Innumeracy: feds can't do math

What's the problem with having a bunch of attorneys in charge of regulatory agencies? They can't be bothered to do even simple math ...

The federal agency in charge of regulating pipelines sets rates to meet a targeted rate of return, which is now 12%. They observed that the annual rate of return for one particular pipeline was 24% and so filed a law suit saying that the pipeline was overcharging. But here's the thing: because the pipeline depreciates over time, you can't compute the annual rate over the original amount.

John Hempton pulled the relevant formula out of Wikipedia (it's just a gussied up compound interest equation), plugged in the numbers and discovered that the rates being charged, rather than being too high, were actually too low -- presumably, Berkshire Hathaway (the owner of the pipeline) was being forced to accept lower-than-allowed rates because of market competition.

No comments:

Post a Comment