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Yesterday, the Surface Transportation Board (STB) announced it calculated the rail industry's after-tax cost of capital for 2010 at 11.03 percent compared with 10.43 percent for 2009.

Each year, the board calculates the industry’s cost of capital, which represents the STB's estimate of the average rate of return needed to persuade investors to provide capital to the freight-rail industry.

“The board uses the cost of capital figure in evaluating the adequacy of individual railroads' revenues each year,” STB members said in a prepared statement, adding that the board also uses the figure when determining the reasonableness of a challenged rail rate, considering a rail line abandonment proposal or valuing a particular railroad operation.

The STB estimated the cost-of-equity component of the industry’s cost of capital using an average of a Capital Asset Pricing Model approach and a multi-stage Discounted Cash Flow model.