Four of seven Class I railroads likely to be deemed revenue adequate for 2014

[NS Newsfeed]

Four of the seven Class I railroads that operate in the US will likely be deemed revenue adequate for 2014, according to an analysis of the US Surface Transportation Board's cost of capital finding for the same year, issued Friday.



BNSF Railway, Norfolk Southern, Union Pacific and the Grand Trunk railroad (the US subsidiary of Canadian National) all had returns on investment in 2014 that were higher than the STB's cost of capital finding of 10.65%.



The railroad's returns on investment in 2014, according to their R-1 filings with the board, were 12.88%, 11.69%, 17.35% and 11.30%, respectively.



CSX, Kansas City Southern and the Soo Line (Canadian Pacific's US subsidiary), had 2014 returns of 10.18%, 8.18% and -0.42%, respectively.



There were five revenue-adequate railroads in 2013, the most ever: BNSF, NS, UP, Grand Trunk and the Soo Line.



A Class I railroad is any US railroad that had more than $467 million in operating revenue in 2013, according to the Association of American Railroads.



Revenue adequacy is an annual determination undertaken by the board to determine whether a railroad has sufficient revenue to cover its costs as well as attract investment capital with a reasonable rate of return.



Staggers Act mandate

A mandate of the Staggers Act, which deregulated the railroad industry in the early 1980s, revenue adequacy is used in a number of board decisions, including rate cases.



The annual finding has come under scrutiny from some shippers, including coal shippers, who argue that railroad profits have grown substantially in the last several years.



In July, the board held a hearing on how it should regulate railroads that are revenue adequate, potentially allowing more rate cases.



In its decision announcing the hearing, the board noted that its predecessor -- the Interstate Commerce Commission -- "declared that once a railroad has become revenue adequate over a period of time, shippers should be able to challenge the railroad's rates on the ground that the railroad is financially healthy and thus does not need to charge such high rates."



While the board often hears rate challenges from coal shippers, neither the ICC nor the board have ever fully defined the process for challenging a rail rate on the basis of revenue adequacy, the board's announcement said.



In 2012 and 2011, three of the seven Class I railroads were deemed revenue adequate, while only one was revenue adequate in 2010. In 2009, none of the railroads were deemed revenue adequate.



Roughly 70% of the coal produced in the US travels by railroad, according to industry statistics.