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>From the Surface Transportation Board, Washington, D.C.
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Today the Surface Transportation Board issued its final decision revising
its method for calculating the railroad industry's cost of capital. The
Board adopts a simple average of a Capital Asset Pricing model (CAPM) and a
multi-stage Discounted Cash Flow (DCF) model to calculate the cost of
equity—one component of the cost of capital. The Board concludes that this
methodology will yield a more precise determination than relying on CAPM
alone.
In January 2008, the Board replaced its
single-stage DCF model with a CAPM model.
During the CAPM rulemaking process, several
parties urged the Board to use a multi-stage
DCF model in conjunction with CAPM to obtain
a more stable and precise estimate of the
cost of equity. The record in that
rulemaking, however, did not provide a
suitable multi-stage DCF model for the Board
to consider. In February 2008, the Board
began to explore whether it could further
improve its methodology for estimating the
cost of equity by incorporating a
multi-stage DCF model. Today's decision,
adopting a simple average of CAPM and a
multi-stage DCF to measure the cost of
equity, concludes this effort.
The Board uses the cost of capital figure in
evaluating the adequacy of individual
railroads' revenues each year. The figure
is also used in maximum rate cases,
feeder-line applications, rail line
abandonments, trackage rights cases,
rail-merger reviews, and more generally in
the Board's Uniform Rail Costing System.
The Board will use this new approach to
estimate the railroad industry's 2008 cost
of capital.
Today's decision, issued in the proceeding
entitled Use of a Multi-Stage Discounted
Cash Flow Model In Determining the Railroad
Industry's Cost of Capital, STB Ex Parte No.
664 (Sub-No. 1)(
http://www.stb.dot.gov/decisions/readingroom.nsf/WebDecisionID/39443?OpenDocument
)
, is available for viewing and downloading
via the Board's Web site at
http://www.stb.dot.gov under "E-Library,"
then under "Decisions & Notices," beneath
the date "1/28/09."
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