80 FR 27281 - Railroad Revenue Adequacy; 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

DEPARTMENT OF TRANSPORTATION
Surface Transportation Board

Federal Register Volume 80, Issue 92 (May 13, 2015)

The Surface Transportation Board (Board) will hold a public hearing on July 22-23, 2015, at its headquarters in Washington, DC, to further examine issues raised in Docket No. EP 722 related to railroad revenue adequacy, and issues raised in Docket No. EP 664 (Sub-No. 2) on how the Board calculates the railroad industry's cost of equity capital. These proceedings are not consolidated but are being addressed in the same decision for administrative convenience.

[Federal Register Volume 80, Number 92 (Wednesday, May 13, 2015)]
[Proposed Rules]
[Pages 27281-27283]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2015-11565]


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DEPARTMENT OF TRANSPORTATION

Surface Transportation Board

49 CFR Chapter X

[Docket No. EP 722; Docket No. EP 664 (Sub-No. 2)]


Railroad Revenue Adequacy; 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

AGENCY: Surface Transportation Board, DOT.

ACTION: Notice of public hearing.

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SUMMARY: The Surface Transportation Board (Board) will hold a public 
hearing on July 22-23, 2015, at its headquarters in Washington, DC, to 
further examine issues raised in Docket No. EP 722 related to railroad 
revenue adequacy, and issues raised in Docket No. EP 664 (Sub-No. 2) on 
how the Board calculates the railroad industry's cost of equity 
capital. These proceedings are not consolidated but are being addressed 
in the same decision for administrative convenience.

DATES: The hearing will be held on July 22-23, 2015, beginning at 9:30 
a.m., in the Hearing Room at the Board's headquarters located at 395 E 
Street SW., Washington, DC. The hearing will be open for public 
observation. Any party wishing to speak at the hearing shall file with 
the Board by July 8, 2015, a notice of intent to participate 
(identifying the party, the proposed speaker, and the time requested, 
and summarizing the key points that the speaker intends to address). 
The notices of intent to participate are not required to be served on 
the parties of record; they will be posted to the Board's Web site when 
they are filed. Parties shall file hearing exhibits, if any, by July 
22, 2015.

ADDRESSES: All filings may be submitted either via the Board's e-filing 
format or in the traditional paper format. Any person using e-filing 
should attach a document and otherwise comply with the instructions at 
the ``E-FILING'' link on the Board's Web site at ``www.stb.dot.gov.'' 
Any person submitting a filing in the traditional paper format should 
send an original and 10 copies of the filing to: Surface Transportation 
Board, Attn: Docket No. [EP 722 or EP 664 (Sub-No. 2), as the case may 
be], 395 E Street SW., Washington, DC 20423-0001.
    Copies of written submissions will be posted to the Board's Web 
site and will

[[Page 27282]]

be available for viewing and self-copying in the Board's Public Docket 
Room, Suite 131. Copies of the submissions will also be available (for 
a fee) by contacting the Board's Chief Records Officer at (202) 245-
0238 or 395 E Street SW., Washington, DC 20423-0001.

FOR FURTHER INFORMATION CONTACT: For Docket No. EP 722: Scott Zimmerman 
at (202) 245-0386. For Docket No. EP 664 (Sub-No. 2): Amy Ziehm at 
(202) 245-0391. Assistance for the hearing impaired is available 
through the Federal Information Relay Service (FIRS) at (800) 877-8339.

SUPPLEMENTARY INFORMATION: On April 2, 2014, the Board served a notice 
announcing that it would receive comments in Docket No. EP 722 to 
explore the Board's methodology for determining railroad revenue 
adequacy and the use of revenue adequacy in rate reasonableness cases, 
and in Docket No. EP 664 (Sub-No. 2) \1\ to explore how the Board 
calculates the railroad industry's cost of equity capital. The Board 
coordinated the two proceedings by inviting comments in both cases on 
the same schedule. Comments and replies were due on September 5, 2014 
and November 4, 2014, respectively.
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    \1\ The Board instituted a rulemaking in this proceeding in 
response to a petition by the Western Coal Traffic League. Pet. of 
W. Coal Traffic League to Institute a Rulemaking Proceeding to 
Abolish the Use of Multi-Stage Discounted Cash Flow Model in 
Determining the R.R. Indus.'s Cost of Equity Capital, EP 664 (Sub-
No. 2) (STB served Dec. 20, 2013).
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    Having reviewed the comments and replies filed in these 
proceedings, the Board will now hold a public hearing on July 22-23, 
2015, beginning at 9:30 a.m., at its headquarters in Washington, DC, to 
further examine these issues. The parties have raised a number of 
issues for the Board to consider. In Docket No. EP 722, many of the 
comments focused on the revenue adequacy component of Constrained 
Market Pricing, by which the Board judges the reasonableness of rail 
freight rates. The parties should be prepared to discuss issues related 
to the revenue adequacy constraint, as set forth in Coal Rate 
Guidelines, Nationwide (Coal Rate Guidelines), 1 I.C.C. 2d 520 (1985), 
and are invited to address the following questions:
    [cir] In Coal Rate Guidelines, the Interstate Commerce Commission 
indicated that revenue adequacy is a long term concept that should be 
measured ``over time.'' 1 I.C.C.2d at 536. Some comments suggest that 
revenue adequacy should be measured over a business cycle, while others 
suggest that a business cycle would not be sufficient. If the revenue 
adequacy constraint were to be utilized, what would be an appropriate 
time period? What would be an appropriate definition for a ``business 
cycle'' if the Board were to use that as a time measure?
    [cir] In Coal Rate Guidelines, the Interstate Commerce Commission 
stated that ``[a] railroad seeking to earn revenues that would provide 
it, over the long term, a return on investment above the cost of 
capital would have to demonstrate with particularity: (1) A need for 
the higher revenues; (2) the harm it would suffer if it could not 
collect them; and (3) why the captive shippers should provide them.'' 
Id. at 536 n.36. Some comments allude to this language in suggesting 
that, in the case of a revenue adequate railroad, that railroad should 
be required to justify rate increases on captive shippers. Should the 
Board consider requiring a revenue adequate railroad, whose increased 
rate has been challenged, to justify the increase on a complaining 
captive shipper? Would such an approach be consistent with the Board's 
governing statute and/or relevant case law?
    [cir] Constrained market pricing imposes constraints on the extent 
to which a railroad may charge differentially higher rates on captive 
traffic, and several comments contend that captive shippers should not 
be required to differentially provide returns in excess of adequate 
revenue levels. Should a revenue adequate railroad's ability to 
differentially price be limited for all captive shippers or for a 
subset of captive shippers that are most likely to be subject to the 
railroad's market power? Is there a way to identify those shippers that 
are most likely to be subject to the railroad's market power, such as 
through Revenue to Variable Cost ratios, the Revenue Shortfall 
Allocation Method, or something approximating the Maximum Mark-up 
Methodology used in the Board's rate proceedings?
    Additionally, the parties should be prepared to further explore the 
following issues raised in the comments and replies:
    [cir] Some comments suggest that revenue adequacy should be tied to 
the availability of competitive access remedies. What competitive 
access remedies would be appropriate (and consistent with the Board's 
governing statute) when a railroad is revenue adequate? Because a 
proposal regarding competitive access remedies is currently pending 
before the Board, see Petition For Rulemaking to Adopt Revised 
Competitive Switching Rules, Docket No. EP 711, parties are asked to 
specifically consider the impact of revenue adequacy on that proposal, 
particularly in light of the recent service issues faced by the 
industry.
    [cir] Some comments argue that any proposal that would limit the 
railroads' return on investment would negatively impact the railroads' 
ability to invest in their networks and expand capacity. Please discuss 
the impact of your revenue adequacy proposals on the railroads, again, 
in light of the recent service issues faced by the industry.
    With respect to Docket No. EP 664 (Sub-No. 2), the parties should 
be prepared to discuss whether the method the Board uses to make its 
annual industry cost of equity capital determinations needs to be 
modified and how such modifications, if any, should be implemented. The 
parties are also invited to discuss the following issues raised in the 
comments:
    [cir] As part of its annual cost of capital determination, the 
Board uses a Multi-Stage Discounted Cash Flow (Multi-Stage DCF) model. 
Some comments suggest that the Board's Multi-Stage DCF model is biased 
upward. Does such a problem exist and, if so, how is it best corrected?
    [cir] Since 2009, the Board has relied on the Capital Asset Pricing 
Model (CAPM) as part of its annual cost of capital determination. Under 
CAPM, ``beta'' is used to measure the amount of non-diversifiable risk 
of the railroad industry. Some comments note that betas for the 
railroad industry have ranged above and below 1.0 since 2009. Do those 
changes in beta reflect actual differences in the riskiness of the 
railroad industry? Should the Board consider setting beta equal to 1.0 
or some other figure?
    [cir] Some comments suggest that the Board's approach for 
determining the ``market risk premium'' under CAPM is atypical. Is the 
Board's methodology sufficiently reliable or are there more commonly 
used approaches that the Board should consider adopting?
    [cir] Certain comments note that the Board's CAPM analysis 
currently relies on a sample of four observations. Does this sample 
adequately reflect the railroad industry, or would using a broader 
sample, such as the S&P 500, lead to a more realistic estimate in 
determining the cost of equity?
    [cir] Some comments contend that the Board should consider changes 
to how it determines Return on Investment. Would changes to the Return 
on Investment methodology require changes to the Cost of Capital 
methodology? Should the Board consider adjusting how it determines 
Return on Investment (e.g., using replacement costs) and how could 
those

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adjustments be implemented in a practicable manner?

Board Releases and Live Video Streaming Available via the Internet

    Decisions and notices of the Board, including this notice, are 
available on the Board's Web site at www.stb.dot.gov. This hearing will 
be available on the Board's Web site by live video streaming. To access 
the hearing, click on the ``Live Video'' link under ``Information 
Center'' at the left side of the home page beginning at 9:30 a.m. on 
July 22-23, 2015.
    This action will not significantly affect either the quality of the 
human environment or the conservation of energy resources.
    It is ordered:
    1. A public hearing will be held on July 22-23, 2015, at 9:30 a.m., 
at the Board's headquarters at 395 E Street SW., Washington, DC, as 
described above.
    2. By July 8, 2015, any party wishing to speak at the hearing shall 
file with the Board a notice of intent to participate (identifying the 
party, the proposed speaker, and the time requested, and summarizing 
the key points that the speaker intends to address). The notices of 
intent to participate need not be served on the parties of record. 
Parties appearing at the hearing shall file hearing exhibits, if any, 
by July 22, 2015.
    3. This decision is effective on its service date.

    Decided: May 8, 2015.

    By the Board, Joseph H. Dettmar, Acting Director, Office of 
Proceedings.
Jeffrey Herzig,
Clearance Clerk.
[FR Doc. 2015-11565 Filed 5-12-15; 8:45 am]
 BILLING CODE 4915-01-P