STB: Five Class I’s Revenue Adequate for 2021Written by Marybeth Luczak, Executive Editor
The Surface Transportation Board (STB) has found five U.S. Class I railroads to be revenue adequate for 2021: BNSF, CSX, Norfolk Southern, Soo Line (the U.S. affiliate of Canadian Pacific) and Union Pacific. Railway Age Capitol Hill Contributing Editor Frank N. Wilner weighs in.
STB determined that those railroads achieved a rate of return on net investment (ROI) equal to or greater than the agency’s calculation of the average cost of capital for the freight rail industry, which for 2021 is 10.37%. STB last month reported the annual cost of capital, which represents the STB Office of Economics’ estimate of the average rate of return needed to persuade investors to provide capital to the industry.
By comparing STB’s cost of capital figure to the 2021 ROIs—calculated from data reported in the carriers’ Annual Report R-1 Schedule 250 filings—a revenue adequacy figure has been determined for each of the Class I’s in operation as of December 31, 2021.
Here are the 2021 Class I ROIs (railroads in bold are revenue adequate):
- BNSF: 13.19%
- CSX: 15.51%
- Grand Trunk Corp. (the U.S. affiliate of CN): 7.79%
- Kansas City Southern: 8.25%
- Norfolk Southern: 13.18%
- Soo Line (the U.S. affiliate of Canadian Pacific): 13.51%
- Union Pacific: 17.03%
“For shippers, the [STB] decision is largely hollow,” observes Wilner, who was formerly Assistant Vice President for Policy at the Association of American Railroads and a White House-appointed (Bill Clinton) chief of staff at the STB, and is the author of seven books, including the soon to be published Railroads & Economic Regulation. “This is because while the 1980 Staggers Rail Act instructed regulators to consider revenue adequacy in determining rate reasonableness, and STB predecessor Interstate Commerce Commission (ICC) in 1985 (Coal Rate Guidelines) established a Revenue Adequacy Constraint, neither the ICC nor STB has followed through.
“That still festering 1985 ICC rulemaking provided that a revenue adequate railroad would be constrained from taking further rate increases unless it could demonstrate, ‘with particularity,’ its need for higher revenue, the harm it would suffer if it could not collect higher revenue, and why a shipper should pay higher rates.
“While most Class I railroads have been revenue adequate—or on the cusp—every year since 2008, the STB remains hung-up on three questions: 1) For how many years should a railroad be found to be revenue adequate before the constraint is applied? 2) Will imposing the constraint inhibit or prevent railroads that are not revenue inadequate from achieving revenue adequacy? 3) Are there situations—an economic downturn, for example—when the constraint should not be imposed, or, if in-place, be lifted?
“In 2019, an STB internal Rate Reform Task Force (RRTF) warned that a railroad could be found revenue adequate in any single year but still not be long-term revenue adequate; or, conversely, be found revenue inadequate in any single year even though it is long-term revenue adequate. The RRTF recommended the agency define the shortest period that constitutes long-term revenue adequacy—but not shorter than five years and include both a year in which a recession began and a year following—and identify a point beyond which demand-based differential pricing is unwarranted.
“Given the continued non-action of the Board, shippers could well borrow a lament from the musical, Cabaret: ‘For the sun will rise and the moon will set; and learn how to settle for what you get. So who cares, so what? So who cares, so what?’”
Railway Age provides the revenue adequacy results for 2020, 2019 and 2018 below.
STB found that five Class I’s were also revenue adequate for 2020. They were BNSF, CSX, Kansas City Southern, Soo Line and Union Pacific. STB’s 2020 railroad cost of capital was 7.89%. Following are the 2020 Class I ROIs (railroads in bold were revenue adequate):
- BNSF: 11.60%
- CSX: 11.35%
- Grand Trunk Corp. (the U.S. affiliate of CN): 7.20%
- Kansas City Southern: 8.06%
- Norfolk Southern: 7.52%
- Soo Line (the U.S. affiliate of Canadian Pacific): 10.68%
- Union Pacific: 14.44%
For 2019, the five Class I’s found to be revenue adequate were BNSF, CSX, Norfolk Southern, Soo Line and Union Pacific; the cost of capital for the year was 9.34%. Below are the 2019 Class I ROIs (railroads in bold were revenue adequate):
- BNSF: 12.04%
- CSX: 12.84%
- Grand Trunk Corp. (the U.S. affiliate of CN): 7.47%
- Kansas City Southern: 6.20%
- Norfolk Southern: 11.59%
- Soo Line (the U.S. affiliate of Canadian Pacific): 11.34%
- Union Pacific: 15.55%
In contrast, STB determined that three Class I’s—CSX, Soo Line and UP—were revenue adequate for 2018; the cost of capital for the year was 12.22%. Following are the 2018 Class I ROIs (railroads in bold were revenue adequate):
- BNSF: 11.89%
- CSX: 13.18%
- Grand Trunk Corp. (the U.S. affiliate of CN): 7.69%
- Kansas City Southern: 8.03%
- Norfolk Southern: 11.63%
- Soo Line (the U.S. affiliate of Canadian Pacific): 13.49%
- Union Pacific: 15.80%
STB Chided on Rail Revenue Constraint