Monday, October 04, 2010

Cost of capital exceeds industry ROI

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The Surface Transportation Board’s newly determined cost of railroad capital for 2009, 10.43%, is one percentage point less than the 2008 figure but exceeds the latest reported industry-wide return on investment (ROI).

ROI for Class I railroads as a group was 9.60% for the 12 months ended June 20, 2010, according to an STB report released a few weeks ago.

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Determination of a railroad's cost of capital was ordered by the Staggers Rail Act of 1980, which essentially deregulated the industry, as a measure of a railroad's “revenue adequacy.” It is a critical statistic in challenges of railroad freight rates by their customers, in railroad abandonment cases, and in setting compensation for use of another railroad’s trackage.

In the most recent 12-month determination of return on investment, only one railroad met the revenue adequacy test of exceeding the 10.43% cost of capital. That was Soo Line, with an ROI of 16.30%.

Other ROIs were BNSF, 10.25%; Union Pacific, 10.02%; Norfolk Southern, 9.44%; CSX Transportation, 8.54% Kansas City Southern, 6.43%; and CN/Grand Trunk Corp., 7.84%.