SURFACE TRANSPORTATION BOARD REVISES ITS COST OF CAPITAL METHODOLOGY

[STBNews@xxxxxxxxxxx]

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>From the Surface Transportation Board, Washington, D.C.
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Today the Surface Transportation Board issued its final decision revising
its method for calculating the railroad industry's cost of capital.  The
Board adopts a simple average of a Capital Asset Pricing model (CAPM) and a
multi-stage Discounted Cash Flow (DCF) model to calculate the cost of
equity—one component of the cost of capital.  The Board concludes that this
methodology will yield a more precise determination than relying on CAPM
alone.



                               In January 2008, the Board replaced its
                               single-stage DCF model with a CAPM model.
                               During the CAPM rulemaking process, several
                               parties urged the Board to use a multi-stage
                               DCF model in conjunction with CAPM to obtain
                               a more stable and precise estimate of the
                               cost of equity.  The record in that
                               rulemaking, however, did not provide a
                               suitable multi-stage DCF model for the Board
                               to consider.   In February 2008, the Board
                               began to explore whether it could further
                               improve its methodology for estimating the
                               cost of equity by incorporating a
                               multi-stage DCF model.  Today's decision,
                               adopting a simple average of CAPM and a
                               multi-stage DCF to measure the cost of
                               equity, concludes this effort.



                               The Board uses the cost of capital figure in
                               evaluating the adequacy of individual
                               railroads' revenues each year.  The figure
                               is also used in maximum rate cases,
                               feeder-line applications, rail line
                               abandonments, trackage rights cases,
                               rail-merger reviews, and more generally in
                               the Board's Uniform Rail Costing System.
                               The Board will use this new approach to
                               estimate the railroad industry's 2008 cost
                               of capital.



                               Today's decision, issued in the proceeding
                               entitled Use of a Multi-Stage Discounted
                               Cash Flow Model In Determining the Railroad
                               Industry's Cost of Capital, STB Ex Parte No.
                               664 (Sub-No. 1)(
                               http://www.stb.dot.gov/decisions/readingroom.nsf/WebDecisionID/39443?OpenDocument
 )
                               , is available for viewing and downloading
                               via the Board's Web site at
                               http://www.stb.dot.gov under "E-Library,"
                               then under "Decisions & Notices," beneath
                               the date "1/28/09."

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