in addition to the impact of revising last year's forecast VRCPI for crop year 2009-2010. The 3.6 percent upward revision to last year's index is largely attributable to:
- higher-than-expected fuel prices and
- CP stock-based compensation, previously not available, which was incorporated into the revised 2009-2010 index.
|Major Component||Effective Weight (%)||% Change|
|Total weighted price changes since 2009-2010 VRCPI Determination||-||7.0|
|Total weighted price changes within 2010-2011||100||3.4|
|Upward Revision to 2009-2010 VRCPI weighted price changes based on actual and up-dated forecasted data.||-||3.6|
 The Agency's determination of the VRCPI for crop year 2010-2011 is: 1.1384, an increase of 7.0 percent from crop year 2009-2010.
 The VRCPI of 1.1384 will be applied in the legislative formula under section 151 of the CTA when the Agency makes its revenue cap determinations by December 31, 2011 for the crop year 2010-2011.
- Geoffrey C. Hare
- Raymon J. Kaduck
- John Scott