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8/15/2007



Rail News: Rail Industry Trends

STB proposes new way to calculate railroads' cost of capital



The public — including shippers — have spoken and the Surface Transportation Board (STB) has listened. Yesterday, the board announced it began a rulemaking proceeding to revise the agency’s method for calculating the rail industry’s cost of capital.

The STB uses cost of capital data to evaluate the adequacy of each railroad’s annual revenue, as well as determine the reasonableness of a challenged rail rate, analyze a proposal to abandon a rail line or estimate the value of a particular railroad’s operation.

The board proposes to change its method for calculating the cost of equity — a key cost of capital component. The STB would use a Capital Asset Pricing Model (CAPM) instead of a discounted cash flow method used since 1982.

“CAPM has become the private sector norm for measuring cost of capital, although there are different methods of applying the model,” STB officials said in a rulemaking announcement.

The board will accept public comments on the rulemaking proposal until Sept. 13.

STB members decided to pursue the rulemaking based, in part, on comments submitted in response to an advanced notice of proposed rulemaking issued in September 2006. Many rail shippers believe the proposed change in calculating railroads’ cost of capital will help their cause in rate challenge cases and potentially lead to lower rates.


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