Rate base and rate of return methodologies for determining reasonable rates for captive rail traffic

Proponents of Stand-Alone Costs (SAC) as the maximum limit on rates for captive rail traffic under the Staggers Act propose to use the replacement Cost Annuity (RCA) methodology to measure SAC rather than the pre-existing ICC rate base methodology, Net original Cost (NOC). The case for using the RCA methodology argues that the resulting very large write-up of the rail industry rate base would not constitute a windfall gain to the carriers and would be economically efficient. The rationale for RCA, however, is based on a number of questionable assumptions. Although the case for RCA denies the relevance of the history of rail regulation, the transition problem cannot be ignored in establishing a reasonable rate for captive shippers in the transition to a less regulated rail industry. A “compensated switch” to Trended Original Cost (TOC) is proposed for the rail industry.