In a Notice served on April 2, 2014, the Surface Transportation Board (Board) solicited public comments to explore the following two aspects of its railroad revenue adequacy standards:
- Proposed changes to the methodology for determining railroad revenue adequacy
- The role of revenue adequacy in judging the reasonableness of rail freight rates
Congress has declared that it is the U.S. government’s policy to “allow […] rail carriers to earn adequate revenues, as determined by the Board,”1 and it requires the Board to maintain revenue adequacy standards and annually calculate revenue adequacy.2 Also, the concept of revenue adequacy is a component of the Board’s rate reasonableness standards.
Substantial changes in the rail industry’s structure and the flow of commerce have prompted questions about whether the Board’s method for determining revenue adequacy appropriately measures the railroad industry’s financial condition. Several major railroads are not considered revenue adequate under the Board’s current standards, even though they are deemed quite successful under more traditional financial measures. In particular, the Board has asked for comments on how it calculates the rail industry’s cost of equity capital.
Although the Board’s rate reasonableness standards have stated for more than two decades that rail rates may not be designed to earn greater revenues than needed to achieve revenue adequacy, the Board has never addressed how the revenue adequacy standard would work in actual practice in a rate case. Therefore, the Board also has requested comments as to how such a standard might be applied to determine if a rail rate is unreasonable.
Initial comments are due on July 1, 2014, and reply comments are due on August 15, 2014. After receiving comments, the Board will hold a public hearing.