The cost of capital represents the STB Office of Economics’ estimate of the average rate of return needed to persuade investors to provide capital to the freight rail industry, according to the STB’s July 20, 2025, decision (download below). The cost of capital was 9.87% for 2023, 10.58% in 2022, 10.37% in 2021, and 7.89% in 2020.
The cost of capital is an aggregate measure and “not intended to measure the desirability of any individual capital investment project”; it “is one component used in evaluating the adequacy of a railroad’s revenue each year … [and] may also be used in other regulatory proceedings, including (but not limited to) those involving the prescription of maximum reasonable rate levels, the proposed abandonment of rail lines, and the setting of compensation for use of another carrier’s lines,” the STB explained.
For 2023, the federal agency reported that:
- The cost of railroad long-term debt was 5.24% (vs. 5.34% in 2023, 4.28% in 2022, 2.63% in 2021, and 2.54% in 2020).
- The cost of common equity was 11.82% (compared with 10.89% in 2023, 11.99 in 2022, 12.03% in 2021, and 9.33% in 2020).
- The cost of preferred equity was 0% (vs. 0% in 2023, 0% in 2022, 0% in 2021, and 3.42% in 2020).
- The capital structure mix of the railroads was 17.26% long-term debt (vs. 18.39% in 2023, 18.28% in 2022, 17.71% in 2021, and 21.16% in 2020); 82.74% common equity (vs. 81.61% in 2023, 81.72% in 2022, 82.29% in 2021, and 78.84% in 2020); and 0% preferred equity (it was also 0% in 2023, 2023, 2021 and 2020).
“This proceeding was instituted by decision served on January 10, 2025, to update the railroad industry’s cost of capital for 2024,” the STB reported. “In that decision, the Board solicited comments from interested parties on the following issues: (1) the railroads’ 2024 current cost of debt capital, (2) the railroads’ 2024 current cost of preferred equity capital (if any), (3) the railroads’ 2024 cost of common equity capital, and (4) the 2024 capital structure mix of the railroad industry on a market value basis. On April 14, 2025, the Board received comments from the Association of American Railroads (AAR) providing the information used to calculate the annual cost-of-capital determination, as established in Use of a Multi-Stage Discounted Cash Flow Model in Determining the Railroad Industry’s Cost of Capital, EP 664 (Sub-No. 1) … AAR states that, based on its calculations, the overall railroad industry cost of capital for 2024 should be 10.68%. … Western Coal Traffic League (WCTL) replied to AAR’s submission on May 5, 2025, stating that its review of AAR’s filing and associated workpapers did not reveal any significant mathematical errors. … Nevertheless, WCTL argues that the cost of capital is substantially overstated due to a miscalculation of the cost of equity component. … According to WCTL, the cost of equity ‘error’ stems from alleged flaws in the Multi-Stage Discounted Cash Flow model (MSDCF) and the implementation of the Capital Asset Pricing Model (CAPM). … Accordingly, as in previous years, WCTL recommends the Board rely only on CAPM (though modified, as discussed below) to calculate the cost of equity. … AAR responded to WCTL’s reply on May 22, 2025, asserting that it followed the Board’s instructions to use the methodology from Railroad Cost of Capital—2023, EP 558 (Sub-No. 27). … AAR notes that WCTL acknowledges that AAR’s filing and associated workpapers had no significant mathematical errors. … AAR asserts that WCTL’s arguments are improper collateral attacks on the Board’s cost-of-capital methodology, … and that WCTL attempts to ‘backdoor its reply as a petition for rulemaking.’ … Accordingly, AAR argues that the Board should deny WCTL’s request to change the methodology.”
As in years prior, the STB reported, “WCTL presents an alternative cost-of-capital figure based only on CAPM to calculate the cost of equity. … In its CAPM calculation, WCTL applies a different market-risk premium and risk-free rate than the ones used by AAR. … WCTL’s alternative cost of capital figure comes to 7.57%. … Although WCTL says that the Board ‘may perceive no immediate legal obligation to consider such matters in this particular proceeding,’ … WCTL nevertheless argues that the deviation between the cost-of-capital values derived under the Board’s methodology and the alternative values WCTL presents ‘is more than sufficient to support a Board-initiated rulemaking proceeding.’ … As the Board has previously directed, challenges to the Board’s cost-of-capital methodology should be addressed in Docket No. EP 664 (via a petition for rulemaking) and not in the annual cost-of-capital proceeding. … As WCTL appears to concede … its arguments are challenges to the Board’s methodology. Accordingly, they are not properly before the Board in this annual proceeding and are not being considered at this time. The Board will accept AAR’s submission, which complies with the Board’s established methodology.”
