Determination No. R-2022-138

[1] The Canadian Transportation Agency’s (Agency) Decision 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 2021–2022 crop year cost of capital rate, which was approved by the Agency in Determination LET-R-34-2021 on April 29, 2021, and with appropriate adjustments to the cost rate of common equity, the Agency has determined 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 2020:

• the cost rate of debt is 5.38%;
• the cost rate of future (deferred) income taxes, investment tax credits and deferred downsizing is 0%;
• the after-tax cost rate of common equity for CP is 6.13%;
• the cost rate of common equity adjusted to include an allowance for income tax for CP is 8.32%; and,
• the cost of capital rate for CP is 5.55%.

[3] The adjustments to the cost rate of common equity made by the Agency to arrive at CP’s 2020 cost of capital rate are presented in Appendix A.

Appendix to Determination R-2022-138

2020 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 29, 2021, in respect of the 2021–2022 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 29, 2021, in respect of the 2021–2022 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 29, 2021, in respect of the 2021–2022 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 R-2019-229.

To determine CP’s cost rate of common equity for the year 2020 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 2020, 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 2020 as posted by the Federal Reserve. The Agency has determined that the appropriate risk-free rates for the year 2020 are 0.65% for 5 to 10-year Government of Canada marketable bonds, 0.54% for 5-year U.S. Treasury Bonds and 0.89% for 10-year U.S. Treasury Bonds.