2024-11-25 1250 Oceanside LLC Response to PD

Home

Application of Hawaii Elec. Light Co., Inc.,60 Haw.625 (1979) 594 P.2d 612 To calculate the rate of return, the costs of each component of capital debt,preferred stock and common equity are weighted according to the ratio each bears to the total capital structure of the company and the resultant figures are *633 added together to yield a sum which is the rate of return. South Central Bell Telephone Co.v.Louisiana Public Service Commission,La.,352 So.2d 964(1977),Cert.denied,437 U.S.910,98 S.Ct.3103,57 L.Ed.2d 1142(1978); City of Evansville v. Southern Indiana Gas and Electric Co.,Ind.App.,339 N.E.2d 562(1975). The proper return to be accorded common equity is the most difficult and least exact calculation in the whole rate of return procedure since there is no contractual cost as in the case of debt or preferred stock. South Central Bell Telephone Co. v. Louisiana Public Service Commission,supra,La.,352 So.2d at 964;Narragansett Electric Co.v.Harsch,supra, 117 R.I.at 425, 368 A.2d at 1211;Butler,The Rate of Return in Texas The Neglected Issue,28 Baylor L.Rev. 937(1976).As the court pointed out in South Central Bell Telephone Co.v.Louisiana Public Service Commission, supra,La.,352 So.2d at 973: **619 Equity capital does not always pay dividends;all profits after fixed charges accrue to it and it must withstand all losses.The cost of such capital cannot be read or computed directly from the company's books. Its determination involves a judgment of what return on equity is necessary to enable the utility to attract enough equity capital to satisfy its service obligations. The Commission adopted 13%As the return on equity which HELCO would achieve at an 8.95%Rate of return and the Division argues that the 13%Return to equity capital is not supported by the evidence. The Commission agreed with HELCO that it could utilize HECO's cost of equity as its own cost of equity since HECO supplies all of the common equity for HELCO.The Division questions the propriety of using HECO's cost of equity capital to determine the adequacy of HELCO's rate of return. The Commission's adoption of HECO's cost of equity capital as HELCO's cost of equity capital is hardly unprecedented.HELCO,as we have stated earlier,is a wholly-owned subsidiary of HECO.HELCO,as a wholly-owned subsidiary, issues no stock to the public. Consequently,HELCO's cost of *634 equity is determined solely by HECO's cost of equity since a portion of each share of HECO's common stock represents an investment in HELCO. Use of the parent's capital structure has been criticized on the grounds that it fails to recognize,Inter alia,that each subsidiary may experience significant differences in operating and financial risks. South Central Bell Telephone Co.v.Louisiana Public Service Commission, supra, La., 352 So.2d at 971. Nevertheless, when a parent owns all or virtually all of the common stock of a subsidiary, the cost of equity to the subsidiary can only be reckoned on the basis of the cost of equity capital to the parent and most commissions have recognized this relationship between a corporate subsidiary and its parent. Re United Telephone Co. of the West, 12 P.U.R.4th 462 (1975);Re Southwestern Bell Telephone Co., 98 P.U.R.3d 30 (1973);Re Columbia Gas of Kentucky,Inc.,2 P.U.R.4th 109(1973);Re Northern States Power Co.,3 P.U.R.4th 388(1973);Re Columbia Gas of New York, Inc.,97 P.U.R.3d 489(1972)Columbia Gas of New York,Inc., 97 P.U.R.3d 489 (1972). In this case as is typical, to support the recommended 13% Common equity return rate, HELCO's expert witness relied on comparable earnings studies which consisted of evidence showing the earnings rate of other companies.HELCO presented four exhibits containing information on the return on common equity for various companies. The first exhibit shows the average return on common equity earned by thirteen utilities during 1970-1974, which average ranged from 11.7% To 13.8%. The second exhibit lists the authorized average return on common equity (14.15%)for the same thirteen utilities. The third exhibit shows the average return on common equity(13.8%)authorized for twenty-four utilities in their most recent rate cases.Finally, the fourth exhibit provides the average return on common equity actually earned(14%)for 1200 companies representing nearly every business activity in the nation. 1iEST LA'r CD 2024 Thomson Reuters. No claim to original U.S. Government Works. 6