1992 Railroad Financial Desk Book: The Costs of Railroad Capital

The Railroad Revitalization and Regulatory Reform Act of 1976 mandated that the Interstate Commerce Commission (ICC) make an annual determination of the revenue adequacy of US freight railroads. The revenue-adequacy criterion adopted by the Commission is that a railroad's overall rate of return...

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Bibliographic Details
Published in:Railway age (Bristol) 1991-12, Vol.192 (12), p.DB39-DB39
Main Author: Levine, Harvey A
Format: Magazinearticle
Language:English
Subjects:
Capital costs
Financial analysis
Measurement
Railroad transportation
Railroads
Regulatory reform
Return on investment
Statistical data
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Summary:The Railroad Revitalization and Regulatory Reform Act of 1976 mandated that the Interstate Commerce Commission (ICC) make an annual determination of the revenue adequacy of US freight railroads. The revenue-adequacy criterion adopted by the Commission is that a railroad's overall rate of return on investment should at least equal its cost of capital (COC). In arithmetic terms, the COC is the average current cost of attracting both debt and equity capital, weighted by the current market values of each type of capital. The ICC cost of railroad equity of 12.9% in 1990, less the cost of risk-free debt, equates to a market risk premium of 5.3%. The average 3% spread between the railroad cost of debt and equity in recent years is below that of both public utilities and other industries. The ICC might consider adopting a "sanity test" for the COC calculation whereby, unless there is strong evidence to the contrary, the railroad COC should not be below that of the market in general.
ISSN:0033-8826
2161-511X