Surface Transportation Board proposes a third method for calculating railroads' capital costs

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WASHINGTON — The Surface Transportation Board on Tuesday announced a notice of proposed rulemaking to enhance its methodology for determining the railroad industry’s cost of capital by incorporating an additional model, called “Step MSDCF,” into the calculation.

Each year, the Board determines the railroad industry’s cost of capital. This figure, which the Board calculates as the weighted average of the cost of debt and the cost of equity, is used in a variety of regulatory proceedings. The Board’s present methodology for calculating the cost-of-equity component of the industry’s cost of capital relies on two models: the Morningstar/Ibbotson Multi-Stage Discounted Cash Flow Model and the Capital Asset Pricing Model. In the proposed rule issued Tuesday, the Board proposes to add a third model, Step MSDCF, which when used in combination with the current two models, would enhance the robustness of the resulting cost-of-equity estimate during periods, like the present one, in which certain railroads are undertaking significant operational changes.

Comments to the proposed rule are due by Nov. 5, and replies are due by Dec. 4.

The original news release is available online.

— From a Surface Transportation Board news release. Oct. 1, 2019

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