Opinion ID: 2808691
Heading Depth: 3
Heading Rank: 1

Heading: Financial Risk

Text: In general, “the higher the proportion of equity capital, the lower the financial risk . . . and thus, in this respect, the lower the necessary rate of return” on equity. Missouri Pub. Serv. Comm’n v. FERC, 215 F.3d 1, 2 (D.C. Cir. 2000). 18 During Period Two rate proceedings, FERC confirmed: “It goes without saying that a 100 percent equity structure would be perceived by informed investors to lessen substantially a company’s financial risk.” Opinion No. 486-F, 142 FERC ¶ 61,132 P 255. That is common sense. See Missouri Pub. Serv. Comm’n, 215 F.3d at 4. Because Kern River has lower financial risk than the members of the 2004 proxy group (based on Kern River’s 100 percent equity structure), the Shippers maintain that FERC should have set Kern River’s return on equity lower than the proxy group’s median 11.55 percent return. FERC reasonably explained why the Shippers’ argument lacks merit. When it set Kern River’s return on equity for Period Two, FERC considered how investors in 2004 would have viewed the transition from a 30 percent equity structure in Period One to the 100 percent equity structure in Period Two. See Opinion No. 486-E, 136 FERC ¶ 61,045 P 204–05. FERC explained how an informed investor would have noticed that the transition toward less financial risk is not abrupt. See id. Instead, the “100 percent equity structure would come on line gradually from 2011 through 2018.” Id. P 205. For example, through the end of 2015 (more than halfway into the transition period), 88 percent of the Period One contracts would still be in effect. See id. Thus, FERC explained that an investor in 2004 would have likely perceived that, during the initial four years of transition to Period Two rates, Kern River’s financial risk would be about the same as Period One. See id. The investor’s perception of the gradual transition, FERC determined, “would trend the required [return on equity] toward the median rather than the lower end of the range in absence of highly persuasive information (evidence) to the contrary.” Id.; see also id. P 206 (noting that the Shippers “have not presented compelling evidence based on the 2004 test period that Kern 19 River’s return on equity should be reduced below the median”). That is not an arbitrary conclusion.