Surface Transportation Board: STB Ex Parte No. 664 (Sub-No. 1)

The Surface Transportation Board of the U.S. Department of Transportation recently revised its methodology for determining the railroad industry's cost of capital after hearings in which Analysis Group Chairman Bruce Stangle delivered expert testimony. The STB had been reviewing its regulatory processes since September 2006, and in January 2009 issued its final decision to adopt an average of two approaches -- one based on the Capital Asset Pricing model (CAPM), the other based on the multi-stage Discounted Cash Flow (DCF) model -- to calculate the cost of equity, a component of the cost of capital.

The Association of American Railroads (AAR) retained Analysis Group to work with AAR's counsel, Sidley Austin LLP, to evaluate various methodologies for calculating the cost of capital. The goal was to determine a methodology that would yield precise results while remaining transparent to review and oversight. Senior Advisor George Kosicki and Vice Presidents Gene J. Kovacs and Ted Davis supported Dr. Stangle and affiliate R. Glenn Hubbard, dean of Columbia Business School, who submitted a verified statement on measurement methodology to the Board.

The STB uses cost-of-capital data to evaluate the adequacy of individual railroads' yearly revenues, and in various types of cases involving shipping rates.

Read the STB press release

Testifying Experts