The U.S. Surface Transportation Board on Oct. 31 rejected an August 2013 petition from the Western Coal Traffic League (WCTL) requesting that the board institute a rulemaking to abolish the use of the multi-stage discounted cash flow model (MSDCF) in determining the railroad industry’s cost of equity capital and instead rely exclusively on the Capital Asset Pricing Model (CAPM).
This case had the potential to reduce rail haul rates that are based off of the cost of capital figures. The WCTL is a voluntary association comprised of member organizations that purchase and ship coal from origins west of the Mississippi River. Its members collectively consume more than 150 million tons of coal annually that is moved by rail. Members include investor-owned electric utilities, electric cooperatives, state power authorities, municipalities, and a non-profit fuel supply cooperative.
In September 2013, the Association of American Railroads (AAR) replied in opposition to WCTL’s petition. In December 2013, the board served a decision granting WCTL’s petition to open a rulemaking proceeding on issues regarding the cost-of-capital calculation (without making any determinations on the merits).
Said the Oct. 31 decision: “After examining the comments and evidence submitted into the record, the Board declines to issue a Notice of Proposed Rulemaking and closes this proceeding. As discussed more fully below, the Board concludes that the cost-of-equity component of our annual cost‑of‑capital estimate for the railroad industry should be calculated, as it has been since 2009, by using a simple average of the estimates produced by the CAPM model and a discounted cash flow (DCF) model. This hybrid approach allows the Board to take advantage of each respective model’s strengths while simultaneously minimizing each model’s weaknesses.
“The current proceeding—the Board’s third exploration of its cost-of-capital methodology since 2008—reaffirms the Board’s previous finding that, while there is no single, correct way to calculate the railroad industry’s cost of equity because the true cost of equity is never revealed, using an average of the CAPM and MSDCF produces a more appropriate estimate for our regulatory purposes than reliance on CAPM alone. Moreover, the Board now has eight years of historical cost-of-capital estimates produced by the hybrid MSDCF/CAPM methodology. Those cost-of-equity estimates demonstrate that the CAPM methodology adopted by the Board…remain acceptable approaches to determining the railroad industry’s cost of equity, and the record in this proceeding has not demonstrated that there are superior alternatives to the Board’s current approach of averaging those models. Therefore, we will decline WCTL’s request to issue a notice of proposed rulemaking and will terminate this proceeding.”