(The following story by John D. Boyd appeared on The Journal of Commerce website on November 18, 2009.)
WASHINGTON, D.C. — The planned purchase of BNSF Railway by Warren Buffett’s Berkshire Hathaway could cause a change in how the Surface Transportation Board calculates a key cost formula that helps it shape some rail freight rates.
Raymond A. Atkins, chief of staff to STB Chairman Daniel Elliott, said the agency “will be exploring the repercussions” and has a team that will look into “various alternatives” for its current capital cost measure once Buffett takes BNSF private.
The STB annually estimates railroads’ costs to woo investment capital, in order to help gauge how much of a return carriers need to generate from their freight traffic. Its calculation can directly affect pricing of railroads’ public rate tariffs on certain cargo types, but industry observers say that regulatory rate structure can also indirectly influence rates on some shipments that are priced through private contracts.
The costs of debt capital are easy to find from money markets, but figuring equity costs involves looking into carriers’ stock prices and using a formula for how well they are performing relative to other choices investors might have. And the results can be controversial, since higher numbers produced by the STB formula can translate into higher rates charged to shippers on regulated freight.
All the largest or Class I railroads in North America are publicly traded, so their stock prices are readily available. That will change once Berkshire closes its BNSF purchase, which is expected in first-quarter 2010.
“The cost of capital does require us to have stock price information,” Atkins told the Transportation Research Forum in Washington, D.C., Nov. 18. “We currently calculate it for the four major Class I railroads” in the U.S., he said, meaning BNSF, Union Pacific Railroad, CSX Transportation and Norfolk Southern Railway.
“So we will be exploring the repercussions of certain recent events,” Atkins said, “on how we would be looking at the cost of capital for the railroad industry.”