STB proposes new rule for determining railroads cost of capital

Staff -- Logistics Management, 8/16/2007

WASHINGTON—The Surface Transportation Board said this week it kicked off a rulemaking proceeding to revise its method for calculating the railroad industry’s cost of capital, which is used by the STB to gauge the adequacy of individual railroad revenues each year.

This cost determination method is also used regulatory proceedings like determining the reasonableness of a challenged rail rate, considering a proposal to abandon a rail line or valuing a particular railroad operation.

In its decision made this week, the STB has proposed to change its method for calculating a key component of its cost of capital—the cost of equity—with a capital asset pricing model (CAPM). The CAPM is used by most private sector industries, while the STB has been using a discounted cash flow method since 1982.

According to an article by the Associated Press, using the CAPM in 2005 would have resulted in railroads receiving a 6.8 percent return on their cost of capital, compared to a 12.2 percent return today under its current formula.

The STB said comments for its proposal are due by September 13.