STB sets rail industry 2006 cost of capital

NITL (The National Industrial Transportation League) -- Logistics Management, 4/23/2008 8:23:00 AM

The Surface Transportation Board (STB) on April 15 issued its final decision calculating the railroad industry's cost of capital for 2006. The STB found that the railroad industry had an after-tax cost of capital of 9.94 percent. This reflects a 2.26-percent drop from the 2005 cost of capital (12.2 percent). The STB noted that its 2006 cost of capital determination implemented its recent methodological change for calculating the cost of equity, a key component of the cost of capital. The agency used the Capital Asset Pricing Model, adopted in a January 17, 2008 decision, to estimate the cost of equity.

The STB uses the cost of capital figure in evaluating the adequacy of individual railroads' revenues each year, as well as in various types of regulatory proceedings. Some of those include determining the reasonableness of a challenged rail rate, considering a proposal to abandon a rail line, or valuing a particular railroad operation in certain other types of cases.

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