Western Coal Traffic League seeks STB rail cost changes

The Western Coal Traffic League (WCTL), representing a number of coal-fired power generators, on Aug. 27 petitioned the U.S. Surface Transportation Board to institute a rulemaking proceeding that would save money on coal movements.

The WCTL wants the board to abolish the use of its Multi-Stage Discounted Cash Flow (MSDCF) model in its determination of the railroad cost of equity (COE) and cost of capital (COC) and to instead rely exclusively on the Capital Asset Pricing Model (CAPM).

The COC is a critical input for calculating variable costs, the associated jurisdictional threshold, and stand-alone costs, the league noted. An overstated COC directly exposes captive shippers, including some WCTL members, to unreasonably high rail rates, the league contended. The COC also colors the general perception of railroad costs and the Board’s view of the railroads’ revenue adequacy, the league added. “An accurate COC is of deep concern to WCTL and its members as well as shippers generally,” it said.

The board substantially improved its COC methodology in 2008 by replacing its defective single-stage discounted cash flow (SSDCF) model with the CAPM starting with the 2006 COE determination, the league added. But, the board took a major step backwards a year later by adopting the hybrid CAPM-MSDCF average starting with the 2008 COE. Adding the use of the MSDCF model has not improved the accuracy or reliability of the board’s COC, the league said.

“It has instead wrongfully increased the railroads’ COC and COE significantly, e.g., the increase in the 2012 COE caused by use of the MSDCF exceeds 300 basis points,” it contended. “Increases of this magnitude were not contemplated when the Board adopted the average of the MSDCF and CAPM models for the determination of railroad equity capital costs.”

The COE values as indicated by the MSDCF model are consistently erroneous because of internal flaws of the model when it is applied to the railroad industry, the league said. Instead, the board must rely solely on the CAPM values. When WCTL presented these same points elsewhere, the board responded that they should be raised in a petition to institute a rulemaking. “The instant filing complies with the Board’s directive,” the league said.

WCTL members are shippers of coal mined west of the Mississippi River that is transported by rail. Members currently ship and receive in excess of 175 million tons of coal by rail each year. WCTL’s members are: Ameren Energy Fuels and Services, Arizona Electric Power Cooperative, CLECO Corp., Austin Energy (City of Austin, Texas), CPS Energy, Entergy Services, Kansas City Power & Light, Lower Colorado River Authority, MidAmerican Energy, Minnesota Power, Nebraska Public Power District, Omaha Public Power District, Texas Municipal Power Agency, Western Fuels Association and Wisconsin Public Service Corp.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.