Appeals Court Faults Pipeline Return Award

Fortnightly Magazine - March 1 1995
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The U.S. Court of Appeals for the District of Columbia Circuit has overturned a Federal Energy Regulatory Commission (FERC) gas pipeline order, finding that the FERC had failed to support its decision to use a hypothetical capital structure in determining the pipeline's revenue requirement. In setting rates for Transcontinental Gas Pipeline, the FERC found the corporate parent's equity ratio of 16.27 percent abnormally low. Although FERC practice is to use the actual corporate structure of a pipeline's corporate parent in setting rate of return, the FERC said that using the actual figures in this case would require an "anomalously high" return award to compensate for the financial risk associated with such a low level of equity. Using figures based on a proxy group of unregulated parent companies with pipeline subsidiaries would still require a rate of return on equity (ROE) at the high end of the zone of reasonableness (14.45 percent), according to the FERC, because the pipeline's business and financial risk were higher than those of all but one of the other pipelines and its current credit ratings were below investment grade.

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