RAILROADS: The Board Proposes to Revise its Methodology for Determining the Railroad Industry’s Cost of Capital

In October, the Board issued a notice of proposed rulemaking to revise its methodology for determining the cost-of-equity component of the cost of capital.  Revisions to the Board’s Methodology for Determining the R.R.  Indus.’s Cost of Capital, Ex Parte 664 (Sub-No. 4) (STB served Oct. 11, 2019).  The proposed rule would add a third model, in addition to the two models (the Capital Asset Pricing Model (CAPM) and the Morningstar/Ibbotson Multi-Stage Discounted Cash Flow Model (MSDCF)) currently used.  Id., slip op. at 3.  The new model, called “Step MSDCF,” would continue to calculate growth of earnings in three stages, like MSDCF.  The first and third stages would be the same as those of MSDCF.  The growth rate of the second stage (years six through 10) of Step MSDCF “would be a gradual transition between the first and third stages.”  Id., slip op. at 5.  Under the proposal, the Board would calculate the cost of capital by using the average of the three models, weighted as follows: CAPM at 50%, MSDCF at 25%, and Step MSDCF at 25%.  Id., slip op. at 3.  As the Board noted, since its move in 2009 from a cost-of-equity estimate based solely on CAPM to one based on the simple average of the CAPM and MSDCF estimates, it has considered revising this calculation at various times.  Id., slip op. at 4-6.

 

In November, the Board granted a motion by the Association of American Railroads (AAR) for clarification and revised Appendix A of the NPRM to correct a discrepancy identified by AAR.  Revisions to the Board’s Methodology for Determining the R.R.  Indus.’s Cost of Capital, Ex Parte 664 (Sub-No. 4) (STB served Nov. 22, 2019).  In this decision the Board also extended the comment period to January 15, 2020 for comments and to February 18, 2020 for reply comments.

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