Opinion ID: 2808691
Heading Depth: 3
Heading Rank: 2

Heading: Composite Equity

Text: The Shippers contend that FERC unjustifiably abandoned the notion of separate capital structures in Period One and Period Two when it referred to a “composite equity” standard. Shippers Br. 21 (quoting Opinion No. 486-E, 136 FERC ¶ 61,045 P 205). In their view, FERC’s reference to composite equity is inconsistent with the design principles underlying Kern River’s levelized rates—i.e., Kern River must develop “individual rates based upon separately calculated equity rate base amounts for each customer class.” Opinion No. 486, 117 FERC ¶ 61,077 P 119. According to the Shippers, it is irrelevant to the design of Period Two rates that some customers might still be paying Period One rates (based on a 30 percent equity capital structure) through 2018 because FERC must calculate Period Two rates based on a 100 percent capital structure. We reject the Shippers’ arguments because they ignore the context of the Commission’s reference to “composite equity” in Opinion No. 486-E. Considering the reference in context, we conclude that FERC did not abandon the separate capital structures for each period when it referred to composite equity. Rather, FERC explained how an investor in 2004 might perceive Kern River’s “generic business risks” during the gradual transition to Period Two rates from 2011 through 2018. Opinion No. 486-E, 136 FERC ¶ 61,045 P 205; see also Opinion No. 486-F, 142 FERC ¶ 61,132 P 254 (“[T]his language forms part of the Commission’s discussion of what informed investors might have perceived in 2004 about Kern River’s business risk.”). By referring to composite equity, FERC rejected the notion that “the 2004 20 investor would be considering investment in a pipeline that would have exclusively Period Two contracts and a Period Two all-equity capital structure.” Opinion No. 486-F, 142 FERC ¶ 61,132 P 236. This observation is rational and consistent with FERC’s position throughout these proceedings.