Opinion ID: 436086
Heading Depth: 3
Heading Rank: 1

Heading: Risk and Allowable Rate of Return

Text: 155 As previously discussed, FERC made no effort to study and estimate the risks associated with oil pipeline operations. Accordingly, FERC offered no reason to believe that the risks associated with the unregulated enterprises from which it derived its rates of return were equivalent to the risks of running an oil pipeline. 70 Because the level of risk associated with an enterprise determines the returns it requires to attract capital, see supra at 1515-16, FERC never established a reasonable connection between its stated purpose to preserve the financial integrity and economic viability of oil pipelines and its selected rate of return indices. 156 FERC attempted to establish such a connection by arguing: 157 If the returns do not exceed those being realized somewhere or other in a roughly comparable segment of the economy's unregulated sector, it is hard to see how they can be branded extortionate or abusive. 158 Our relative permissiveness makes the risk problem more manageable. Can even the riskiest of pipelines argue that it is so hazardous that it is entitled to more than anyone makes any place else? 159 21 FERC at 61,645-46 (emphasis in original). The first sentence of this passage lacks any semblance of valid reasoning from the record. FERC never even attempted to establish that the relevant segments of the economy's unregulated sector were in fact roughly comparable to the oil pipelines. If the enterprises were roughly comparable, the reference to them might be justified. FERC, however, assumed, without explanation, the existence of that factual predicate in order to justify its selected rate of return indices. Unfortunately, this assumption is not supported by any sound explanation based on the record, and therefore this attempted justification rests on nothing more than a blind, conclusionary assertion of rough comparability. 160 The second paragraph in this passage makes use of a non sequitur. In preceding paragraphs, FERC had permitted the oil pipelines to choose a rate of return for themselves from a buffet bedecked with those found in a wide variety of lucrative unregulated enterprises. It is therefore pure illogic to assume that the risk problem is the spectre that the oil pipelines might claim entitlement to even greater rewards. As we have discussed above, the real risk problem with FERC's methodology--the problem FERC entirely failed to address--lies in whether FERC's selected indices grossly overestimate the risks and needed returns prevailing in the oil pipeline business. 161