Railroad Revenues:

Analysis of Alternative Methods To Measure Revenue Adequacy

RCED-87-15BR: Published: Oct 2, 1986. Publicly Released: Dec 22, 1986.

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Pursuant to a congressional request, GAO provided information on the Interstate Commerce Commission's (ICC) implementation of the railroad revenue adequacy provisions of the Staggers Rail Act of 1980, focusing on: (1) recent trends in railroad financial indicators; (2) railroads' financial performance compared to other industries'; (3) how ICC measures revenue adequacy; (4) alternative approaches to measuring revenue adequacy; and (5) whether any railroads would be revenue-adequate if ICC used alternative approaches.

GAO found that: (1) until the Staggers Rail Act passed, ICC used multiple financial indicators to measure railroads' financial condition; (2) after the act's passage, ICC changed to a single standard which compared a railroad's return on net investment (ROI) with the ICC-determined cost of capital; (3) under this approach, ICC has not found any railroad to be revenue-adequate in the last 3 years; (4) railroads that are not revenue-adequate have competitive advantages, such as the freedom to set unregulated rates in certain areas; and (5) while the overall financial picture for railroads is mixed, there are many positive indicators, including increases in railroads' cash flow, ROI, and ability to service debt loads. GAO also found that ICC could determine revenue adequacy by: (1) adjusting its current method to use the embedded cost of debt instead of the current cost of debt, considering deferred taxes as capital, and calculating ROI using depreciation accounting; (2) comparing the real cost of capital with an ROI estimate derived from the current reproduction cost of the net asset base; or (3) using multiple indicators, as it did before the act's passage. GAO noted that, under each of the alternatives it proposed, no railroad would have been revenue-adequate in 1984. In addition, GAO found that: (1) pending legislation would require ICC to use multiple indicators; and (2) the current-cost and multiple-indicators methods appear to be impractical, leaving some form of the present ICC method as the best method for measuring revenue adequacy.

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