The cost of capital represents the STB’s estimate of the average rate of return needed to persuade investors to provide capital to the freight rail industry. More specifically, it is defined as the minimum rate of return on investment that providers of capital require as a condition for investing in or lending to a railroad. A railroad's cost of capital is the average cost of equity (common and preferred stock) and debt (i.e., bonds, equipment trust certificates, financial lease arrangements), weighted by its percent of capital structure. “The cost of debt is straight forward. The cost of equity is more subjective, but generally what a prudent investor would expect to earn on that investment,” according to Railway Age Contributing Editor Frank N. Wilner.
STB said the cost of capital figure “is an essential component of many of the agency’s core regulatory responsibilities. The Board uses the cost of capital figure in evaluating the adequacy of individual railroads’ revenues each year.” It also uses the figure when determining the reasonableness of a challenged rail rate, considering a proposal to abandon a rail line, or valuing a particular railroad operation.
The Board's decision in Docket No. EP 558 (Sub-No. 16) is available at the STB website at www.stb.dot.gov.