STB says five U.S.-based Class I railroads are revenue adequate for calendar year 2019

The Washington, D.C.-based Surface Transportation Board (STB), an independent adjudicatory and economic-regulatory agency charged by Congress with resolving railroad rate and service disputes and reviewing proposed railroad mergers, recently announced that it made its annual determination of revenue adequacy for United States-based Class I railroads for calendar year 2019.

STB explained that a railroad is considered to be revenue adequate if it achieves a rate of return on net investment equal to at least the current cost of capital for the railroad industry for 2019, which it determined to be 9.34%.

And it added that Congress directed the Board to conduct such revenue adequacy determinations on an annual basis, with STB finding that five Class I railroads achieved a rate of return on net investment equal to or greater than the agency’s calculation of the cost of capital for the railroad industry. 

The five Class I railroads that were revenue adequate in 2019 were: BNSF Railroad Company (12.04%), CSX Transportation, Inc. (12.84%), Norfolk Southern Combined Railroad Subsidiaries (11.59%), Soo Line Corporation, including U.S. affiliates of Canadian Pacific Railway (11.34%), and Union Pacific Railroad Company (15.55%).

In a research note, Ravi Shanker, Morgan Stanley transportation analyst, wrote that the STB is required to assess revenue adequacy for Class I’s annually and take it into consideration when reviewing rate of reasonableness on shipments where a rail holds market dominance. 

“Revenue adequate rails face potentially increased regulatory pricing scrutiny as rails that are not deemed revenue adequate are usually allowed to adjust rates without the interference from the STBs,” he wrote. “While [five] rails have been deemed adequate, we note that there remains significant complexity around next steps and it is unclear how or when revenue adequacy determinations will influence a reasonable rate determination.”

Tony Hatch, principal of New York-based ABH Consulting, pulled no punches, when assessing the STB’s revenue adequacy list, in a research note.

“The very announcement points out the inadequacies of the list itself, with the greatest of respect (it is slow/late; it counts only the U.S. as per the STB being, of course, an American government body even if the freight rail system is continental, and it shows that ROIC/CoC [return on invested capital/cost of capital] is very much an art, maybe even a dark art, and not a science,” he wrote. “For example, is the CoC really 9.34%?  Isn’t that perhaps one-third too high?  Yes, it seems closer to the mark than 12.2% for last (2018) year.  Does this matter?  Well, maybe not today. But with the very nature—and use—of ‘revenue adequacy’ up for debate in the future, it does bear watching.  Note that the two Canadian lines system-wide would have ranked number 1 &2.”