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Rail News: Rail Industry Trends

STB sets rail industry's cost of capital


The Surface Transportation Board on Aug. 2 decided the composite railroad industry cost of capital was 10.37% for 2021.

The figure represents the STB Office of Economics' estimate of the average rate of return needed to persuade investors to provide capital to the freight-rail industry, according to the board's written decision.

The figure is one component used in evaluating the adequacy of a railroad's revenue. It's part of the board's regulatory duties to determine annually the cost of capital.

In February, the STB announced plans to update the industry's cost of capital for 2021.

It solicited comments from interested parties on the following issues: railroads' 2021 current cost of debt capital; railroads' 2021 current cost of preferred equity capital, if any; railroads' 2021 cost of common equity capital; the 2021 capital structure mix of the railroad industry on a market-value basis; and the appropriate treatment of Kansas City Southern in light of the proposed merger with Canadian Pacific now under the STB's review.

The Association of American Railroads provided the board information that was used to calculate the annual cost-of-capital determination. The Western Coal Traffic League replied to the AAR's submission and expressed concern that the cost of capital was overstated based on the model used and recommended an alternative model be used in the calculation.

In its decision, the board said it accepted the AAR's submission, including that KCS should not be included in the calculation because of the merger with CP. To read the board's decision, click here.

Contact Progressive Railroading editorial staff.

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