Determination No. R-2021-180

[1] The Canadian Transportation Agency’s (Agency) Decision No. 601-R-1998 dated December 7, 1998, determined that a distinct cost of capital rate shall be used for regulatory purposes other than for establishing regulated grain and interswitching rates.

[2] Based on CP’s 2020-2021 crop year cost of capital rate which was approved by the Agency in Determination No. LET-R-33-2021 on April 28, 2021, and with appropriate adjustments to the cost rate of common equity, the Agency has determined for CP that for regulatory purposes other than for calculating the western grain volume-related composite price index and for establishing regulated interswitching rates, for the year 2019:

• the cost rate of debt is 5.39 percent;
• the cost rate of future (deferred) income taxes, investment tax credits and deferred downsizing is 0 percent;
• the after-tax cost rate of common equity is 9.17 percent;
• the cost rate of common equity adjusted to include an allowance for income tax is 12.52 percent; and
• the cost of capital rate is 7.59 percent.

[3] The adjustments to the cost rate of common equity made by the Agency to arrive at CP’s 2019 cost of capital rate are presented in Appendix A.

APPENDIX TO DETERMINATION NO. R-2021-180

2019 cost of capital rate for the Canadian Pacific Railway Company for regulatory purposes other than for calculating the western grain volume-related composite price index and for establishing regulated interswitching rates

Reasons for the Canadian Transportation Agency’s (Agency) adjustments

1.0 Net Rail Investment - approved by the Agency on April 28, 2021 in respect of the Re‑determination of the 2020-2021 crop year cost of capital rate for calculating the western grain volume-related composite price index.

2.0 Capital Structure - approved by the Agency on April 28, 2021 in respect of the Re‑determination of the 2020-2021 crop year cost of capital rate for calculating the western grain volume-related composite price index.

3.0 Capital Structure Cost Rates - approved by the Agency on April 28, 2021 in respect of the Re-determination of the 2020-2021 crop year cost of capital rate for calculating the western grain volume-related composite price index, with the exception of the cost rate of common equity.

The cost rate of common equity is estimated using the Capital Asset Pricing Model approved in Determination No. R-2019-229.

To determine CP’s cost rate of common equity for the year 2019 for regulatory purposes other than for calculating the western grain volume-related composite price index and for establishing regulated interswitching rates, the Agency used the annual average of monthly yields for 5-to-10-year Government of Canada marketable bonds in 2019, as posted by the Bank of Canada, as proxies for a Canadian risk-free rate of return. For the U.S. risk free rates, the Agency used the annual average of monthly yields for 5-year and 10-year U.S. Treasury bonds for the year 2019 as posted by the Federal Reserve. The Agency has determined that the appropriate risk free rates for the year 2019 are 1.53 percent for 5-to-10-year Government of Canada marketable bonds, 1.96 percent for 5-year U.S. Treasury Bonds and 2.14 percent for 10-year U.S. Treasury Bonds.