Opinion ID: 2633766
Heading Depth: 3
Heading Rank: 5

Heading: Risk Premium

Text: The Carriers contend that RCA imputed an inadequate risk premium to compensate lenders and equity investors for purportedly extraordinary risks inherent to the project. They urge that expert witnesses Dr. Tye and Dr. Gaske aptly estimated the low end of a reasonable risk premium to be 2% on debt and equity, and that RCA erred by assessing a parsimonious .75% risk premium on equity alone. Dr. Tye's pre-filed testimony about risk discusses, in an abstract and conclusory fashion, such considerations as the propriety of putting $10 billion investor eggs in one basket; risks of non-completion or non-viability; legal obstacles; escalating construction costs; decreasing world oil prices; possible regulatory setbacks; and Alaska's extreme climate and geography. He concluded that a risk premium should range from 2-5%. RCA's Order No. 151 adopted the Carrier's methodology for computing a risk premium including a prospective view of risks that, in hindsight, proved evanescent. It rejected rote reliance on the data inputs proposed by any one testifying expert. RCA concluded that cited academic studies regarding the risks of unrelated high-cap or high-tech projects like tunnels, subways, airports, toll roads, and power plants were quite possibly apples to oranges comparisons. It decided that, to the extent the pipeline was ever an all-or-nothing gamble, such risk spanned the planning stage only. RCA therefore awarded a risk premium for non-completion due to regulatory and legal uncertainties limited to that stage. It augmented this risk premium for the contingency of cost overruns during construction. In other respects RCA found TAPS less risky than an average pipeline. There was a low risk of inadequate supply of oil; a low risk of competition from alternative carriers; no extra risk of throughput interruption; and no risk of a volatile regulatory climate. The Carriers argue that a risk premium should be applied to the entire capital structure, both debt and equity. RCA's analysis focuses on the risks to equity investors and does not specifically discuss the risk to lenders in this context. Presumably, the risk to lenders is reflected in the interest rates they charge, for which the Carriers are directly reimbursed in the rate formula. In a related context, RCA noted that TAPS could be expected to generate funds to cover debt service under almost any scenario. It appears that Dr. Tye was the sole witness to unequivocally endorse a risk premium on debt. RCA was not required to accept his seemingly idiosyncratic approach to risk. RCA's risk analysis was extraordinarily thoughtful and complete. It addressed the contentions and evidence of all parties. It supported its analysis with a thirteen-page single-spaced endnote with eighty-eight citations to the record or to prior cases. It merits the deference courts must apply when reviewing complex decisions implicating agency expertise. This court sustains RCA's findings as supported by the record.