By Frank N. Wilner, Capitol Hill Contributing Editor, Railway Age Magazine; October 15, 2019
NEWS ITEM: The Surface Transportation Board (STB) proposes to change the formula for computing the cost of the equity component of the railroad industry’s cost of capital. This is of consequence to railroads, shippers and investors because cost of capital is a determinant of railroad revenue adequacy and a threshold for a host of other regulatory limitations on rail ratemaking.
Background is in order.
First, railroad economic regulation was only partially relaxed in 1980 by the Staggers Rail Act. While most rail freight rates are now the product of market forces and insulated from regulator interference, captive shippers—those able to demonstrate a lack of effective transportation alternatives to rail—may still challenge before the STB the reasonableness of their common carrier (not confidential contract) freight rates in hopes of having any intended rate hike cancelled or modified.