SURFACE TRANSPORTATION BOARD DECISION DOCUMENT
    Decision Information

Docket Number:  
NOR_42125_0

Case Title:  
E.I. DUPONT DE NEMOURS AND COMPANY V. NORFOLK SOUTHERN RAILWAY COMPANY

Decision Type:  
Decision

Deciding Body:  
Entire Board

    Decision Summary

Decision Notes:  
DECISION: (1) MADE TECHNICAL CORRECTIONS TO THE FINAL MERITS DECISION SERVED ON MARCH 24, 2014; (2) ADDED A PUBLIC VERSION OF THE MARKET DOMINANCE APPENDIX TO THE MERITS DECISION; (3) MADE SEVERAL GRAMMATICAL AND FORMATTING CHANGES TO THE MERITS DECISION; AND (4) ESTABLISHED A DEADLINE FOR THE FILING OF PETITIONS FOR RECONSIDERATION.

    Decision Attachments

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    Full Text of Decision

44043 SERVICE DATE – OCTOBER 3, 2014

EB

 

SURFACE TRANSPORTATION BOARD

 

DECISION

 

Docket No. NOR 42125

 

E.I. DUPONT DE NEMOURS AND COMPANY

v.

NORFOLK SOUTHERN RAILWAY COMPANY

 

Digest:[1] The Board makes technical corrections to its decision (Merits Decision) finding that certain rates charged by Norfolk Southern Railway Company for shipments by E.I. du Pont de Nemours and Company had not been shown to be unreasonable. The Board also adds a public version of the market dominance appendix to the Merits Decision, makes several grammatical and formatting changes to the Merits Decision, and establishes a deadline for the filing of petitions for reconsideration.

 

Decided: October 1, 2014

 

On March 24, 2014, the Board served the final merits decision (Merits Decision) in this proceeding finding that certain rates charged by Norfolk Southern Railway Company (NS) for shipments by E.I. du Pont de Nemours and Company (DuPont) had not been shown to be unreasonable. On March 31, 2014, DuPont filed a motion, which NS supported, (1) stating that it had identified a number of technical errors in the Merits Decision and (2) requesting that the Board extend the deadline for filing petitions for reconsideration until 20 days after the Board issues a decision addressing the technical errors. The Board tolled the deadline for seeking reconsideration; confirmed that it would issue a decision correcting technical errors, with petitions for reconsideration due 20 days thereafter; and granted DuPont’s contested motion seeking an extension for the page limit on petitions for reconsideration (and replies thereto) to 50 pages.[2]

 

DuPont and NS submitted a joint petition on April 14, 2014, identifying 31 technical errors. The parties agree on the appropriate correction for 28 of these, but disagree about the proper method for correcting the remaining three.

 

TECHNICAL MATTERS RAISED BY THE PARTIES

 

1. Operating Expense Volume Index. The parties agree that the car-miles index used to project operating expenses throughout the discounted cash flow (DCF) model is calibrated incorrectly for the 2009-2010 adjustment, resulting in an understatement of operating expenses for 2010 and all subsequent years. This error is corrected.

 

2. Allocation of Contingency and Mobilization. The parties agree that the DCF model did not allocate mobilization and contingency costs between real estate acquisition costs and all other road property accounts. This error is corrected.

 

3. Investment Contingency Costs. The parties agree that the DCF model used a figure for road property investment contingency that omitted a contingency factor for engineering investment. This error is corrected.

 

4. Bonus Depreciation. The parties agree that while the text of the Merits Decision stated that the Board was adopting DuPont’s position on bonus depreciation, the associated workpapers did not implement this position, resulting in an understatement of bonus depreciation and an overstatement of capital carrying charges. This error is corrected.

 

5. Miles Used to Develop State Income Tax Rates. The parties agree that while the text of the Merits Decision stated that the Board was adopting NS’s proposed route miles, the corresponding adjustment to operating miles—used to develop a weighted average state income tax rate—was not made in the associated workpapers. This error is corrected.

 

6. Real Estate Acquisition Costs. The parties agree that the calculation of land investment values did not include the real estate acquisition costs adopted by the Board in the text of the Merits Decision. This error is corrected.

 

7. Number of Locomotives. The parties agree that, given the fact that the text of the Merits Decision stated that the Board was adopting the locomotive “peaking factor” proposed by DuPont (and adjustments to that factor to account for warm-up and cool-down periods), both the number of GP38 locomotives and the number of ES44AC locomotives should be reduced in the associated workpapers. This error is corrected.

 

8. Peaking Factor. The parties agree that the calculation of railcar requirements did not properly account for the “peaking factor” proposed by DuPont and adopted by the Board in the text of the Merits Decision. This error is corrected.

 

9. Start-up and Training. The parties agree that the calculation of start-up and training expenses should be reduced to reflect the downward revisions made by the Board in the text of the Merits Decision to the maintenance-of-way (MOW) staff numbers proposed by NS. This error is corrected.

 

10. Fringe Benefit Ratio on MOW Salaries. The parties agree that the salaries for certain MOW employees did not properly account for the fringe benefit ratio proposed by NS and adopted by the Board in the text of the Merits Decision. This error is corrected.

 

11. Bridge Inspector Wages. The parties agree that the total for bridge inspector wages was calculated using an incorrect bridge inspector salary number. This error is corrected.

 

12. Fuel Facilities Investment. The parties agree that the total for fuel facilities investment failed to include fueling facility costs for 12 large yards, and also incorrectly calculated costs for direct-to-locomotive fueling facilities. These errors are corrected.

 

13. Stripping Costs in Roadbed Preparation. The parties agree that roadbed preparation costs mistakenly included costs related to stripping, which were proposed by NS but rejected by the Board in the text of the Merits Decision. This error is corrected.

 

14. Earthwork Unit Costs. The parties agree that various earthwork unit costs were calculated incorrectly because they included costs proposed by NS but rejected by the Board in the text of the Merits Decision. This error is corrected.

 

15. Yard Drainage Investment. The parties agree that while the text of the Merits Decision stated that the Board was adopting DuPont’s proposed yard drainage costs for six major yards and NS’s proposed yard drainage costs for certain other yards, no yard drainage costs were included in the associated workpapers. This error is corrected.

 

16. Land for Waste Quantities. The parties agree that average land cost for waste material was understated because the calculation did not include the full costs for the “agricultural land” sub-component. This error is corrected.

 

17. Undercutting Investment. The parties agree that while the text of the Merits Decision rejected proposed investment for undercutting, the earthwork quantity summary formulas in the associated workpapers were not adjusted to exclude undercutting quantities. This error is corrected.

 

18. Culvert Investment. The parties agree that while the text of the Merits Decision stated that the Board was adopting NS’s proposed culvert costs, no such costs were included in the road property investment calculation. This error is corrected.

 

19. Retaining Wall Investment. The parties agree that the cost of retaining walls was calculated incorrectly because gabion unit cost was not multiplied by gabion quantity. This error is corrected.

 

20. Mobile Bridge Investment. The parties agree that while the text of the Merits Decision stated that the Board was accepting the movable bridge unit costs proposed by DuPont and the parties’ agreement on movable bridge inventory, the associated workpapers included not only two bridges excluded by the parties, but also included the movable span costs proposed by DuPont as well as the movable span costs proposed by NS. These errors are corrected.

 

21. MOW Building Costs. The parties agree that while the text of the Merits Decision stated that the Board was adopting NS’s proposed MOW building costs, DuPont’s proposed costs for MOW yard buildings were used in the associated workpapers. This error is corrected.

 

22. Guard Booth Investment Costs. The parties agree that auto yard guard booth costs were double-counted. This error is corrected.

 

23. Intermodal Yard Paving Costs. The parties agree that paving costs for medium-sized intermodal yards were adjusted incorrectly. This error is corrected.

 

24. Slide Fence Investment Costs. The parties agree that while the text of the Merits Decision stated that the Board was adopting the slide fence costs advocated by DuPont on rebuttal, NS’s proposed slide fence costs were used in the associated workpapers. This error is corrected.

 

25. Yard Light and Paving Investment. The parties agree that while the text of the Merits Decision stated that the Board was adopting yard unit costs and quantities proposed by DuPont on rebuttal, no lighting costs for small, medium, and large flat yards were included in the associated workpapers. The parties further agree that total paving costs for small flat, medium flat, large flat, and hump yards were calculated incorrectly. These errors are corrected.

 

26. Loose and Solid Rock Quantities in Roadbed Preparation. The parties agree that while certain common earthwork quantities were excluded from roadbed preparation figures, corresponding loose rock and solid rock quantities were not excluded. This error is corrected.

 

27. Ballast Unit Costs. The parties agree that while the text of the Merits Decision stated that the Board was adopting the ballast costs proposed by DuPont on rebuttal, the ballast costs proposed by DuPont on opening were used in the associated workpapers. This error is corrected.

 

28. Traffic and Revenue—Shifting Tonnage from Capped Plants. The parties agree that while the text of the Merits Decision stated that the Board was accepting DuPont’s proposal to reallocate coal shipment volumes from coal-fired power plants that would exceed the 85% capacity limit to other plants below that limit, the traffic and revenue figures in the associated workpapers were not adjusted accordingly. This error is corrected.

 

29. Terminal Value Calculation. The parties agree that while the text of the Merits Decision stated that the Board was accepting DuPont’s proposal to adjust the DCF’s terminal value, the calculations in the associated workpapers were not adjusted accordingly. The parties disagree on the appropriate method for correcting this error. NS argues that the terminal value calculation should be adjusted to make the tax shielding effect of interest payments consistent with the railroad’s capital structure into perpetuity, starting after the 20-year debt amortization period. In contrast, DuPont proposes to use the average interest payment over the 20-year debt amortization period in the perpetuity calculation. Because NS’s proposal fails to give the benefit of tax shielding to the stand-alone railroad in years 10-20, see Joint Technical Corrections Petition, NS WP “D42125 Exhibit III-H-1 STB No3 (NS Exhibit 2 Terminal Value).xlsm,” this error will be corrected in the manner proposed by DuPont. In addition, the terminal value calculation portion of the Merits Decision did not fully describe our intent to accept DuPont’s adjustment but reject its interest rate calculation. Attached as Appendix A is a revised Appendix D (Discounted Cash Flow Analysis), Section F (Terminal Adjustment Value) of the Merits Decision, which includes corrected language to reflect this intent.

 

30. Fuel Expense Indexing. The parties agree that while the text of the Merits Decision stated that the Board would use EIA forecasts of WTI fuel costs to calculate the fuel portion of operating expenses, the associated workpapers did not make a corresponding adjustment to the operating expense index. The parties disagree on the appropriate method for correcting this error. DuPont argues that the Board should apply the EIA WTI fuel price forecast across the 2011-2019 DCF operating expense forecast period, while NS argues that the Board should use actual fuel expense data where available (i.e., 2011 and 2012) and apply the EIA WTI fuel price forecast only to subsequent years (i.e., 2013-2019) in the DCF operating expense forecast period. Because the Board generally finds that actual data, when available, is superior to forecasts or projections, see Duke Energy Corp. v. Norfolk S. Ry., 7 S.T.B. 89, 143 (2003), this error will be corrected in the manner proposed by NS.

 

31. Phased PTC Investment. The parties agree that the DCF model did not properly account for costs related to positive train control (PTC) system upgrades over the 2010-2015 time period. The parties disagree about what costs should be phased in and how to effectuate the phased investment. As to the first issue, NS argues that costs for PTC development, testing, spectrum, back office functionality, design, and locomotive radios would need to be incurred a second time to make the 2009-installed PTC system compliant with 2015 requirements, while DuPont argues that only the $90.3 million for PTC development that was inadvertently included in the base year calculation should be spread over the 2010-2015 period. In the underlying Merits Decision, at 229-30 & n.1192, the Board accepted DuPont’s position that only PTC development costs would be required to upgrade the system to meet RISA requirements, and so this part of the error will be corrected in the manner proposed by DuPont. As to the second issue, in order to reflect bonus depreciation, DuPont would create separate DCF models for each year of the phase-in period and then combine the results, while NS would phase in the costs as part of the overall DCF model without recognition of any bonus depreciation. The Merits Decision notes, at page 285, that bonus depreciation will apply “to the extent the costs are incurred during the appropriate time period and the bonus depreciation is otherwise applicable.” This language was not intended, however, to imply that DuPont would be entitled to bonus depreciation during the development period for something that would not be placed in service during the 2010-2015 time period. As a result, this part of the error will be corrected in the manner proposed by NS. Should the parties believe this issue warrants further discussion, they may raise it in a petition for reconsideration.

 

RESULTS OF CORRECTED ANALYSIS

 

The tables below contain corrected calculations resulting from our resolution of the various technical matters raised by the parties. These tables will replace the corresponding tables in the Merits Decision.

 

TABLE A-1

 

DRR 2009 Operating Costs*

($ millions)

 

DuPont

NS

STB

Train & Engine Personnel

$338.8

$586.0

$544.1

Locomotive Requirements

80.6

145.3

119.4

Locomotive Maintenance

156.4

151.1

151.1

Locomotive Operations

435.8

458.2

422.5

Railcar Lease & Maintenance

356.2

420.1

416.8

Materials & Supply—Operating

4.5

11.1

11.0

Ad Valorem Tax

56.9

84.2

84.2

Operating Managers

63.6

128.5

128.5

General & Administrative

77.4

172.1

171.6

Loss & Damage

12.8

12.8

12.8

Maintenance-Of-Way

156.9

377.1

350.1

Trackage Rights

58.9

74.0

74.0

Intermodal Lift and Ramp

108.0

110.4

110.4

Insurance

39.9

69.6

66.4

Startup and Training

121.6

207.9

207.6

Motor Vehicles

6.9

6.9

6.9

TOTAL

$2,075.1

$3,015.6

$2,877.6

* Columns do not add up due to rounding.


 


 

TABLE A-2

 

Total DRR Locomotive Requirements[12]

Locomotive Type

DuPont Opening

NS Reply

DuPont Rebuttal

STB

Road/Helper Service–ES44-AC

481

977

639

921[13]

Local Service–GP38

101

291

180

283

Switch Service–SW1500

80

94

Switch Service–SD40-2

173

173

TOTAL

662

1,441

913

1,377

 

 


TABLE A-4

 

MOW Costs

 

DuPont

NS

STB

Staffing

$108,831,351

$264,738,135

252,228,398

Equipment

$21,592,073

$55,869,494

$38,702,372

Contracted Maintenance Expense

 

 

 

Geometry Testing

$1,999,014

$5,080,447

$5,080,447

Rail Flaw Detection Testing

$2,402,989

$2,402,989

$2,402,989

Rail Grinding

$0*

$7,993,078

$7,993,078

Yard Cleaning

$959,400

$1,893,091

$1,893,091

Vegetation Control

$4,288,448

$9,969,433

$9,969,433

Major Bridge Inspection

$187,076

$935,379

$935,379

Ballast Cleaning

$0

$1,866,775

$1,866,775

Re-Paving Crossings

$2,060,240

$2,060,240

$2,060,240

Snow Removal

$325,000

$750,000

$750,000

Storm Debris Removal

$100,000

$250,000

$100,000

Washouts

$100,000

$500,000

$500,000

Environmental Cleanup

$100,000

$100,000

$100,000

Annual Average Clearing for Wrecks

$3,316,806

$6,169,106

$6,169,106

Annual Average Derailment

$3,331,295

$11,339,799

$11,339,799

Annual Bridge Maintenance

$380,000

$380,000

$380,000

Annual Building Maintenance

$2,010,849

$719,782

$2,720,541

Communications System Maintenance

$4,874,524

$4,124,965

$4,874,524

TOTAL

$156,859,065

$377,142,713

$350,066,172

* Capitalized by DuPont, $5,568,260.

 

 

 

 


TABLE B-1

 

DRR Construction Costs

 

DuPont

NS

STB

Land

$4,099,533,161

$5,323,836,000

$5,188,144,371

Roadbed Preparation

$4,336,345,856

$9,173,241,189

$6,089,782,845

Track

$8,208,180,061

$10,628,413,215

$9,739,622,711

Tunnels

$1,081,190,307

$1,085,992,262

$1,081,190,307

Bridges

$2,285,092,433

$4,348,113,677

$3,677,520,158

Signals and Communications

$1,489,241,789

$2,154,911,924

$2,049,755,911

Buildings and Facilities

$1,043,764,479

$2,636,247,091

$1,617,063,936

Public Improvements

$165,472,162

$243,336,967

$165,420,637

Mobilization

$502,450,751

$916,793,225

$659,349,626

Engineering

$1,860,928,709

$2,980,863,797

$2,442,035,651

Contingencies

$2,097,266,655

$3,370,629,499

$2,752,174,178

TOTAL

$27,169,466,364

$42,862,378,846

$35,462,060,332

 


 

TABLE B-8

 

 

DuPont

NS

STB

Clearing & Grubbing

$84,231,998

$127,954,212

$127,701,421

Earthwork

$3,247,473,950

$5,794,354,032

$4,722,681,552

Finish Grading

$0

$68,592,142

$68,592,142

Land for waste quantities

$320,124,853

$611,364,762

$147,067,735

Lateral Drainage

$50,086,319

$50,086,319

$50,086,319

Yard Drainage

$0

$135,385,380

$93,277,503

Retaining Walls

$377,273,513

$938,032,394

$517,206,161

Rip Rap

$36,943,483

$36,989,466

$36,947,918

Relocation of Utilities

$147,136

$147,136

$147,136

Topsoil Placement / Seeding

$1,439,739

$866,863

$866,863

Subgrade Preparation

$0

$76,476,462

$76,476,462

Road Surfacing

$523,750

$524,265

$523,750

Lighting

$0

$267,146,016

$0

Environmental Compliance

$177,345

$177,345

$177,345

Dust Control

$0

$7,250,116

$0

Winter Costs

$0

$311,080,798

$0

Culvert Cost

$217,923,770

$746,813,482

$248,030,538

TOTAL

$4,336,345,856

$9,173,241,189

$6,089,782,845

 

 


 

TABLE B-10

 

Track Construction

 

DuPont

NS

STB

Sub-ballast & Ballast

$1,125,237,557

$2,354,887,144

$2,066,764,868

Ties

$1,621,007,097

$1,820,757,718

$1,809,344,005

Rail

$2,519,913,701

$3,228,501,513

$2,673,593,103

Other Track Materials

$797,129,391

$882,650,414

$877,335,828

Turnouts

$526,710,980

$575,226,561

$575,226,561

Switch Heaters

$54,131,000

$50,901,000

$50,901,000

Derails & Wheel Stops

$13,425,265

$34,544,713

$34,544,713

Lubricators

$12,067,596

$12,067,596

$12,067,596

Field Welds

$31,623,631

$33,964,324

$33,755,087

Diamond Crossings

$30,829,950

$30,221,170

$30,287,332

Weather-Related Labor Additions

$0

$19,120,569

$0

Track Installation/Labor

$1,476,103,893

$1,585,570,494

$1,575,802,617

TOTAL

$8,208,180,061

$10,628,413,215

$9,739,622,711

 


 

TABLE B-14

 

Bridges

 

DuPont

NS

STB

Railroad Bridges

$2,273,067,514

$4,082,575,690

$3,627,493,855

Partially Owned Lines

$0

$187,437,013

$37,336,383

Highway Overpasses

$12,024,919

$12,689,920

$12,689,920

Weather Related Additions

$0

$65,411,053

$0

TOTAL

$2,285,092,433

$4,348,113,677

$3,677,520,158

 


 

TABLE B-17

 

Signals & Communications

 

DuPont

NS

STB

Signals

$1,036,280,765

$1,558,751,965

$1,528,174,916

Communications

$243,726,222

$254,813,841

$243,726,222

PTC

$94,017,984

$94,017,984

$94,017,984

Locomotive PTC Costs

$46,477,431

$93,527,469

$93,527,469

PTC Development Costs

$68,739,387

$153,800,665

$90,309,321

TOTAL

$1,489,241,789

$2,154,911,924

$2,049,755,911

 


 

TABLE B-18

Buildings & Facilities

 

DuPont

NS

STB

Headquarters Building

$11,212,906

$33,122,085

$33,122,085

Fueling Facilities

$91,620,788

$202,067,953

$202,067,953

Locomotive Shops

$186,302,766

$279,454,149

$310,504,610

Car Repair Shop

$0

$37,831,620

$0

Crew Facilities

$18,306,554

$31,685,640

$31,685,640

MoW & Signal Maintainer Facilities

$13,565,391

$76,670,455

$39,938,735

Major Yards

$209,612,345

$12,260,382

$12,260,382

Minor Yards

$79,653,833

$13,506,673

$13,506,673

Non-automotive Observation Towers

$0

$10,783,649

$10,783,649

Auto Yards

$125,832,676

$127,934,070

$136,091,820

Intermodal Yards

$303,768,908

$792,762,789

$457,319,716

Bulk Transfer Yards

$3,888,312

$33,922,000

$7,083,442

Mechanical Offices

$0

$4,520,435

$0

Warehouses (and other miscellaneous buildings and site costs)

$0

$979,725,191

$362,699,231

TOTAL

$1,043,764,479

$2,636,247,091

$1,617,063,936

 


 

TABLE C-2

 

Revenue Forecasts

($ millions)

Year

DuPont

NS

STB

2009

$3,109.7

$2,851.7

$2,930.1

2010

6,152.8

5,611.2

5,768.4

2011

6,718.2

6,074.8

6,252.0

2012

7,238.1

6,561.6

6,739.2

2013

7,721.8

7,024.4

7,201.8

2014

8,349.7

7,444.6

7,721.4

2015

8,916.5

7,825.8

8,192.9

2016

9,713.2

8,353.0

8,897.1

2017

10,642.3

8,930.9

9,765.7

2018

11,660.5

9,547.4

10,657.8

2019

5,320.1

4,254.4

4,858.5


 

TABLE D-1

 

DRR Capital Recovery

($ millions)

Year

Capital Requirement Road Property

Total Taxes

Required Cash Flow

Present Value

2009

$2,014.2

$0

$2,014.2

$1,921.1

2010

3,626.4

0

3,626.4

3,167.7

2011

3,733.8

0

3,733.8

2,915.0

2012

3,892.5

0

3,892.5

2,725.3

2013

4,002.9

0

4,002.9

2,514.1

2014

4,158.6

0

4,158.6

2,343.0

2015

4,332.5

823.6

3,508.9

1,780.3

2016

4,490.9

1,403.7

3,087.2

1,400.0

2017

4,655.2

1,560.4

3,094.8

1,259.0

2018

4,830.2

1,639.3

3,190.9

1,164.5

2019

2,072.8

709.6

1,363.1

462.2

Terminal Value

***

17,155.7

TOTAL

$38,807.9

 


 

TABLE D-2

 

DRR Total Revenue Requirements

($ millions)

Year

RPI Capital Recovery

Operating Expenses

DRR Revenue Requirements

2009

$2,014.2

$1,874.6

$3,888.7

2010

3,626.4

3,556.3

7,182.7

2011

3,733.8

4,013.4

7,747.2

2012

3,892.5

4,125.4

8,017.9

2013

4,002.9

4,406.5

8,409.4

2014

4,158.6

4,613.3

8,771.9

2015

4,332.5

4,809.7

9,142.2

2016

4,490.9

5,122.7

9,613.7

2017

4,655.2

5,462.3

10,117.5

2018

4,830.2

5,816.1

10,646.3

2019

2,072.8

2,565.7

4,638.4

 


 

TABLE D-3

 

Discounted Cash Flow Analysis

($ millions)

Year

DRR Revenue Requirements

NS Forecast Revenues

Difference

Present Value

Cumulative Difference

2009

$3,888.7

$2,930.1

$(958.6)

$(935.1)

$(935.1)

2010

7,182.7

5,768.4

(1,414.3)

(1,234.1)

(2,169.2)

2011

7,747.2

6,252.0

(1,495.2)

(1,159.3)

(3,328.5)

2012

8,017.9

6,739.2

(1,278.7)

(898.5)

(4,227.0)

2013

8,409.4

7,201.8

(1,207.6)

(761.2)

(4,988.2)

2014

8,771.9

7,721.4

(1,050.5)

(594.0)

(5,582.3)

2015

9,142.2

8,192.9

(949.3)

(481.6)

(6,063.9)

2016

9,613.7

8,897.1

(716.6)

(326.1)

(6,390.0)

2017

10,117.5

9,765.7

(351.8)

(143.6)

(6,533.6)

2018

10,646.3

10,657.8

11.5

4.2

(6,529.4)

2019

4,638.4

4,858.5

220.0

76.3

(6,453.1)

 


 

MARKET DOMINANCE

 

An important part of the Merits Decision focused on determining the specific movements over which NS has market dominance. Much of that analysis was provided in a highly confidential “market dominance appendix.” Because that appendix contained competitively sensitive information, it was initially provided only to the parties’ outside counsel. Since then, the parties have proposed redactions of confidential or highly confidential material contained in the market dominance appendix so that a public version of the appendix could be released. As a result, the Merits Decision is being updated to (1) clarify that this process has been completed and (2) include a public version of the market dominance appendix.

 

SUMMARY

 

Pursuant to this decision, the Merits Decision is being updated to (1) include a public version of the market dominance appendix; (2) reflect the technical corrections the Board has adopted in response to suggestions made by the parties; (3) include a revised Appendix D (Discounted Cash Flow Analysis), Section F (Terminal Adjustment Value) of the Merits Decision; and (4) make several minor grammatical and formatting changes elsewhere in the decision—e.g., changing “Appendix” to “appendix” in three places and moving a parenthetical identifying a short cite to earlier in the decision.

 

This action will not significantly affect either the quality of the human environment or the conservation of energy resources.

 

It is ordered:

 

1. The technical corrections discussed in this decision are hereby adopted.

 

2. The Merits Decision is being updated to include the public version of the highly confidential market dominance appendix, and otherwise modified as set forth above.

 

3. Petitions for reconsideration of this decision and the Merits Decision must be filed by October 23, 2014.

 

4. This decision is effective on the date of service.

 

By the Board, Chairman Elliott, Vice Chairman Miller, and Commissioner Begeman.

 

 

 


APPENDIX A

 

Merits Decision Replacement Section F (Terminal Value Adjustment) of Appendix D (Discounted Cash Flow Analysis)

 

DuPont proposes an adjustment to the terminal value in the Board’s DCF model.[1524] DuPont states that the Board’s DCF model assumes that the SARR’s capital structure remains constant in perpetuity, so there will always be debt, with associated interest payments, as well as equity.[1525] But for tax purposes, according to DuPont, the Board’s DCF model assumes that the SARR is 100% equity financed during the period after year 20 and before the first assets are replaced in the replacement level of the model.[1526] Therefore, DuPont argues, during this period, the cost of capital assumes that the SARR makes interest payments, but the model does not allow the SARR to receive the tax shielding effect of those interest payments.[1527] DuPont proposes to correct this mismatch by assuming that interest payments continue in perpetuity for tax shield purposes as well.[1528] To do this, DuPont adjusts the terminal value in the capital carrying charges to reflect the cost of capital assumption that the SARR’s level of debt is held constant into perpetuity, and that interest tax shields consistent with this level of debt are accounted for in the cash flow calculation.[1529]

 

NS disagrees, arguing that this assumption contradicts DuPont’s position and Board precedent that the term of the SARR’s debt is 20 years.[1530] NS also argues that DuPont’s extension of the DRR’s interest payments into perpetuity conflicts with the interest rates included in the DRR’s cost of debt, because the cost of debt is based on a collection of short and long term debt instruments.[1531] NS asserts that, if the Board is inclined to eliminate the mismatch identified by DuPont, the correct method would be to revert back to Coal Trading and recalculate the DRR capital structure as the debt is amortized.[1532] NS includes a version of the DCF model implementing this change.[1533]

 

On rebuttal, DuPont argues that, contrary to NS’s position, the ICC and the Board did not even recognize this mismatch, let alone approve it, in Coal Trading, McCarty Farms 1997, or Major Issues.[1534] DuPont argues that NS’s proposed fix matches the capital structure adopted in Coal Trading, but the ICC soon discarded this approach in Bituminous Coal, 10 I.C.C. 2d at 319.[1535] DuPont also argues that the Coal Trading approach is unrealistic because it contends that the cost of equity would decline as the proportion of equity increases over time, but NS fails to adjust the cost of capital downward.[1536]

 

We will accept DuPont’s argument regarding the terminal value adjustment to correct the mismatch it has identified, but we will correct DuPont’s interest rates to reflect the Board’s holding that DuPont must pay down the principal on its capital investments. See supra Section E (Interest Schedule of Assets Purchased With Debt Capital). DuPont is correct that the ICC’s decision in Coal Trading did not encounter the mismatch described here, because the capital structure adopted by the ICC shifted to greater proportions of equity over time as the SARR paid off the principal on its debt. Coal Trading, 6 I.C.C. 2d at 379-80. The Board’s decisions in McCarty Farms 1997 and Major Issues did not approve or even refer to the mismatch identified by DuPont. McCarty Farms 1997, 2 S.T.B. at 522-23 & n.123; Major Issues, slip op. at 65. Accordingly, DuPont’s adjustment is not contrary to Board precedent.

 

To the extent there is a contradiction between DuPont’s adjustment and the assumption that the term of the SARR’s debt is 20 years, as NS claims, it is a contradiction that already exists in the Board’s DCF model. That is, as DuPont points out, the DCF model assumes that the SARR’s capital structure includes a debt component (including the cost of the associated interest payments) in perpetuity, not for 20 years. However, as structured the model does not allow the SARR to receive the tax shielding effect of those interest payments. Thus, DuPont’s adjustment fixes one aspect of an apparent contradiction, rather than creating a new one. As for NS’s argument that there would be a conflict with the interest rates included in the DRR’s cost of debt, it is a feature of the DCF model to assume current numbers into perpetuity. If interest rates significantly change, the lawful rate may change as a result, and any party is free to petition the Board, under 49 C.F.R.  1115.4, to reopen a proceeding on the grounds of substantially changed circumstances. Finally, NS’s proposed alternative solution, reverting to the Coal Trading approach of recalculating the SARR’s capital structure over time, would be unnecessarily disruptive to the Board’s DCF methodology, unlike the simple adjustment proposed by DuPont.

 

As discussed in the previous section, DuPont’s DCF utilizes coupon, interest-only payments and does not include a home mortgage style payment as the Board requires. Because of the inconsistency between the interest payments in these two scenarios, the Board must adjust the interest value to determine the proper tax benefit. To do so, a straight-line average of the interest payments over the amortization period, here 20 years, is used as the value for determining the tax benefit received in the terminal value calculation.



[1] The digest constitutes no part of the decision of the Board but has been prepared for the convenience of the reader. It may not be cited to or relied upon as precedent. Policy Statement on Plain Language Digests in Decisions, EP 696 (STB served Sept. 2, 2010).

[2] See E.I. DuPont de Nemours & Co. v. Norfolk S. Ry., NOR 42125, slip op. at 1 (STB served Apr. 11, 2014); E.I. DuPont de Nemours & Co. v. Norfolk S. Ry., NOR 42125, slip op. at 1 (STB served Apr. 30, 2014); E.I. DuPont de Nemours & Co. v. Norfolk S. Ry., NOR 42125, slip op. at 1 (STB served June 11, 2014).

[12] The number of locomotives in this table has been reduced to reflect DuPont’s peaking factor of 5.4%.

[13] In its brief, NS acknowledges that it had not properly reflected its warm-up, cool-down period for locomotives. To correct for this error, it reduced the number of ES44 locomotives it proposed for the DRR by 4%. NS Brief at 57-58. The Board accepts this correction from 977 to 938 ES44-AC locomotives and incorporates it into the DRR’s Locomotive Requirements.

[1524] DuPont Opening III-H-7 to III-H-10.

[1525] DuPont Opening III-H-8.

[1526] DuPont Opening III-H-8 to III-H-9.

[1527] DuPont Opening III-H-9.

[1528] DuPont Opening III-H-9.

[1529] DuPont Opening III-H-9.

[1530] NS Reply III-H-9.

[1531] NS Reply III-H-9 to III-H-10.

[1532] NS Reply III-H-10.

[1533] NS Reply III-H-10, citing NS Reply WP “Alternative DCF.xlsx.”

[1534] DuPont Rebuttal III-H-11 to III-H-12 (citing Coal Trading, 6 I.C.C. 2d at 379-80; McCarty Farms 1997, 2 S.T.B. at 522 n.123; Major Issues in Rail Rate Cases (Major Issues), EP 657 (Sub-No. 1), slip op. at 65 (STB served Oct. 30, 2006), aff’d sub nom. BNSF Ry. v. STB, 526 F.3d 770 (D.C. Cir. 2008)).

[1535] DuPont Rebuttal III-H-12.

[1536] DuPont Rebuttal III-H-12 to III-H-13.