Revisions to the Board's Methodology for Determining the Railroad Industry's Cost of Capital, 39154-39157 [2020-14061]

Download as PDF 39154 Federal Register / Vol. 85, No. 126 / Tuesday, June 30, 2020 / Proposed Rules lesson, the correction of assigned work with such suggestions or recommendation as may be necessary to instruct the student, the keeping of student achievement records, and issuance of a diploma, certificate, or other evidence to the student upon satisfactorily completing the requirements of the course. (b) Special services or special courses means those services or courses that VA requests that are supplementary to those the institution customarily provides for similarly circumstanced non-Veteran students and that the contracting officer considers to be necessary for the rehabilitation of the trainee. 871.205 Proration of charges. A contract must include the exact formula agreed on for the proration of charges in the event that the Veteran’s program is interrupted or discontinued before the end of the term, semester, quarter, or other period, or the program is completed in less time than stated in the contract. 871.206 Other fees and charges. VA may pay fees and other charges that are not prescribed by law but are required by nongovernmental organizations, such as initiation fees required to become a member of a labor union and the dues necessary to maintain membership incidental to training on the job or to obtaining employment during a period in which the Veteran is a chapter 31 participant, provided there are no facilities feasibly available where the necessary training can be feasibly accomplished or employment obtained without paying such charges. Payment for such fees must be made in accordance with part 813. khammond on DSKJM1Z7X2PROD with PROPOSALS 871.207 Payment of tuition or fees. (a) Contracts, agreements, or arrangements requiring the payment of tuition or fees must provide either of the following: (1) Payment for tuition or fees must be made in arrears and must be prorated in installments over the school year or the length of the course. (2) An institution may be paid in accordance with paragraph (b) of this section, if the institution operates on a regular term, quarter, or semester basis and normally accepts students only at the beginning of the term, quarter, or semester and if the institution is one of the following: (i) An institution of higher learning that uses a standard unit of credit recognized by accrediting associations. Such institutions include those that are members of recognized national or VerDate Sep<11>2014 16:34 Jun 29, 2020 Jkt 250001 regional educational accrediting associations, and those that, although not members of such accrediting associations, grant standard units of credit acceptable at full value without examination by collegiate institutions that are members of national or regional accrediting associations. (ii) A public tax-supported institution. (iii) An institution operated and controlled by a State, county, or local board of education. (b) An institution that meets the exceptions of paragraph (a)(2) of this section and that has a refund policy providing for a graduated scale of charges for purposes of determining refunds may be paid part or all such tuitions or fees for a term, quarter, or other period of enrollment immediately following the date on which the refund expires. (c) Proration of charges does not apply to a fee for noncontinuing service, such as a registration fee, etc. (d) The period for which payment of charges may be made is the period of actual enrollment and is subject to the following: (1) The effective date is the date of the trainee’s entrance into training status, except that payment may be made for an entire semester, quarter, or term in institutions operating on that basis if the trainee enters no later than the final date set by the institution for enrolling for full credit. (2) In those cases where the institution has not set a final date for enrolling for full credit or does not set a date acceptable to VA, payment may be prorated on the basis of attendance, regardless of the refund policy. (3) If an institution customarily charges for the amount of credit or number of hours of attendance for which a trainee enrolls, payment may be made on that basis when a trainee enrolls after the final date permitted for carrying full credit for the semester or term. 871.208 Rehabilitation facilities. Charges by rehabilitation facilities for the rehabilitation services provided under 38 U.S.C. chapter 31 are paid in the same manner as charges for educational and vocational services through contract, agreement, or other arrangement. 871.209 Records and reports. Contracts, agreements, or arrangements must provide for the number and frequency of reports, adequate financial records to support payment for each trainee, and maintenance of attendance and progress PO 00000 Frm 00059 Fmt 4702 Sfmt 4702 records. Such records must be preserved for a period of three years. 871.210 Prohibition on advertising— training of Veterans. The training of persons under a VA contract or the fact that the United States is using the facilities of the institution for training Veterans must not be used in any way to advertise the institution. References in the advertising media or correspondence of the institution shall be limited to a list of courses under 38 U.S.C. chapter 31 and must not be directed or pointed specifically to Veterans. 871.211 Contract clauses. (a) Contracting officers must use the following clauses, as appropriate, in solicitations and contracts for vocational rehabilitation and employment services as they pertain to training and rehabilitation services and contracts for counseling services: (1) 852.271–72, Time Spent by Counselee in Counseling Process. (2) 852.271–73, Use and Publication of Counseling Results. (3) 852.271–74, Inspection of Instruction, Counseling or Testing Operations. (b) See 837.110–70(a) for clause 852.237–74, Non-Discrimination in Service Delivery. [FR Doc. 2020–12906 Filed 6–29–20; 8:45 am] BILLING CODE 8320–01–P SURFACE TRANSPORTATION BOARD 49 CFR Chapter X [Docket No. EP 664 (Sub-No. 4)] Revisions to the Board’s Methodology for Determining the Railroad Industry’s Cost of Capital Surface Transportation Board. Notice of proposed rulemaking; withdrawal. AGENCY: ACTION: The Board is withdrawing the document published on October 4, 2019 (84 FR 53094), as corrected on October 18, 2019 (84 FR 55897), as of June 30, 2020. ADDRESSES: The docket for this withdrawn rulemaking is available at www.stb.gov. DATES: FOR FURTHER INFORMATION CONTACT: Nathaniel Bawcombe at (202) 245–0376. Assistance for the hearing impaired is available through the Federal Relay Service at (800) 877–8339. SUPPLEMENTARY INFORMATION: On September 30, 2019, as corrected October 11, 2019, the Board issued a E:\FR\FM\30JNP1.SGM 30JNP1 Federal Register / Vol. 85, No. 126 / Tuesday, June 30, 2020 / Proposed Rules notice of proposed rulemaking seeking public comment on its proposal to change its existing methodology for determining the railroad industry’s cost of capital. Revisions to the Board’s Methodology for Determining the R.R. Indus.’s Cost of Capital (NPRM), EP 664 (Sub-No. 4) (STB served Sept. 30, 2019), corrected (STB served Oct. 11, 2019).1 Specifically, the Board proposed incorporating an additional model, referred to as the ‘‘Step Multi-Stage Discounted Cash Flow Model’’ (Step MSDCF), to complement its use of Morningstar/Ibbotson Multi-Stage Discounted Cash Flow Model (Morningstar/Ibbotson MSDCF) and Capital Asset Pricing Model (CAPM) in determining the cost-of-equity component of the cost of capital. Based upon the comments and replies received in response to the NPRM, the Board will withdraw its proposal and discontinue this proceeding. khammond on DSKJM1Z7X2PROD with PROPOSALS Background Each year, the Board determines the railroad industry’s cost of capital and then uses this figure in a variety of regulatory proceedings, including the annual determination of railroad revenue adequacy, rate reasonableness cases, feeder line applications, rail line abandonments, trackage rights cases, and rail merger reviews. The annual cost-of-capital figure is also used as an input in the Uniform Railroad Costing System, the Board’s general purpose costing system. The Board calculates the cost of capital as the weighted average of the cost of debt and the cost of equity. See Methodology to be Employed in Determining the R.R. Indus.’s Cost of Capital, EP 664, slip op. at 3 (STB served Jan. 17, 2008). While the cost of debt is observable and readily available, the cost of equity (the expected return that equity investors require) can only be estimated.2 Id. Thus, estimating the cost of equity requires relying on appropriate finance models. Id. In 2009, the Board began to calculate the cost of equity based on a simple average of the estimates produced by CAPM and Morningstar/Ibbotson MSDCF. See Use of a Multi-Stage Discounted Cash Flow Model in Determining the R.R. Indus.’s Cost of 1 References to the NPRM in this decision refer to the corrected decision. The NPRM was published in the Federal Register on October 18, 2019 (84 FR 55,897). On November 22, 2019, the Board served a clarifying decision with a revised Appendix A detailing the algebraic formula for its proposal. 2 The Board must make ‘‘an adequate and continuing effort to assist . . . carriers in attaining revenue levels,’’ which should, among other objectives, ‘‘permit the raising of needed equity capital.’’ 49 U.S.C. 10704(a)(2). VerDate Sep<11>2014 16:34 Jun 29, 2020 Jkt 250001 Capital, EP 664 (Sub-No. 1), slip op. at 15 (STB served Jan. 28, 2009). Since that time, the Board has consistently found that the simple average of CAPM and Morningstar/Ibbotson MSDCF has produced a reasonable estimate of the cost of equity used to gauge the financial health of the railroad industry. See, e.g., R.R. Cost of Capital—2018, EP 558 (Sub-No. 22) (STB served Sept. 30, 2019); R.R. Cost of Capital—2017, EP 558 (Sub-No. 21) (STB served Dec. 6, 2018). Under CAPM, the cost of equity is equal to RF + b × RP, where RF is the risk-free rate of interest,3 RP is the market-risk premium,4 and b (or beta) is the measure of systematic, nondiversifiable risk. Under CAPM, the Board calculates the risk-free rate based on the average yield to maturity for a 20year U.S. Treasury Bond. The estimate for the market-risk premium is based on returns experienced by the S&P 500 since 1926. Lastly, the industry beta is calculated by using a portfolio of weekly, merger-adjusted railroad stock returns for the previous five years. Under Morningstar/Ibbotson MSDCF, the cost of equity is the discount rate that equates a firm’s market value to the present value of the expected stream of cash flows. Morningstar/Ibbotson MSDCF calculates growth of earnings in three stages. In the first stage (years one through five), the qualifying railroad’s 5 annual earnings growth rate is assumed to be the median value of its three- to five-year growth rate estimates, as determined by railroad industry analysts and published by the Institutional Brokers Estimate System.6 In the second stage (years six through 10), the growth rate is the simple average of all of the qualifying railroads’ median three- to five-year growth rate estimates in stage one. In the third stage (years 11 and onwards), the growth rate is the long-run nominal growth rate of the U.S. economy. This long-run 3 The risk-free rate of interest is an exogenously determined interest rate at which investors may borrow or lend without fear of default. 4 The market-risk premium is the predicted additional return from investing in the market (in this case, the S&P 500) instead of risk-free investments over the long term. It is calculated by subtracting the risk-free rate from that market return. 5 The Board determines the railroad industry’s cost of capital for a ‘‘composite railroad,’’ which is based on data from Class I carriers that meet certain criteria developed in Railroad Cost of Capital— 1984, 1 I.C.C.2d 989 (1985), as modified by Revisions to the Cost-of-Capital Composite Railroad Criteria, EP 664 (Sub-No. 3) (STB served Oct. 25, 2017). 6 This data can be retrieved from Refinitiv (formerly Thomson ONE Investment Management). See R.R. Cost of Capital—2018, EP 558 (Sub-No. 22), slip op. at 10. PO 00000 Frm 00060 Fmt 4702 Sfmt 4702 39155 nominal growth rate is estimated by using the historical growth in real gross domestic product plus the long-run expected inflation rate. Most recently, in September 2019, the Board used the simple average of CAPM and Morningstar/Ibbotson MSDCF to calculate the cost of capital in Railroad Cost of Capital—2018, Docket No. EP 558 (Sub-No. 22). In that proceeding, comments and supporting data from the Association of American Railroads (AAR) showed a large increase in growth rates 7 and the cost of capital over the prior year’s figures.8 See generally AAR Comments, Apr. 22, 2019, R.R. Cost of Capital—2018, EP 558 (Sub-No. 22). According to AAR, lower tax rates and rail operating changes, including precision scheduled railroading, among other factors, contributed to analysts’ higher growth expectations in 2018. See id. at V.S. Gray 45–46. In Railroad Cost of Capital—2018, EP 558 (Sub-No. 22), slip op. at 3, the Board explained that the validity of its existing methodology was not undermined simply because the cost of capital turned out to be higher than expected. However, the high cost of capital combined with the major operating changes within the rail industry did prompt the Board to explore whether its methodology could be improved with an additional model to capture different information. In particular, the Board considered changes related to growth rates in the second stage or middle horizon (years six through 10) of Morningstar/Ibbotson MSDCF, leading to the NPRM in this docket. As proposed in the NPRM, Step MSDCF would calculate growth of earnings in three stages. The first and third stages would be identical to those of Morningstar/Ibbotson MSDCF. Unlike Morningstar/Ibbotson MSDCF, however, the growth rate of the second stage (years six through 10) would be a gradual transition between the first and third stages. The transition would begin at year six and step down or up in equal increments each year towards the terminal growth rate (or third stage). See NPRM, EP 664 (Sub-No. 4), slip op. at 5, 10–11. Furthermore, the NPRM proposed to calculate the cost of capital pursuant to the weighted average of the 7 For example, the second stage growth rate estimate produced by Morningstar/Ibbotson MSDCF produced a value of 19.88%, as compared with the second stage growth rate value of 13.55% reflected in the 2017 cost of capital. Compare R.R. Cost of Capital—2018, EP 558 (Sub-No. 22), slip op. at 17, with R.R. Cost of Capital—2017, EP 558 (Sub-No. 21), slip op. at 18. 8 The 2018 cost of capital (12.22%) was 2.18 percentage points higher than the 2017 cost of capital (10.04%). E:\FR\FM\30JNP1.SGM 30JNP1 khammond on DSKJM1Z7X2PROD with PROPOSALS 39156 Federal Register / Vol. 85, No. 126 / Tuesday, June 30, 2020 / Proposed Rules three models, with CAPM weighted at 50%, Morningstar/Ibbotson MSDCF weighted at 25%, and Step MSDCF weighted at 25%. Id. at 3. In response to the NPRM, the Board received comments and replies from AAR and Western Coal Traffic League (WCTL), as well as comments from Roger J. Grabowski, Managing Director of Duff & Phelps. AAR’s primary argument is that incorporation of Step MSDCF is unwarranted because the 2018 cost-of-capital figure was a ‘‘data anomaly’’ caused by an unusual combination of market factors that affected the inputs used in Morningstar/ Ibbotson MSDCF. (AAR Comments 1–2.) According to AAR, Step MSDCF would neither remedy what caused the 2018 anomaly in the first place nor prevent future anomalies of the same kind. (Id. at 3.) AAR also identifies problems in Step MSDCF that it argues would need to be corrected before the Board could adopt it. (Id. at 23–25.) As an alternative to Step MSDCF, AAR encourages the Board to move the observation date (the date upon which the data for the cost of capital is drawn) from the last Friday in December to the last Friday in January to prevent a future anomaly ‘‘should that rare event reoccur.’’ (Id. at 3.) WCTL also opposes the Board’s Step MSDCF proposal, although for different reasons. WCTL states that Step MSDCF represents, at best, a modest improvement to the Board’s cost-ofcapital methodology and argues instead that both Step MSDCF and Morningstar/ Ibbotson MSDCF should be eliminated from the Board’s cost-of-capital methodology completely. (WCTL Comments 2, 19–20.) According to WCTL, the Board should reconfigure its cost-of-capital methodology to rely on CAPM alone, with some additional modifications. (Id. at 5–8.) Dr. Grabowski suggests that the third-stage growth rate of MSDCF may be incorrectly estimating the railroads’ cost of equity and proposes a modification to it. (Grabowski Comments 1, 4.) by a mismatch between declining stock prices and lagging growth rate estimates in December, that the Board’s approach does not effectively address the anomaly, and that Step MSDCF has technical issues. (See AAR Comments 8–13, 20–22, V.S. Villadsen 5–15.) Although WCTL criticizes aspects of AAR’s analysis, (WCTL Reply 3–5), it does not dispute AAR’s demonstration of the cause of the anomaly. AAR and WCTL agree that adding Step MSDCF to the Board’s cost-of-capital methodology would provide little to no meaningful benefit. (See AAR Comments 29; WCTL Reply 2.) Given this record, the Board will withdraw its proposal to add Step MSDCF to its cost-of-equity calculation. The Board will not pursue AAR’s suggestion that, in lieu of the proposal, the Board permanently move the observation date for stock price and growth rate inputs from the end of December to the end of the following January. (See AAR Comments 26.) The events that occurred in 2018 are by AAR’s own account ‘‘unusual,’’ (AAR Comments 3), and using a January date raises other issues, such as whether a January data point includes information not available at the end of the prior year. See Railroad Cost of Capital—2008, EP 558 (Sub-No. 12), slip op. at 9 (STB served Sept. 25, 2009).9 The Board also declines to adopt WCTL’s alternative proposals. The Board has explicitly rejected some, such as WCTL’s requests to either move to a CAPM-only approach or to change the Morningstar/Ibbotson MSDCF regarding cashflows and growth rates, (WCTL Comments 2), in prior decisions.10 WCTL’s other suggestion, that Morningstar/Ibbotson MSDCF’s ‘‘variability’’ is a reason to abandon it, (WCTL Comments 16–17), has been implicitly rejected in the Board’s decisions finding that Morningstar/ Ibbotson MSDCF and CAPM each have their own strengths and weaknesses that, when averaged together, lead to a Discussion Although the Board found that its current cost-of-capital methodology remained reasonable, the Board proposed including Step MSDCF in its cost-of-equity calculation in an attempt to improve its methodology in light of the 2018 cost of capital and recent operating changes within the rail industry. However, the comments in response to the NPRM indicate that adding Step MSDCF may not be a necessary change to the Board’s cost-ofcapital methodology at this time. AAR persuasively argues that the 2018 costof-capital figure was an anomaly caused 9 As WCTL points out, in Railroad Cost of Capital—2008, EP 558 (Sub-No. 12), slip op. at 10, the Board rejected AAR’s similar proposal to use March 31, 2009 data, in favor of WCTL’s data that was drawn from the end of the year. (WCTL Reply 5.) 10 Pet. of the W. Coal Traffic League to Inst. a Rulemaking Proceeding to Abolish the Use of the Multi Stage Discounted Cash Flow Model in Determining the R.R. Indus.’s Cost of Equity Capital, EP 664 (Sub-No. 2), slip op. at 1–2 (STB served Sept. 28, 2018); Pet. of the W. Coal Traffic League, EP 664 (Sub-No. 2), slip op. at 2 (STB served Aug. 14, 2017); Pet. of the W. Coal Traffic League, EP 664 (Sub-No. 2), slip op. at 2, 5, 9, 11– 13 (STB served Apr. 28, 2017); Pet. of the W. Coal Traffic League, EP 664 (Sub-No. 2), slip op. at 11, 14, 17–18, 20 (STB served Oct. 31, 2016); Use of a Multi-Stage Discounted Cash Flow Model, EP 664 (Sub-No. 1), slip op. at 12–13. VerDate Sep<11>2014 16:34 Jun 29, 2020 Jkt 250001 PO 00000 Frm 00061 Fmt 4702 Sfmt 4702 more robust result.11 And all of WCTL’s arguments, including that the Board should address the generally accepted accounting principles treatment of operating leases as debt for purposes of the cost of capital, (WCTL Comments 29–30),12 go beyond the scope of this proceeding exploring whether the Board’s methodology could be improved with an additional model to capture different information, addressing the types of results that occurred in 2018.13 Conclusion For the reasons discussed above, the Board will withdraw its proposal to incorporate Step MSDCF into its methodology for determining the railroad industry’s cost of capital and discontinue this proceeding. It is ordered: 1. The Board’s proposal to modify its existing cost-of-capital methodology by incorporating Step MSDCF is withdrawn. This proceeding is discontinued. 2. Notice of the Board’s action will be published in the Federal Register. 3. This decision is effective on the date of service. Decided: June 23, 2020. By the Board, Board Members Begeman, Fuchs, and Oberman. Board Member Oberman commented with a separate expression. Board Member Oberman, commenting: While I concur in the Board’s decision for the reasons stated therein, I write separately to emphasize my conviction that the Board should continue to closely scrutinize the extent to which equity markets are incentivizing railroads to reduce operating ratios and whether and how such efforts might result in changes to the Board’s cost-ofcapital figure. It must be emphasized that the annual cost-of-capital determination directly impacts important aspects of the Board’s oversight duties. For example, the Board uses its cost-of-capital determination in a variety of regulatory proceedings, including railroad revenue adequacy determinations, feeder-line applications, rail line abandonments, trackage rights cases, and rail merger reviews. The 11 See Pet. of the W. Coal Traffic League, EP 664 (Sub-No. 2), slip op. at 11 (STB served Oct. 31, 2016). 12 WCTL raised this argument previously in Railroad Cost of Capital—2015, EP 558 (Sub-No. 19), slip op. at 4–5 (STB served Aug. 5, 2016), and the Board declined to adopt it. 13 Dr. Grabowski’s suggestion that the third-stage growth rate of Morningstar/Ibbotson MSDCF may incorrectly estimate the railroads’ cost of equity, and his proposed new approach to estimating the long-run nominal growth rate, (Grabowski Comments 1, 4), is similarly beyond the scope of the question raised in this proceeding. E:\FR\FM\30JNP1.SGM 30JNP1 Federal Register / Vol. 85, No. 126 / Tuesday, June 30, 2020 / Proposed Rules annual cost-of-capital figure is also an input into the Uniform Railroad Costing System and therefore has a direct bearing on rate reasonableness cases. Equity markets’ incentivizing railroads to lower operating ratios could translate into increases in the cost-ofcapital figure. My concern is that, as a result, a railroad might be found to be revenue inadequate even when, in reality, it is financially healthy. Likewise, a higher cost-of-capital figure can affect whether a particular commodity shipment is above or below the 180% R/VC threshold and is therefore eligible for rate review by the Board. Separately and in addition to the above matters, the need for continued scrutiny arises from my increasing concern that there is a point beyond which the demands of equity markets for a return of capital may impact the ability of the railroads to meet their common carrier obligations and may deprive the network of the capital it requires to support the needs of the public and the national defense. Finally, given that the United States and the entire world are presently facing health and economic crises, and that these crises have adversely affected the railroad industry along with the other parts of the economy, I recognize that my above stated concerns are not as immediate as they might otherwise be. Nevertheless, as the economy recovers and the railroad industry regains its full strength, the concerns outlined above may well reoccur and warrant the continued scrutiny I have urged. Jeffrey Herzig, Clearance Clerk. [FR Doc. 2020–14061 Filed 6–29–20; 8:45 am] BILLING CODE 4915–01–P DEPARTMENT OF COMMERCE National Oceanic and Atmospheric Administration 50 CFR Part 648 [Docket No. 200617–0163] khammond on DSKJM1Z7X2PROD with PROPOSALS RIN 0648–BJ79 Fisheries of the Northeastern United States; Monkfish; Framework Adjustment 12 National Marine Fisheries Service (NMFS), National Oceanic and Atmospheric Administration (NOAA), Commerce. ACTION: Proposed rule; request for comments. AGENCY: VerDate Sep<11>2014 16:34 Jun 29, 2020 Jkt 250001 We are proposing to approve and implement specifications submitted by the New England and Mid-Atlantic Fishery Management Councils in Framework Adjustment 12 to the Monkfish Fishery Management Plan. This action would set monkfish specifications for fishing year 2020 and project specifications for the 2021 and 2022 fishing years. This action is needed to establish allowable monkfish harvest levels that will prevent overfishing. SUMMARY: Public comments must be received by July 30, 2020. DATES: You may submit comments on this document, identified by NOAA– NMFS–2020–0064, by either of the following methods: • Electronic Submission: Submit all electronic public comments via the Federal e-Rulemaking Portal. Go to www.regulations.gov/ #!docketDetail;D=NOAA-NMFS-20200064, click the ‘‘Comment Now!’’ icon, complete the required fields, and enter or attach your comments. Instructions: Comments sent by any other method, to any other address or individual, or received after the end of the comment period, may not be considered by NMFS. All comments received are a part of the public record and will generally be posted for public viewing on www.regulations.gov without change. All personal identifying information (e.g., name, address, etc.), confidential business information, or otherwise sensitive information submitted voluntarily by the sender will be publicly accessible. NMFS will accept anonymous comments (enter ‘‘N/ A’’ in the required fields if you wish to remain anonymous). If you are unable to submit your comment through www.regulations.gov, contact Allison Murphy, Fishery Policy Analyst, allison.murphy@noaa.gov. Copies of the Framework 12 document, including the Regulatory Flexibility Act Analysis and other supporting documents for the specifications, are available from Thomas A. Nies, Executive Director, New England Fishery Management Council, 50 Water Street, Mill 2, Newburyport, MA 01950. The specifications document is also accessible via the internet at: https:// www.nefmc.org/management-plans/ monkfish. ADDRESSES: FOR FURTHER INFORMATION CONTACT: Allison Murphy, Fishery Policy Analyst, (978) 281–9122. SUPPLEMENTARY INFORMATION: PO 00000 Frm 00062 Fmt 4702 Sfmt 4702 39157 Background The monkfish fishery is jointly managed under the Monkfish Fishery Management Plan (FMP) by the New England and the Mid-Atlantic Fishery Management Councils. The fishery extends from Maine to North Carolina from the coast out to the end of the continental shelf. The Councils manage the fishery as two management units, with the Northern Fishery Management Area (NFMA) covering the Gulf of Maine and northern part of Georges Bank, and the Southern Fishery Management Area (SFMA) extending from the southern flank of Georges Bank through Southern New England and into the Mid-Atlantic Bight to North Carolina. The monkfish fishery is primarily managed by landing limits and a yearly allocation of monkfish days-at-sea calculated to enable vessels participating in the fishery to catch, but not exceed, the target total allowable landings (TAL) and the annual catch target (ACT), which is the TAL plus an estimate of expected discards, for each management area. Both the ACT and the TAL are calculated to maximize yield in the fishery over the long term. Proposed Measures 1. Specifications We are proposing to adjust the NFMA and SFMA quotas for fishing year 2020 (Table 1), based on the Councils’ recommendations. We are also projecting these quotas for fishing years 2021 and 2022. On August 21, 2019, the New England Council’s Scientific and Statistical Committee (SSC) recommended acceptable biological catch levels in the NFMA and SFMA for fishing years 2020–2022. The New England Council approved the specifications on September 24, 2019. The Mid-Atlantic Council approved the specifications on October 7, 2019. Both Councils’ recommendations for the 2020–2022 monkfish specifications are based on the results of the 2019 assessment update and the recommendations of the SSC. The Councils recommended a 10percent increase in the acceptable biological catch and annual catch limit in the NFMA and status quo acceptable biological catch and annual catch limit in the SFMA, when compared to the 2017–2019 specifications. Discards, calculated using a moving average of the most recent three years of data, increased in both areas, but more significantly in the SFMA. Data indicate that this substantial increase is due to the large 2015 monkfish year class being discarded by scallop dredge gear. After E:\FR\FM\30JNP1.SGM 30JNP1

Agencies

[Federal Register Volume 85, Number 126 (Tuesday, June 30, 2020)]
[Proposed Rules]
[Pages 39154-39157]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-14061]


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SURFACE TRANSPORTATION BOARD

49 CFR Chapter X

[Docket No. EP 664 (Sub-No. 4)]


Revisions to the Board's Methodology for Determining the Railroad 
Industry's Cost of Capital

AGENCY: Surface Transportation Board.

ACTION: Notice of proposed rulemaking; withdrawal.

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DATES: The Board is withdrawing the document published on October 4, 
2019 (84 FR 53094), as corrected on October 18, 2019 (84 FR 55897), as 
of June 30, 2020.

ADDRESSES: The docket for this withdrawn rulemaking is available at 
www.stb.gov.

FOR FURTHER INFORMATION CONTACT: Nathaniel Bawcombe at (202) 245-0376. 
Assistance for the hearing impaired is available through the Federal 
Relay Service at (800) 877-8339.

SUPPLEMENTARY INFORMATION: On September 30, 2019, as corrected October 
11, 2019, the Board issued a

[[Page 39155]]

notice of proposed rulemaking seeking public comment on its proposal to 
change its existing methodology for determining the railroad industry's 
cost of capital. Revisions to the Board's Methodology for Determining 
the R.R. Indus.'s Cost of Capital (NPRM), EP 664 (Sub-No. 4) (STB 
served Sept. 30, 2019), corrected (STB served Oct. 11, 2019).\1\ 
Specifically, the Board proposed incorporating an additional model, 
referred to as the ``Step Multi-Stage Discounted Cash Flow Model'' 
(Step MSDCF), to complement its use of Morningstar/Ibbotson Multi-Stage 
Discounted Cash Flow Model (Morningstar/Ibbotson MSDCF) and Capital 
Asset Pricing Model (CAPM) in determining the cost-of-equity component 
of the cost of capital. Based upon the comments and replies received in 
response to the NPRM, the Board will withdraw its proposal and 
discontinue this proceeding.
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    \1\ References to the NPRM in this decision refer to the 
corrected decision. The NPRM was published in the Federal Register 
on October 18, 2019 (84 FR 55,897). On November 22, 2019, the Board 
served a clarifying decision with a revised Appendix A detailing the 
algebraic formula for its proposal.
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Background

    Each year, the Board determines the railroad industry's cost of 
capital and then uses this figure in a variety of regulatory 
proceedings, including the annual determination of railroad revenue 
adequacy, rate reasonableness cases, feeder line applications, rail 
line abandonments, trackage rights cases, and rail merger reviews. The 
annual cost-of-capital figure is also used as an input in the Uniform 
Railroad Costing System, the Board's general purpose costing system.
    The Board calculates the cost of capital as the weighted average of 
the cost of debt and the cost of equity. See Methodology to be Employed 
in Determining the R.R. Indus.'s Cost of Capital, EP 664, slip op. at 3 
(STB served Jan. 17, 2008). While the cost of debt is observable and 
readily available, the cost of equity (the expected return that equity 
investors require) can only be estimated.\2\ Id. Thus, estimating the 
cost of equity requires relying on appropriate finance models. Id.
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    \2\ The Board must make ``an adequate and continuing effort to 
assist . . . carriers in attaining revenue levels,'' which should, 
among other objectives, ``permit the raising of needed equity 
capital.'' 49 U.S.C. 10704(a)(2).
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    In 2009, the Board began to calculate the cost of equity based on a 
simple average of the estimates produced by CAPM and Morningstar/
Ibbotson MSDCF. See Use of a Multi-Stage Discounted Cash Flow Model in 
Determining the R.R. Indus.'s Cost of Capital, EP 664 (Sub-No. 1), slip 
op. at 15 (STB served Jan. 28, 2009). Since that time, the Board has 
consistently found that the simple average of CAPM and Morningstar/
Ibbotson MSDCF has produced a reasonable estimate of the cost of equity 
used to gauge the financial health of the railroad industry. See, e.g., 
R.R. Cost of Capital--2018, EP 558 (Sub-No. 22) (STB served Sept. 30, 
2019); R.R. Cost of Capital--2017, EP 558 (Sub-No. 21) (STB served Dec. 
6, 2018).
    Under CAPM, the cost of equity is equal to RF + [beta] x RP, where 
RF is the risk-free rate of interest,\3\ RP is the market-risk 
premium,\4\ and [beta] (or beta) is the measure of systematic, non-
diversifiable risk. Under CAPM, the Board calculates the risk-free rate 
based on the average yield to maturity for a 20-year U.S. Treasury 
Bond. The estimate for the market-risk premium is based on returns 
experienced by the S&P 500 since 1926. Lastly, the industry beta is 
calculated by using a portfolio of weekly, merger-adjusted railroad 
stock returns for the previous five years.
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    \3\ The risk-free rate of interest is an exogenously determined 
interest rate at which investors may borrow or lend without fear of 
default.
    \4\ The market-risk premium is the predicted additional return 
from investing in the market (in this case, the S&P 500) instead of 
risk-free investments over the long term. It is calculated by 
subtracting the risk-free rate from that market return.
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    Under Morningstar/Ibbotson MSDCF, the cost of equity is the 
discount rate that equates a firm's market value to the present value 
of the expected stream of cash flows. Morningstar/Ibbotson MSDCF 
calculates growth of earnings in three stages. In the first stage 
(years one through five), the qualifying railroad's \5\ annual earnings 
growth rate is assumed to be the median value of its three- to five-
year growth rate estimates, as determined by railroad industry analysts 
and published by the Institutional Brokers Estimate System.\6\ In the 
second stage (years six through 10), the growth rate is the simple 
average of all of the qualifying railroads' median three- to five-year 
growth rate estimates in stage one. In the third stage (years 11 and 
onwards), the growth rate is the long-run nominal growth rate of the 
U.S. economy. This long-run nominal growth rate is estimated by using 
the historical growth in real gross domestic product plus the long-run 
expected inflation rate.
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    \5\ The Board determines the railroad industry's cost of capital 
for a ``composite railroad,'' which is based on data from Class I 
carriers that meet certain criteria developed in Railroad Cost of 
Capital--1984, 1 I.C.C.2d 989 (1985), as modified by Revisions to 
the Cost-of-Capital Composite Railroad Criteria, EP 664 (Sub-No. 3) 
(STB served Oct. 25, 2017).
    \6\ This data can be retrieved from Refinitiv (formerly Thomson 
ONE Investment Management). See R.R. Cost of Capital--2018, EP 558 
(Sub-No. 22), slip op. at 10.
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    Most recently, in September 2019, the Board used the simple average 
of CAPM and Morningstar/Ibbotson MSDCF to calculate the cost of capital 
in Railroad Cost of Capital--2018, Docket No. EP 558 (Sub-No. 22). In 
that proceeding, comments and supporting data from the Association of 
American Railroads (AAR) showed a large increase in growth rates \7\ 
and the cost of capital over the prior year's figures.\8\ See generally 
AAR Comments, Apr. 22, 2019, R.R. Cost of Capital--2018, EP 558 (Sub-
No. 22). According to AAR, lower tax rates and rail operating changes, 
including precision scheduled railroading, among other factors, 
contributed to analysts' higher growth expectations in 2018. See id. at 
V.S. Gray 45-46. In Railroad Cost of Capital--2018, EP 558 (Sub-No. 
22), slip op. at 3, the Board explained that the validity of its 
existing methodology was not undermined simply because the cost of 
capital turned out to be higher than expected. However, the high cost 
of capital combined with the major operating changes within the rail 
industry did prompt the Board to explore whether its methodology could 
be improved with an additional model to capture different information. 
In particular, the Board considered changes related to growth rates in 
the second stage or middle horizon (years six through 10) of 
Morningstar/Ibbotson MSDCF, leading to the NPRM in this docket.
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    \7\ For example, the second stage growth rate estimate produced 
by Morningstar/Ibbotson MSDCF produced a value of 19.88%, as 
compared with the second stage growth rate value of 13.55% reflected 
in the 2017 cost of capital. Compare R.R. Cost of Capital--2018, EP 
558 (Sub-No. 22), slip op. at 17, with R.R. Cost of Capital--2017, 
EP 558 (Sub-No. 21), slip op. at 18.
    \8\ The 2018 cost of capital (12.22%) was 2.18 percentage points 
higher than the 2017 cost of capital (10.04%).
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    As proposed in the NPRM, Step MSDCF would calculate growth of 
earnings in three stages. The first and third stages would be identical 
to those of Morningstar/Ibbotson MSDCF. Unlike Morningstar/Ibbotson 
MSDCF, however, the growth rate of the second stage (years six through 
10) would be a gradual transition between the first and third stages. 
The transition would begin at year six and step down or up in equal 
increments each year towards the terminal growth rate (or third stage). 
See NPRM, EP 664 (Sub-No. 4), slip op. at 5, 10-11. Furthermore, the 
NPRM proposed to calculate the cost of capital pursuant to the weighted 
average of the

[[Page 39156]]

three models, with CAPM weighted at 50%, Morningstar/Ibbotson MSDCF 
weighted at 25%, and Step MSDCF weighted at 25%. Id. at 3.
    In response to the NPRM, the Board received comments and replies 
from AAR and Western Coal Traffic League (WCTL), as well as comments 
from Roger J. Grabowski, Managing Director of Duff & Phelps. AAR's 
primary argument is that incorporation of Step MSDCF is unwarranted 
because the 2018 cost-of-capital figure was a ``data anomaly'' caused 
by an unusual combination of market factors that affected the inputs 
used in Morningstar/Ibbotson MSDCF. (AAR Comments 1-2.) According to 
AAR, Step MSDCF would neither remedy what caused the 2018 anomaly in 
the first place nor prevent future anomalies of the same kind. (Id. at 
3.) AAR also identifies problems in Step MSDCF that it argues would 
need to be corrected before the Board could adopt it. (Id. at 23-25.) 
As an alternative to Step MSDCF, AAR encourages the Board to move the 
observation date (the date upon which the data for the cost of capital 
is drawn) from the last Friday in December to the last Friday in 
January to prevent a future anomaly ``should that rare event reoccur.'' 
(Id. at 3.) WCTL also opposes the Board's Step MSDCF proposal, although 
for different reasons. WCTL states that Step MSDCF represents, at best, 
a modest improvement to the Board's cost-of-capital methodology and 
argues instead that both Step MSDCF and Morningstar/Ibbotson MSDCF 
should be eliminated from the Board's cost-of-capital methodology 
completely. (WCTL Comments 2, 19-20.) According to WCTL, the Board 
should reconfigure its cost-of-capital methodology to rely on CAPM 
alone, with some additional modifications. (Id. at 5-8.) Dr. Grabowski 
suggests that the third-stage growth rate of MSDCF may be incorrectly 
estimating the railroads' cost of equity and proposes a modification to 
it. (Grabowski Comments 1, 4.)

Discussion

    Although the Board found that its current cost-of-capital 
methodology remained reasonable, the Board proposed including Step 
MSDCF in its cost-of-equity calculation in an attempt to improve its 
methodology in light of the 2018 cost of capital and recent operating 
changes within the rail industry. However, the comments in response to 
the NPRM indicate that adding Step MSDCF may not be a necessary change 
to the Board's cost-of-capital methodology at this time. AAR 
persuasively argues that the 2018 cost-of-capital figure was an anomaly 
caused by a mismatch between declining stock prices and lagging growth 
rate estimates in December, that the Board's approach does not 
effectively address the anomaly, and that Step MSDCF has technical 
issues. (See AAR Comments 8-13, 20-22, V.S. Villadsen 5-15.) Although 
WCTL criticizes aspects of AAR's analysis, (WCTL Reply 3-5), it does 
not dispute AAR's demonstration of the cause of the anomaly. AAR and 
WCTL agree that adding Step MSDCF to the Board's cost-of-capital 
methodology would provide little to no meaningful benefit. (See AAR 
Comments 29; WCTL Reply 2.) Given this record, the Board will withdraw 
its proposal to add Step MSDCF to its cost-of-equity calculation.
    The Board will not pursue AAR's suggestion that, in lieu of the 
proposal, the Board permanently move the observation date for stock 
price and growth rate inputs from the end of December to the end of the 
following January. (See AAR Comments 26.) The events that occurred in 
2018 are by AAR's own account ``unusual,'' (AAR Comments 3), and using 
a January date raises other issues, such as whether a January data 
point includes information not available at the end of the prior year. 
See Railroad Cost of Capital--2008, EP 558 (Sub-No. 12), slip op. at 9 
(STB served Sept. 25, 2009).\9\
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    \9\ As WCTL points out, in Railroad Cost of Capital--2008, EP 
558 (Sub-No. 12), slip op. at 10, the Board rejected AAR's similar 
proposal to use March 31, 2009 data, in favor of WCTL's data that 
was drawn from the end of the year. (WCTL Reply 5.)
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    The Board also declines to adopt WCTL's alternative proposals. The 
Board has explicitly rejected some, such as WCTL's requests to either 
move to a CAPM-only approach or to change the Morningstar/Ibbotson 
MSDCF regarding cashflows and growth rates, (WCTL Comments 2), in prior 
decisions.\10\ WCTL's other suggestion, that Morningstar/Ibbotson 
MSDCF's ``variability'' is a reason to abandon it, (WCTL Comments 16-
17), has been implicitly rejected in the Board's decisions finding that 
Morningstar/Ibbotson MSDCF and CAPM each have their own strengths and 
weaknesses that, when averaged together, lead to a more robust 
result.\11\ And all of WCTL's arguments, including that the Board 
should address the generally accepted accounting principles treatment 
of operating leases as debt for purposes of the cost of capital, (WCTL 
Comments 29-30),\12\ go beyond the scope of this proceeding exploring 
whether the Board's methodology could be improved with an additional 
model to capture different information, addressing the types of results 
that occurred in 2018.\13\
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    \10\ Pet. of the W. Coal Traffic League to Inst. a Rulemaking 
Proceeding to Abolish the Use of the Multi Stage Discounted Cash 
Flow Model in Determining the R.R. Indus.'s Cost of Equity Capital, 
EP 664 (Sub-No. 2), slip op. at 1-2 (STB served Sept. 28, 2018); 
Pet. of the W. Coal Traffic League, EP 664 (Sub-No. 2), slip op. at 
2 (STB served Aug. 14, 2017); Pet. of the W. Coal Traffic League, EP 
664 (Sub-No. 2), slip op. at 2, 5, 9, 11-13 (STB served Apr. 28, 
2017); Pet. of the W. Coal Traffic League, EP 664 (Sub-No. 2), slip 
op. at 11, 14, 17-18, 20 (STB served Oct. 31, 2016); Use of a Multi-
Stage Discounted Cash Flow Model, EP 664 (Sub-No. 1), slip op. at 
12-13.
    \11\ See Pet. of the W. Coal Traffic League, EP 664 (Sub-No. 2), 
slip op. at 11 (STB served Oct. 31, 2016).
    \12\ WCTL raised this argument previously in Railroad Cost of 
Capital--2015, EP 558 (Sub-No. 19), slip op. at 4-5 (STB served Aug. 
5, 2016), and the Board declined to adopt it.
    \13\ Dr. Grabowski's suggestion that the third-stage growth rate 
of Morningstar/Ibbotson MSDCF may incorrectly estimate the 
railroads' cost of equity, and his proposed new approach to 
estimating the long-run nominal growth rate, (Grabowski Comments 1, 
4), is similarly beyond the scope of the question raised in this 
proceeding.
---------------------------------------------------------------------------

Conclusion

    For the reasons discussed above, the Board will withdraw its 
proposal to incorporate Step MSDCF into its methodology for determining 
the railroad industry's cost of capital and discontinue this 
proceeding.
    It is ordered:
    1. The Board's proposal to modify its existing cost-of-capital 
methodology by incorporating Step MSDCF is withdrawn. This proceeding 
is discontinued.
    2. Notice of the Board's action will be published in the Federal 
Register.
    3. This decision is effective on the date of service.
    Decided: June 23, 2020.
    By the Board, Board Members Begeman, Fuchs, and Oberman. Board 
Member Oberman commented with a separate expression.

Board Member Oberman, commenting:
    While I concur in the Board's decision for the reasons stated 
therein, I write separately to emphasize my conviction that the Board 
should continue to closely scrutinize the extent to which equity 
markets are incentivizing railroads to reduce operating ratios and 
whether and how such efforts might result in changes to the Board's 
cost-of-capital figure.
    It must be emphasized that the annual cost-of-capital determination 
directly impacts important aspects of the Board's oversight duties. For 
example, the Board uses its cost-of-capital determination in a variety 
of regulatory proceedings, including railroad revenue adequacy 
determinations, feeder-line applications, rail line abandonments, 
trackage rights cases, and rail merger reviews. The

[[Page 39157]]

annual cost-of-capital figure is also an input into the Uniform 
Railroad Costing System and therefore has a direct bearing on rate 
reasonableness cases.
    Equity markets' incentivizing railroads to lower operating ratios 
could translate into increases in the cost-of-capital figure. My 
concern is that, as a result, a railroad might be found to be revenue 
inadequate even when, in reality, it is financially healthy. Likewise, 
a higher cost-of-capital figure can affect whether a particular 
commodity shipment is above or below the 180% R/VC threshold and is 
therefore eligible for rate review by the Board.
    Separately and in addition to the above matters, the need for 
continued scrutiny arises from my increasing concern that there is a 
point beyond which the demands of equity markets for a return of 
capital may impact the ability of the railroads to meet their common 
carrier obligations and may deprive the network of the capital it 
requires to support the needs of the public and the national defense.
    Finally, given that the United States and the entire world are 
presently facing health and economic crises, and that these crises have 
adversely affected the railroad industry along with the other parts of 
the economy, I recognize that my above stated concerns are not as 
immediate as they might otherwise be. Nevertheless, as the economy 
recovers and the railroad industry regains its full strength, the 
concerns outlined above may well reoccur and warrant the continued 
scrutiny I have urged.

Jeffrey Herzig,
Clearance Clerk.
[FR Doc. 2020-14061 Filed 6-29-20; 8:45 am]
BILLING CODE 4915-01-P