82 FR 49295 - Revisions to the Cost-of-Capital Composite Railroad Criteria

SURFACE TRANSPORTATION BOARD

Federal Register Volume 82, Issue 205 (October 25, 2017)

The Surface Transportation Board (STB or Board) is adopting a final action to update one of the screening criteria used to create the ``composite railroad'' for the Board's annual cost-of-capital determination. This final action requires a company's stock to be listed on either the New York Stock Exchange (NYSE) or the Nasdaq Stock Market (NASDAQ), rather than on either the NYSE or American Stock Exchange (AMEX), as the AMEX no longer exists.

[Federal Register Volume 82, Number 205 (Wednesday, October 25, 2017)]
[Rules and Regulations]
[Pages 49295-49297]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2017-22894]


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SURFACE TRANSPORTATION BOARD

49 CFR Chapter X

[Docket No. EP 664 (Sub-No. 3)]


Revisions to the Cost-of-Capital Composite Railroad Criteria

AGENCY: Surface Transportation Board.

ACTION: Final Action.

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SUMMARY: The Surface Transportation Board (STB or Board) is adopting a 
final action to update one of the screening criteria used to create the 
``composite railroad'' for the Board's annual cost-of-capital 
determination. This final action requires a company's stock to be 
listed on either the New York Stock Exchange (NYSE) or the Nasdaq Stock 
Market (NASDAQ), rather than on either the NYSE or American Stock 
Exchange (AMEX), as the AMEX no longer exists.

DATES: This action is applicable on November 24, 2017.

FOR FURTHER INFORMATION CONTACT: Amy C. Ziehm, (202) 245-0391. 
Assistance for the hearing impaired is available through the Federal 
Information Relay Service (FIRS) at (800) 877-8339.

SUPPLEMENTARY INFORMATION: As one of its regulatory responsibilities, 
the Board determines annually the railroad industry's cost of 
capital.\1\ The cost-of-capital figure represents the Board's estimate 
of the average rate of return needed to persuade investors to provide 
capital to the freight rail industry. The cost-of-capital determination 
is one component used in evaluating the adequacy of railroad revenues 
each year under the procedures and standards mandated by Congress in 
the Railroad Revitalization and Regulatory Reform Act of 1976, Public 
Law 94-210, 90 Stat. 31 (1976) and promulgated in Standards for 
Railroad Revenue Adequacy, 364 I.C.C. 803 (1981), modified, 3 I.C.C.2d 
261 (1986), aff'd sub nom. Consol. Rail Corp. v. United States, 855 
F.2d 78 (3d Cir. 1988). The cost-of-capital finding is also an 
essential component of many other Board regulatory proceedings.
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    \1\ The cost of capital is calculated as the weighted average of 
the cost of debt and the cost of equity, with the weights determined 
by the railroad industry's capital structure (the fraction of 
capital from debt or equity on a market-value basis). See 
Methodology to be Employed in Determining R.R. Indus.'s Cost of 
Capital, EP 664, slip op. at 6 (STB served Jan. 17, 2008).
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    The Board determines the railroad industry's cost of capital for a 
``composite railroad,'' which is based on data from a sample of 
railroads. Pursuant to Railroad Cost of Capital--1984, 1 I.C.C.2d 989 
(1985), the sample includes all railroads that meet the following 
criteria:

--The company is a Class I line-haul railroad;
--If the Class I railroad is controlled by another company, the 
controlling company is primarily a railroad company and is not already 
included in the study frame; \2\
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    \2\ A company is considered to be primarily in the railroad 
business if at least 50% of its total assets are devoted to railroad 
operations. R.R. Cost of Capital--1984, 1 I.C.C.2d at 1003-04.
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--The company's bonds are rated at least BBB by Standard & Poor's and 
Baa by Moody's;
--The company's stock is listed on either the NYSE or the AMEX; and
--The company has paid dividends throughout the review year.

1 I.C.C.2d at 1003-04; see also R.R. Cost of Capital--2015, EP 558 
(Sub-No. 19), slip op. at 3 (STB served Aug. 5, 2016).
    On April 18, 2017, the Board issued a Notice of Proposed Rulemaking 
(NPRM) that proposed to update the fourth screening criterion used to 
create the ``composite railroad'' for the Board's annual cost-of-
capital determination. Specifically, the Board proposed that its fourth 
screening criterion be modified to require a company's stock to be 
listed on either the NYSE or the NASDAQ, rather than on either the NYSE 
or AMEX, as the AMEX is no longer in existence. See NPRM, slip op. at 
1-2.
    The Board sought comments on the NPRM by May 18, 2017, and replies 
by June 19, 2017. The Board received comments on the proposed action 
from the Association of American Railroads (AAR) and the Western Coal 
Traffic League (WCTL). No reply comments were filed. After 
consideration of the comments received, the Board is adopting the 
changes proposed in the NPRM as a final action.

Comments

    In its comments, AAR states that it is supportive of the Board's 
proposal to update the ``composite railroad'' screening criteria to 
better reflect the current state of the marketplace. (AAR Comment 2.) 
AAR requests that the Board move expeditiously to adopt the proposal 
and prohibit any party from expanding the scope of this proceeding by 
offering proposals that would ``manipulate'' the cost-of-capital 
process. (Id.)
    WCTL generally supports the Board's proposal and states that 
expanding the screening criteria to include NASDAQ-listed companies, 
i.e., CSX Corporation (CSX),\3\ would result in a larger composite 
sample. (WCTL Comment 1-2.) WCTL, however, argues that the ``composite 
railroad'' sample is still rather small, consisting of just four 
companies--CSX; Kansas City Southern Corporation (KCS); Norfolk 
Southern Corporation (NSC); and Union Pacific Corporation (UPC)--that 
have

[[Page 49296]]

significant differences. (Id. at 2.) WCTL also notes that the composite 
sample omits BNSF Railway Company (BNSF)--which, it asserts, is by some 
measures the largest railroad in the United States--because BNSF 
constitutes less than 50% of the assets of its parent company, 
Berkshire Hathaway. (Id.) According to WCTL, by including CSX in the 
composite sample (but omitting BNSF), the industry average cost of 
capital reflects roughly 59% western and 41% eastern railroads, even 
though in actuality western railroads--UPC, BNSF, and KCS--account for 
73% of the industry, and the two eastern railroads--CSX and NSC--
account for only 27%. (Id.) \4\ WCTL argues that excluding CSX, along 
with BNSF, from the composite sample would actually result in an 
average that is more representative of the regional division (75% 
western and 25% eastern). (Id.) WCTL asserts that the Board's proposal 
could result in an average that is less representative of the industry 
as a whole, and a cost-of-capital figure that is more distorted. (Id. 
at 2-3.) Additionally, WCTL states that a ``complicating factor'' is 
that the second stage of the Board's Multi-Stage Discounted Cash Flow 
model (MSDCF) uses a simple average of the growth rates of the 
individual carriers, such that KCS counts just as much as UPC. (Id.)
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    \3\ In the Board's cost of capital calculation for 2016, the 
Board waived its requirement that a company's stock be listed on 
either the NYSE or the AMEX, noting that CSX Corporation transferred 
its stock exchange listing from the NYSE to the NASDAQ in 2015. R.R. 
Cost of Capital--2016, EP 558 (Sub-No. 20), slip op. at 2 n.4 (STB 
served Aug. 7, 2017).
    \4\ WCTL's figures appear to be percentages of the total market 
capitalization of the railroad industry.
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    Despite its criticisms, WCTL recommends that the Board adopt the 
proposed change, but ``on a tentative or qualified basis that would 
allow the Board to revisit the matter, and allow parties to present 
relevant evidence, if inclusion of NASDAQ-traded carriers turns out to 
undermine the representativeness of the composite sample, or the 
accuracy of the cost-of-capital'' figure. (Id.)

The Final Action

    To reflect the current marketplace, the Board will adopt the 
changes proposed in the NPRM and now require, as its fourth screening 
criterion, that a company's stock be listed on either the NYSE or the 
NASDAQ. Commenters generally support the Board's proposal and agree 
that the NASDAQ is a suitable replacement for the AMEX in the cost-of-
capital determination. As noted in the NPRM, when the Board's 
predecessor adopted the fourth screening criterion, it did so to 
``insure the availability of stock price data.'' R.R. Cost of Capital--
1984, 1 I.C.C.2d at 1004. By requiring applicable carriers to trade on 
either the NYSE or the NASDAQ, the Board will continue to ensure the 
availability of stock price data for use in the Board's computation of 
the rail industry's cost of capital.
    Although WCTL supports the Board's proposal and states that 
expanding the screening criteria to include NASDAQ-listed companies, 
i.e., CSX, would result in a larger composite group, it argues that the 
Board's proposed change could result in an average cost-of-capital 
figure that is less representative of the regional division of rail 
assets than it is now. The Board, however, is unpersuaded by WCTL's 
argument. The purpose of including only carriers listed on particular 
stock exchanges in the ``composite group'' is to ensure the 
availability of stock price data for the annual cost-of-capital 
determinations for carriers that satisfy the other criteria. See R.R. 
Cost of Capital--1984, 1 I.C.C.2d 989, 1004 (1984). Here, there is no 
debate that CSX meets the other criteria and that NASDAQ is a reliable 
source of stock price data. Excluding a carrier that meets the other 
criteria and has a reliable source of stock data, in an effort to 
achieve a ``balance'' between eastern and western carriers, is 
unwarranted.
    In any event, railroads operating in different parts of the United 
States may confront different markets, traffic mixes, densities, and 
topography. As a consequence, there are differences in the cost 
structures of eastern and western carriers. These physical and cost 
structure differences, however, do not imply variances in the cost of 
capital on a regional basis. Investors deploy capital around the world, 
looking to obtain the highest possible return, while incurring the 
lowest possible risk. WCTL has not provided evidence to demonstrate 
that there is any difference in the rate of return investors demand--
i.e., the cost of capital--when investing in eastern and western rail 
carriers. Therefore, the Board believes that it is better to include 
CSX in the composite-industry cost of capital, as it was in previous 
years when it was listed on NYSE, to ensure a larger sample size.
    With respect to WCTL's argument that another ``complicating 
factor'' is that the second stage of the Board's MSDCF uses a simple 
average of the growth rates of individual carriers, such that KCS 
counts as much as UP, the Board finds such an argument to be outside 
the scope of this proceeding. The core issue here is whether, for 
purposes of the cost-of-capital calculation, it is appropriate to 
replace a defunct stock exchange (AMEX) with a stock exchange in 
current and prevalent use (NASDAQ). WCTL's growth rate argument does 
not relate to that issue and is a collateral attack on other components 
of the Board's approved methodology.
    Finally, the Board declines WCTL's request to adopt the final 
action on a conditional or tentative basis, purportedly to allow 
parties to present additional evidence after implementation. If parties 
have concerns in the future that inclusion of NASDAQ-traded carriers 
ultimately results in a less representative composite sample, they may 
file a petition to modify or revisit the composite group criteria 
regulation.

Regulatory Flexibility Act Statement

    The Regulatory Flexibility Act of 1980 (RFA), 5 U.S.C. 601-612, 
generally requires a description and analysis of new rules that would 
have a significant economic impact on a substantial number of small 
entities. In drafting a rule, an agency is required to: (1) Assess the 
effect that its regulation will have on small entities; (2) analyze 
effective alternatives that may minimize a regulation's impact; and (3) 
make the analysis available for public comment. 5 U.S.C. 601-604. Under 
Sec.  605(b), an agency is not required to perform an initial or final 
regulatory flexibility analysis if it certifies that the proposed or 
final rules will not have a ``significant impact on a substantial 
number of small entities.''
    Because the goal of the RFA is to reduce the cost to small entities 
of complying with federal regulations, the RFA requires an agency to 
perform a regulatory flexibility analysis of small entity impacts only 
when a rule directly regulates those entities. In other words, the 
impact must be a direct impact on small entities ``whose conduct is 
circumscribed or mandated'' by the proposed rule. White Eagle Coop. 
Ass'n v. Conner, 553 F.3d 467, 478, 480 (7th Cir. 2009). An agency has 
no obligation to conduct a small entity impact analysis of effects on 
entities that it does not regulate. United Distrib. Cos. v. FERC, 88 
F.3d 1105, 1170 (D.C. Cir. 1996).
    In the NPRM, the Board already certified under 5 U.S.C. 605(b) that 
the proposed change would not have a significant economic impact on a 
substantial number of small entities within the meaning of the RFA. The 
Board explained that a change in the listing requirement for inclusion 
in the composite railroad would not have a significant economic impact 
on the railroads included; likewise, the Board articulated that, 
whether or not a railroad would be included in the composite group 
would have no significant economic impact on that individual railroad. 
A copy of the

[[Page 49297]]

NPRM was served on the U.S. Small Business Administration (SBA).
    The final action changes one of the criteria for a railroad's 
inclusion in the data sample that the Board uses to calculate the 
annual cost of capital. By definition, that group of railroads is 
limited to Class I carriers, which are not small businesses under the 
Board's definition for RFA purposes.\5\ Thus, the action does not place 
any additional burden on small entities. Therefore, the Board certifies 
under 5 U.S.C. 605(b) that the final action will not have a significant 
economic impact on a substantial number of small entities within the 
meaning of the RFA. A copy of this decision will be served upon the 
Chief Counsel for Advocacy, Office of Advocacy, U.S. Small Business 
Administration, Washington, DC 20416.
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    \5\ Effective June 30, 2016, for the purpose of RFA analysis for 
rail carriers subject to our jurisdiction, the Board defines a 
``small business'' as a rail carrier classified as a Class III rail 
carrier under 49 CFR part 1201. See Small Entity Size Standards 
Under the Regulatory Flexibility Act, EP 719 (STB served June 30, 
2016) (with Board Member Begeman dissenting). Class III carriers 
have annual operating revenues of $20 million or less in 1991 
dollars, or $35,809,698 or less when adjusted for inflation using 
2016 data. Class II carriers have annual operating revenues of less 
than $250 million in 1991 dollars or $ less than $447,621,226 when 
adjusted for inflation using 2016 data. The Board calculates the 
revenue deflator factor annually and publishes the railroad revenue 
thresholds on its Web site. 49 CFR part 1201.
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    It is ordered:
    1. The final action described above is adopted and will be 
applicable on November 24, 2017.
    2. Notice of the action adopted here will be published in the 
Federal Register.
    3. A copy of this decision will be served upon the Chief Counsel 
for Advocacy, Office of Advocacy, U.S. Small Business Administration.
    4. This decision is effective on the date of service.

    Decided: October 17, 2017.

    By the Board, Board Members Begeman and Miller.
Kenyatta Clay,
Clearance Clerk.
[FR Doc. 2017-22894 Filed 10-24-17; 8:45 am]
BILLING CODE 4915-01-P