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Rail News: Rail Industry Trends

STB adopts new method to calculate railroads' cost of capital


Yesterday, the Surface Transportation Board (STB) issued a final decision that revises its method for calculating the rail industry's cost of capital.

The board will adopt a simple average of a Capital Asset Pricing model (CAPM) and a multi-stage Discounted Cash Flow (DCF) model to calculate the cost of equity, one cost-of-capital component. STB members believe this methodology will yield a more precise determination than relying solely on the CAPM.

In January 2008, the board replaced its single-stage DCF model with a CAPM model. During the CAPM rulemaking process, several parties urged the STB to use a multi-stage DCF model in conjunction with CAPM to obtain a more stable and precise cost-of-equity estimate. However, the record in that rulemaking did not provide a suitable multi-stage DCF model for the board to consider, the STB said.

In February 2008, the STB began to explore whether it could further improve its methodology for estimating the cost of equity by incorporating a multi-stage DCF model. Under the latest decision, the board now adopts a simple average of CAPM and a multi-stage DCF to measure the cost of equity.

The STB uses the cost-of-capital figure to evaluate the adequacy of individual railroads' revenue each year. The figure also is used in maximum rate cases, feeder-line applications, rail line abandonments, trackage rights cases and rail-merger reviews. The board plans to use the new approach to estimate the rail industry's 2008 cost of capital.

Contact Progressive Railroading editorial staff.

More News from 1/29/2009