Determination No. R-2023-167

[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 (now CPKC) 2023-2024 crop year cost of capital rate which the Agency established in Determination R-2023-86 on April 20, 2023, 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 2022:

• the cost rate of debt is 3.39%;
• 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 CPKC is 8.35%;
• the cost rate of common equity adjusted to include an allowance for income tax for CPKC is 11.30%; and
• the cost of capital rate for CPKC is 7.13%.

[3] The adjustments to the cost rate of common equity made by the Agency to arrive at CPKC’s 2022 cost of capital rate are presented in the Appendix.

Appendix to Determination R-2023-167

2022 cost of capital rate for Canadian Pacific Kansas City Limited for regulatory purposes other than for calculating the western grain volume-related composite price index and for establishing regulated interswitching rates

Reasons for the Agency’s adjustments

1.0 Net Rail Investment - determined by the Agency on April 20, 2023, in respect of the 2023-2024 crop year cost of capital rate for calculating the western grain volume-related composite price index.

2.0 Capital Structure - determined by the Agency on April 20, 2023, in respect of the 2023-2024 crop year cost of capital rate for calculating the western grain volume-related composite price index.

3.0 Capital Structure Cost Rates - determined by the Agency on April 20, 2023, in respect of the 2023-2024 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 set out in Determination R-2019-229.

To determine CPKC’s cost rate of common equity for the year 2022 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 2022, 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 2022 as posted by the Federal Reserve. The Agency has determined that the appropriate risk free rates for the year 2022 are 2.78% for 5-to-10-year Government of Canada marketable bonds, 3.00% for 5‑year U.S. Treasury Bonds and 2.95% for 10-year U.S. Treasury Bonds.