Both Arkansas Electric Cooperative Corp. (AECC) and the Western Coal Traffic League (WCTL) on May 11 filed critical comments with the U.S. Surface Transportation Board over recent testimony from the Association of American Railroads (AAR) in a case regarding the railroad industry cost of capital for 2014.
The Arkansas Electric testimony highlights what it said are four considerations that are crucial to the proper measurement of the railroad industry cost of capital:
- The data for 2014 reveal a dramatic escalation of “supracompetitive” rail earnings – i.e., earnings above the level needed to provide a market return on invested capital.
- The data for 2014 continue to manifest the broad range of methodological problems discussed by AECC in Railroad Revenue Adequacy and the petition of the Western Coal Traffic League to institute a rulemaking proceeding to abolish the use of the multi-stage discounted cash flow model in determining the railroad industry’s Cost Of Equity Capital.
- Although AECC in another case documented what said are severe problems with increasing beta values (and computed cost of capital) under the CAPM portion of the Board’s cost-of-capital methodology, AAR doesn’t even acknowledge or attempt to address directly AECC’s evidence.
- In the cost of capital findings developed by AAR, results for more than half of the individual Class I railroads are either missing or “nonsensical.”
AECC is a membership-based generation and transmission cooperative that provides wholesale electric power to electric cooperatives located in each of the 75 counties in Arkansas and in surrounding states. AECC has entered into arrangements with other utilities within the state to share generation and transmission facilities. For example, it holds ownership interests in the White Bluff and Independence power plants, each of which typically uses in excess of 6 million tons of Powder River Basin (PRB) coal each year. In addition, AECC holds ownership interests in the Flint Creek and Turk power plants, each of which typically uses around 2 million tons of PRB coal each year.
Said the Western Coal Traffic League in its May 11 remarks: “The AAR’s mathematical calculations for the 2014 determination appear technically accurate. However, the technical accuracy is of little import given the infirmities in the underlying methodology. While the Board is, in theory, reviewing its methodology for calculating the cost of equity (‘COE’) portion of the cost of capital (‘COC’) in EP 664 (Sub-No. 2), that proceeding has been languishing, as a hearing is now scheduled to be held nearly twenty-three months after the League filed its petition. The instant proceeding provides an appropriate forum to consider what would constitute a more appropriate COC methodology, what results it might yield, and whether the difference is significant.”
Among other things, WCTL said the continued presence of the Kansas City Southern (KSU), a relatively small carrier, in the industry sample, and the exclusion of the BNSF Railway, the largest carrier by some obvious measures, remains problematic. “The sample is not representative, especially as KSU derives much of its revenue from its Mexico subsidiary,” WCTL wrote.
Also, the league said there is every reason to think that the earnings per share (EPS) growth rates for CSX Transportation, Norfolk Southern and Union Pacific Railroad reflect their substantial stock buyback programs, thereby tainting use of those growth rates.
WCTL is a voluntary association, whose regular membership consists entirely of shippers of coal mined west of the Mississippi River that is transported by rail. WCTL members currently ship and receive in excess of 125 million tons of coal by rail each year. Those members include: Ameren Missouri, Arizona Electric Power Cooperative, Austin Energy (City of Austin, Texas), CLECO Corp., CPS Energy, Entergy Services and Kansas City Power & Light.