A sharper-than-expected drop in fuel costs has led federal regulators to dial back the index that decides how much money railways get to keep from hauling Prairie grain.

The Canadian Transportation Agency on announced Thursday it will cut its volume-related composite price index (VRCPI) by 5.6 per cent, to 1.2517, for the 2015-16 crop year.

The VRCPI is the inflation factor in the annual maximum revenue entitlement — that is, the revenue cap — imposed on Canadian National and Canadian Pacific Railways (CN, CP) for their handling of Prairie grain.

The revised VRCPI — a composite of the CTA’s forecasted prices for railway labour, fuel, materials and capital spending — will be applied when the CTA sets the 2015-16 cap, a decision expected by Dec. 31, 2016.

The bulk of the 5.6 per cent cut is a 4.1 per cent decrease due to the difference between the CTA’s forecasts for 2014 costs and “actual data,” and changing its forecasts for 2015 accordingly.

Specifically, the CTA said, it “over-forecasted” the expected change in the railways’ fuel costs for 2014-15, based on “third-party” outlooks for crude oil prices and the value of the Canadian dollar.

The third-party forecasts for the price of crude oil last year were higher than the actual 2014 price, and forecasts for the Canadian dollar were lower than actual levels, the CTA said. Crude oil, priced in U.S. dollars, is more expensive under a lower loonie.

Last year’s 2015 forecast for the price of crude oil was “much lower” than this year’s, the CTA said, while the 2015 forecast for the exchange rate was higher, which works to “partially offset” the forecast decline in crude oil prices.

This isn’t the first time the CTA has had to re-tweak the VRCPI based on fuel price volatility, which for the agency and its third-party experts makes rail fuel costs “very difficult to predict… with a high level of accuracy.”

The CTA also announced Thursday it will consult with industry stakeholders on developing a new methodology for adjusting the VRCPI to factor in CN and CP’s use of hopper cars leased out to the two companies’ U.S. subsidiaries.

The consultations follow an application from CN to adjust the 2014-15 VRCPI to factor in the railways’ costs of obtaining grain cars, as grain hopper cars from the federal government’s fleet age out of service. — AGCanada.com Network