STB: 2020 Railroad Cost of Capital Set at 7.89%

Written by William C. Vantuono, Editor-in-Chief
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The Surface Transportation Board decided on Aug. 4, 2021 that the annual cost of capital for the railroad industry was 7.89% for 2020. This figure represents the Board’s Office of Economics estimate of the average rate of return needed to persuade investors to provide capital to the freight rail industry.

Additionally, the Board found that, for 2020:

  • The cost of railroad long-term debt was 2.54%.
  • The cost of common equity was 9.33%.
  • The cost of preferred equity was 3.42%.
  • The capital structure mix of the railroads was 21.16% long-term debt, 78.84% common equity, and 0.00% preferred equity.

“One of the Board’s regulatory responsibilities is to determine annually the railroad industry’s cost of capital … [which] is an aggregate measure,” STB said in Docket No. EP 558 (Sub-No. 24), downloadable below. “It is not intended to measure the desirability of any individual capital investment project. This determination is one component used in evaluating the adequacy of a railroad’s revenue each year pursuant to 49 U.S.C.  10704(a)(2) and (3), Standards for R.R. Revenue Adequacy, 364 I.C.C. 803 (1981), modified, 3 I.C.C.2d 261 (1986), aff’d sub nom. Consolidated. Rail Corp. v. United States, 855 F.2d 78 (3d Cir. 1988). The cost-of-capital finding may also be used in other regulatory proceedings, including (but not limited to) those involving the prescription of maximum reasonable rate levels, the proposed abandonment of rail lines, and the setting of compensation for use of another carrier’s lines.”

“This proceeding was instituted by decision served on Feb. 5, 2021, to update the railroad industry’s cost of capital for 2020,” STB added. “In that decision, the Board solicited comments from interested parties on the following issues: (1) the railroads’ 2020 current cost of debt capital; (2) the railroads’ 2020 current cost of preferred equity capital (if any); (3) the railroads’ 2020 cost of common equity capital; and (4) the 2020 capital structure mix of the railroad industry on a market value basis. The Board received comments from the Association of American Railroads (AAR) providing the information used to calculate the annual cost-of-capital determination, as established in Use of a Multi-Stage Discounted Cash Flow Model in Determining the Railroad Industry’s Cost of Capital, EP 664 (Sub-No. 1) (STB served Jan. 28, 2009).

Download Docket No. EP 558 (Sub-No. 24), RAILROAD COST OF CAPITAL—2020:

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