Title: MOUNTAIN STATES TELEPHONE v DEPT

State: montana

Issuer: Montana Supreme Court

Document:

No. 80-99 IN THE SUPREME COURT OF THE STATE OF MONTANA 1981 MOUNTAIN STATES TELEPHONE AND TELEGRAPH COMPANY, a Colorado corporation, Plaintiff and Appellant, VS. THE DEPARTMENT OF PUBLIC SERVICE REGULATION, MONTANA PUBLICE SERVICE COMMISSION et al., Defendants and Respondents. Appeal from: District Court of the First Judicial District, In and for the County of Lewis and Clark. Honorable Peter Meloy, Judge presiding. Counsel of Record: For Appellant: Hughes, Bennett, Kellner and Sullivan, Helena, Montana J. Walter Hyer argued, Denver, Colorado For Respondents: Calvin K. Simshaw argued, M.P.S.C., Helena, Montana James C. Paine Montana Consumer Counsel Counsel, Helena, Montana John Allen argued, Consumer Counsel, Helena, Montana Filed: Submitted: January 12, 1981 Decided : FEB 5 - l9%l M r . Chief J u s t i c e Frank I. H a s w e l l d e l i v e r e d t h e Opinion of t h e C o u r t . T h i s is an a p p e a l by Mountain S t a t e s Telephone & T e l e g r a p h Company (Mountain B e l l ) from a judgment of t h e D i s t r i c t Court i n a u t i l i t y rate c a s e . The Montana P u b l i c S e r v i c e Commission (PSC) g r a n t e d Mountain B e l l an a n n u a l rate i n c r e a s e t o t a l l i n g $3,097,000 as compared t o t h e $11.83 m i l l i o n sought. The D i s t r i c t Court concurred. W e a f f i r m . Mountain B e l l p e t i t i o n e d t h e PSC f o r u t i l i t y rate i n c r e a s e s t h a t would g e n e r a t e $11.83 m i l l i o n a d d i t i o n a l y e a r l y r e v e n u e s from i t s Montana customers. PSC g r a n t e d i n t e r i m r a t e i n c r e a s e s of $2,326,000 pending its f i n a l d e c i s i o n which a r e n o t a t i s s u e i n t h i s a p p e a l . PSC's f i n a l o r d e r g r a n t e d Mountain B e l l a n a n n u a l revenue i n c r e a s e of $3,097,000 i n i n c r e a s e d c h a r g e s f o r its s e r v i c e s to its Montana customers. Mountain B e l l p e t i t i o n e d t h e District Court of L e w i s and C l a r k County f o r j u d i c i a l review of PSC's f i n a l o r d e r p u r s u a n t to t h e Montana A d m i n i s t r a t i v e P r o c e d u r e s A c t . S u b s e q u e n t l y Mountain B e l l e l e c t e d to proceed under Montana P u b l i c U t i l i t i e s A c t ( S e c t i o n 69-3-401, MCA e t s e q ) . The District C o u r t ' s p r e t r i a l o r d e r narrowed t h e i s s u e s to two: (1) PSC's a p p l i c a t i o n of t h e "double l e v e r a g e " a d j u s t m e n t i n d e t e r m i n i n g t h e c o s t of c a p i t a l i n Mountain B e l l ' s rate b a s e , ( 2 ) PSC's "NARUC" t a x a d j u s t m e n t . The District Court r e c e i v e d t h e t r a n s c r i p t of p r o c e e d i n g s be£ o r e t h e PSC, heard a d d i t i o n a l e v i d e n c e , and remanded t h e case t o t h e PSC f o r r e c o n s i d e r a t i o n on t h e b a s i s of t h e a d d i t i o n a l e v i d e n c e . The PSC r e c o n s i d e r e d , a£ f irmed its p r e v i o u s f i n a l o r d e r , and r e t u r n e d t h e case to t h e D i s t r i c t Court. The D i s t r i c t C o u r t a f f i r m e d PSC's f i n a l o r d e r h o l d i n g (1) t h a t t h e "double l e v e r a g e " concept was l a w f u l , was a p p l i e d w i t h i n t h e s t a t u t o r y a u t h o r i t y of t h e PSC, and was supported by s u b s t a n t i a l e v i d e n c e , and ( 2 ) t h a t t h e "NARUC" t a x a d j u s t m e n t was w i t h i n t h e s t a t u t o r y a u t h o r i t y of t h e PSC and was supported by s u b s t a n t i a l e v i d e n c e . Mountain B e l l appealed from t h e judgment of t h e D i s t r i c t C o u r t , abandoning t h e i s s u e of t h e "NARUC" t a x a d j u s t m e n t . The sole i s s u e on a p p e a l is t h e l e g a l i t y of PSC1s "double leverage'' a d j u s t m e n t i n d e t e r m i n i n g t h e cost of c a p i t a l i n Mountain B e l l ' s rate base. B e f o r e c o n s i d e r i n g t h e arguments of Mountain B e l l , an u n d e r s t a n d i n g of t h e c a p i t a l s t r u c t u r e of Mountain B e l l and its p a r e n t company, AT&T is n e c e s s a r y . The "double l e v e r a g e " a d j u s t m e n t , as a p p l i e d h e r e , is premised on t h e PSC1s con- s i d e r a t i o n of t h e p a r e n t - s u b s i d i a r y f i n a n c i a l r e l a t i o n s h i p and its e f f e c t on t h e c o s t of c a p i t a l i n Mountain B e l l ' s rate b a s e . I t is a b a s i c p r i n c i p l e of u t i l i t y r e g u l a t i o n t h a t a u t i - l i t y is e n t i t l e d to r e c e i v e a f a i r and r e a s o n a b l e rate of r e t u r n on its investment i n p l a n t and equipment used to p r o v i d e its ser- v i c e s to t h e p u b l i c . I n d e t e r m i n i n g a f a i r and r e a s o n a b l e rate o f r e t u r n , it is n e c e s s a r y to d e t e r m i n e what it costs t h e u t i l i t y t o s e c u r e t h e r e q u i r e d c a p i t a l t o f i n a n c e its o p e r a t i o n s . T h i s " c o s t of c a p i t a l " approach to u t i l i t y ratemaking i n v o l v e s d e t e r - mining t h e composite c o s t of t h e s e v e r a l t y p e s of t h e u t i l i t y ' s c a p i t a l , p r o p e r l y weighted on t h e b a s i s of an a p p r o p r i a t e c a p i t a l s t r u c t u r e . N e w England Telephone & T e l e g r a p h Co. v. P u b l i c U t i l i t y Commission (1978 ), Me. , 390 A.2d 8, 32. The " c o s t of c a p i t a l " i n v o l v e s n o t o n l y t h e i n t e r e s t t h e u t i l i t y must pay on its borrowed c a p i t a l ( d e b t ) , b u t a l s o t h e cost of a t t r a c t i n g p u r c h a s e r s of its common s t o c k ( e q u i t y ) . A r e g u l a t o r y commission such as t h e PSC must a u t h o r i z e u t i l i t y rates s u f f i c i e n t t o c o v e r t h e u t i l i t y ' s cost of d e b t and cost of e q u i t y , b u t no more, o r t h e u t i l i t y ' s customers w i l l be paying e x c e s s i v e rates f o r t h e s e r v i c e s t h e u t i l i t y p r o v i d e s . I n t h i s case Mountain B e l l ' s c a p i t a l s t r u c t u r e as r e f l e c t e d i n i t s books i n d i c a t e s t h a t it is funded 44.65% b y borrowed funds ( d e b t ) and 55.35% b y sale of its common s t o c k ( e q u i t y ) . Because Mountain B e l l is p a r t i a l l y financed by d e b t and p a r t i a l l y financed by e q u i t y , Mountain B e l l ' s common s t o c k h o l d e r s a r e s a i d to be "leveraged" t o t h e e x t e n t t h a t t h e c o s t of its d e b t is less t h a n t h e ( w e i g h t e d ) c o s t of its c a p i t a l . I n o t h e r words, Mountain B e l l 's common s t o c k h o l d e r s a r e " l e v e r a g e d " because Mountain B e l l is paying less i n t e r e s t on its borrowed funds t h a n t h e r e t u r n it makes on t h e use of its borrowed funds. T h i s is l e v e r a g e #l. But i n t h i s c a s e t h e r e is a second or "double l e v e r a g e " e n joyed by t h e common s t o c k h o l d e r s of AT&T a r i s i n g o u t of t h e p a r e n t - s u b s i d i a r y r e l a t i o n s h i p between AT&T and Mountain B e l l . When t h i s c a s e was heard by t h e PSC, ATbT owned 88.55% o f t h e common s t o c k of Mountain B e l l , w i t h t h e b a l a n c e being h e l d by m i n o r i t y s t o c k h o l d e r s . Thus t h e common s t o c k h o l d e r s of AT&T a r e "double leveraged": f i r s t , because t h e c o s t of d e b t i n AT&T1s c a p i t a l s t r u c t u r e is less t h a n t h e r e t u r n it makes on t h e use of its borrowed funds; and second because it d e r i v e s t h e b e n e f i t of s i m i l a r l e v e r a g e i n Mountain B e l l ' s own c a p i t a l s t r u c t u r e by r e a s o n of its 88.55% ownership of Mountain B e l l ' s common s t o c k . The PSC found t h a t i f t h e " c o s t of c a p i t a l " i n Mountain B e l l ' s r a t e base was considered i n i s o l a t i o n w i t h o u t r e g a r d t o t h e "double l e v e r a g e " enjoyed by AT&T8s common s t o c k h o l d e r s , it would r e s u l t i n an e x c e s s i v e r e t u r n to AT&T' s common s t o c k h o l d e r s a t t h e expense of Montana u t i l i t y r a t e p a y e r s . To correct t h i s i n e q u i t y , t h e PSC a p p l i e d a "double l e v e r a g e " a d j u s t m e n t i n d e t e r m i n i n g t h e " c o s t of c a p i t a l " i n Mountain B e l l ' s r a t e base. I n summary form, t h e PSC a p p l i e d t h e "double l e v e r a g e " a d j u s t m e n t i n t h i s manner: (1) PSC determined t h a t t h e c a p i t a l s t r u c t u r e of Mountain B e l l was composed of 45.65% d e b t (borrowed f u n d s ) and 55.35% e q u i t y (common s t o c k ) a s r e f l e c t e d i n its books. ( 2 ) PSC determined t h a t an 11.25% r e t u r n on t h e c a p i t a l i n v e s t e d i n Mountain B e l l was a f a i r and reasonable r a t e of r e t u r n . ( 3 ) PSC determined t h a t i f ~ o u n t a i n B e l l had been funded i n t h e open market t h e weighted c o s t of Mountain B e l l I s c a p i t a l would have been 9.473, f i g u r e d as f o l l o w s : Weighted Type o f C a p i t a l -- % o f C a p i t a l i z a t i o n Cost - - C o s t Debt 44.65% X 7.26% = 3.24% Common S t o c k 55.35% X 11.25% = 6.23% 100.00% 9.47% ( 4 ) PSC determined t h a t 88.55% o f Mountain B e l l ' s e q u i t y is owned by AT&T whose weighted cost of c a p i t a l is 9.86% f i g u r e d as f o l l o w s : Weighted Type of C a p i t a l -- % of C a p i t a l i z a t i o n C o s t - - Cost Debt 23.1% X 6.47% = 1.49% P r e f e r r e d S t o c k 8.0% X 7.82% = .63% Common S t o c k ( 5 ) PSC determined t h a t 88.55% o f Mountain B e l l ' s e q u i t y s h o u l d be sourced to AT&T because it owned 88.55% o f Mountain B e l l ' s s t o c k ; and AT&Tts cost of c a p i t a l of 9.86% s h o u l d be a p p l i e d t o such 88.55%. The remaining 11.45% o f Mountain B e l l ' s e q u i t y h e l d by m i n o r i t y s t o c k h o l d e r s was allowed a c a p i t a l cost ( 6 ) PSC determined t h a t t h e composite weighted cost of c a p i t a l to Mountain B e l l was 8.78% based on t h e f o l l o w i n g computation : Weighted Type o f C a p i t a l -- - - % o f C a p i t a l i z a t i o n Cost C o s t Debt 44.65 X 7.26% = 3.24% E q u i t y s u p p l i e d by AT&T 49.01 X 9.86% = 4.83% (88.55% x 55.35%) E q u i t y s u p p l i e d by m i n o r i t y s t o c k h o l d e r s The use of 8.78% as t h e weighted cost of c a p i t a l of Mountain B e l l w i l l r e s u l t i n a r e t u r n of 10.01% t o its m i n o r i t y s t o c k h o l d e r s r a t h e r t h a n t h e 11.25% found to be a f a i r and r e a s o n a b l e r e t u r n by t h e PSC. The D i s t r i c t Court h e l d t h i s ine- q u i t y was t h e r e s u l t of t h e c a p i t a l s t r u c t u r e of AT&T and Mountain B e l l r a t h e r t h a n t h e PSC's rate o r d e r . The D i s t r i c t C o u r t p o i n t e d o u t t h a t t h e PSC's f u n c t i o n was f u l f i l l e d when it e s t a b l i s h e d a f a i r and r e a s o n a b l e rate of r e t u r n on t h e u t i l i t y ' s i n v e s t m e n t r e g a r d l e s s of how t h e u t i l i t y ' s management d i s t r i b u t e d t h a t r e t u r n among its s t o c k h o l d e r s . Mountain B e l l advances t h r e e p r i n c i p a l arguments a g a i n s t t h e PSC1s a p p l i c a t i o n of t h e "double l e v e r a g e " a d j u s t m e n t i n d e t e r m i n i n g t h e cost of c a p i t a l i n Mountain B e l l ' s rate base: (1) t h a t it is n o t s u p p o r t e d by s u b s t a n t i a l e v i d e n c e , ( 2 ) t h a t t h e "double l e v e r a g e " a d j u s t m e n t as a p p l i e d by t h e PSC is incon- s i s t e n t w i t h i n i t s e l f , i g n o r i n g t h e v e r y p r i n c i p l e s on which it is based, and ( 3 ) it is premised on a d i s r e g a r d of a p p l i c a b l e law i n t h a t t h e m i n o r i t y s t o c k h o l d e r s w i l l n o t r e c e i v e t h e r e t u r n on t h e i r investment found t o be f a i r and r e a s o n a b l e by t h e PSC. A t t h e o u t s e t we n o t e t h a t Mountain B e l l ' s t h i r d argument is now moot. The m i n o r i t y s t o c k h o l d e r ' s i n t e r e s t s i n Mountain B e l l have been purchased by AT&T. Mountain B e l l is now a wholly- owned s u b s i d i a r y of AT&T. Mountain B e l l c o n t e n d s f i r s t t h a t PSC's use of t h e "double l e v e r a g e " a d j u s t m e n t must be set a s i d e as unsupported by s u b s t a n - t i a l evidence. Mountain B e l l urges t h a t t h e u n c o n t r a d i c t e d e v i - dence shows t h a t Mountain B e l l ' s c a p i t a l s t r u c t u r e a p p r o p r i a t e l y c o n s i s t s of 44.65% d e b t , b u t by use of t h e "double l e v e r a g e " a d j u s t m e n t , t h e PSC r a i s e d Mountain B e l l ' s d e b t ratio to 55.99%, w i t h o u t an a n a l y s i s of t h e e f f e c t on t h e c o s t of e q u i t y . The a d d i t i o n of 11.34% d e b t i n t o t h e c a p i t a l s t r u c t u r e must be accm- p a n i e d by a change i n t h e cost of e q u i t y , i n o r d e r t o p r o v i d e a r e t u r n t o e q u i t y r e f l e c t i n g t h e i n c r e a s e d r i s k . The r e s u l t is a s u b s t a n t i a l u n d e r s t a t e m e n t of Mountain B e l l ' s revenue requirements--a r e s u l t which is c o n t r a r y to t h e f i n a n c i a l p r i n - c i p l e s r e l i e d on by t h e p a r t i e s , a c c o r d i n g to Mountain B e l l . The e v i d e n c e p r e s e n t e d by t h e PSC e s t a b l i s h e d to t h e s a t i s f a c t i o n of t h e d i s t r i c t judge t h a t t h e "double l e v e r a g e " a d j u s t m e n t w a s based on s u b s t a n t i a l e v i d e n c e . The District Court found t h a t t h e double l e v e r a g e a d j u s t m e n t simply e s t a b l i s h e d t h e t r u e cost of t h a t p o r t i o n of Mountain B e l l ' s e q u i t y (common s t o c k ) a t t r i b u t a b l e to AT&T's f i n a n c i n g (88.55%). The PSC e s t a b l i s h e d 9.86% as t h e t r u e cost by weighing t h e t h r e e asso- c i a t e d costs making up AT&T1s c a p i t a l s t r u c t u r e - - d e b t , p r e f e r r e d s t o c k and common s t o c k . C o n t r a r y to what Mountain B e l l a s s e r t e d , t h i s a d j u s t m e n t d i d n o t i n f u s e a d d i t i o n a l d e b t i n t o Mountain B e l l ' s c a p i t a l s t r u c t u r e . The e a r n i n g s of Mountain B e l l w i l l be s u b j e c t t o t h e same d e b t o b l i g a t i o n s r e g a r d l e s s of t h e s o u r c e of t h e e q u i t y investment. There is no i n c r e a s e i n t h e f i n a n c i a l r i s k n o r any change i n t h e p r i o r i t y of t h e Mountain B e l l s t o c k - h o l d e r s ' claim t o t h e assets o r income of Mountain B e l l . T h e r e f o r e , t h e Mountain B e l l s t o c k h o l d e r s are n o t e n t i t l e d t o a g r e a t e r rate of r e t u r n because t h e r i s k of t h e s t o c k h o l d e r s h a s n o t been i n c r e a s e d . Here t h e r e t u r n to t h e s t o c k h o l d e r s of Mountain B e l l c a p i t a l is in£ luenced because t h e c a p i t a l s t r u c t u r e o f t h e c o n s o l i d a t e d B e l l System h a s v a r y i n g amounts of d e b t i n t h e c a p i t a l s t r u c t u r e of both AT&T and Mountain B e l l , n o t because t h e "double l e v e r a g e " a d j u s t m e n t h a s i n c r e a s e d t h e r i s k to s t o c k h o l d e r s i n Mountain B e l l . W e n o t e t h a t t h e "double l e v e r a g e " a d j u s t m e n t h a s pre- v i o u s l y been recognized by r e g u l a t o r y commissions i n s i t u a t i o n s i n v o l v i n g a p a r e n t and a wholly-owned s u b s i d i a r y : R e General Telephone Company of Wisconsin ( 1 9 6 0 ) , 34 PUR3d 497, 515-519; R e Hawkeye S t a t e Telephone Co. ( 1 9 7 4 ) , 2 PUR4th 166, 180-181; R e United Telephone Co. o f N e w J e r s e y ( 1 9 7 4 ) , 2 PUR4th 299, 307-310; R e M i d s t a t e Telephone C o . , Inc. ( 1 9 7 5 ) , 1 0 PUR4th 88, 95-96; R e C o n t i n e n t a l Telephone Co. o f Minnesota, I n c . ( 1 9 7 6 ) , 1 4 PUR4th 310, 315-317; Re B l a c k s t o n e V a l l e y Electric Company ( 1 9 7 8 ) , 24 PUR4th 309, 321-323. It h a s been recognized b u t denied a p p l i c a - t i o n i n t h e o n l y a p p e l l a t e d e c i s i o n c i t e d i n v o l v i n g a p a r e n t cor- p o r a t i o n owning 86% o f t h e s t o c k of t h e s u b s i d i a r y . New England Telephone & Telegraph Co. v. P u b l i c U t i l i t i e s Commission, s u p r a , M e . , 389 A.2d a t 39-43. T h a t c a s e is c l e a r l y d i s t i n g u i s h a b l e , i n t h a t t h e MaiwCommission f a i l e d to ade- q u a t e l y c o n s i d e r t h e e f f e c t of "double l e v e r a g e " on both t h e m a j o r i t y and m i n o r i t y s h a r e h o l d e r s so as t o e n a b l e t h e c o u r t t o d e t e r m i n e t h e r e a s o n a b l e n e s s of t h e r e s u l t ; a d d i t i o n a l l y t h e method of a p p l y i n g double l e v e r a g e by t h e MaineCommission was n o t s u p p o r t e d by s u b s t a n t i a l e v i d e n c e and was i n c o n s i s t e n t w i t h t h e Commission's own d e c l a r a t i o n concerning t h e "double l e v e r a g e " c o n c e p t . None of t h e s e f a c t o r s is p r e s e n t i n t h e i n s t a n t case. The District Court found t h a t " t h e a p p l i c a t i o n of 'double l e v e r a g e ' d o e s not cause an i n c r e a s e i n f i n a n c i a l r i s k and t h e r e is, t h e r e f o r e , no i n c r e a s e i n t h e c o s t of e q u i t y " and " t h e r e b e i n g no change i n p r i o r i t i e s [ t h e p r i o r i t y of c l a i m s of Mountain B e l l s t o c k h o l d e r s to t h e a s s e t s and income of Mountain B e l l ] t h e r e is no change i n f i n a n c i a l r i s k and no change i n t h e cost of e q u i t y . " (Bracketed material i n s e r t e d . ) W e hold t h a t t h e PSC's o r d e r w a s l a w f u l and was supported by s u b s t a n t i a l evidence. Accordingly, we af f i r m t h e D i s t r i c t C o u r t on t h i s i s s u e mindful of o u r role i n reviewing cases under t h e Montana P u b l i c U t i l i t i e s A c t ( s e c t i o n s 69-3-401, MCA e t s e q . ). Our review i n u t i l i t y rate cases is l i m i t e d to d e t e r m i n i n g whether t h e PSC o r d e r (1) e x c e e d s t h e c o n s t i t u t i o n a l or s t a t u t o r y powers of t h e PSC o r ( 2 ) is based upon a m i s t a k e of l a w . Cascade County Consumer's Ass'n v. PSC ( 1 9 6 4 ) , 144 Mont. 169, 192, 394 P.2d 856, 868. The Commission is t h e judge of t h e f a c t s and t h e c o u r t o n l y d e c i d e s q u e s t i o n s of l a w . New England Telephone & T e l e g r a p h Co. v. P u b l i c U t i l i t i e s Commission, s u p r a , M e . I 390 A.2d a t 15. I n d e c i d i n g q u e s t i o n s of l a w , t h i s Court may d e t e r m i n e whether t h e PSC a c t e d a r b i t r a r i l y and u n r e a s o n a b l y w i t h o u t s u f f i c i e n t e v i d e n c e to s u p p o r t its f i n d i n g s , or e x e r c i s e d its a u t h o r i t y unreasonably, o r set t h e u t i l i t y rates s o l o w t h a t t h e y a r e con£ i s c a t o r y and d e p r i v e t h e u t i l i t y of its p r o p e r t y w i t h o u t due p r o c e s s of l a w . Cascade County Consumers Ass'n v. PSC, s u p r a . T h i s Court on a p p e a l c a n n o t s u b s t i t u t e its judgment f o r t h a t of t h e PSC. S t a t e v. P u b l i c S e r v i c e Comm. ( 1 9 5 7 ) , 1 3 1 Mont. 272, 280-281, 309 P.2d 1035, 1040. Mountain B e l l n e x t c o n t e n d s t h a t t h e "double l e v e r a g e " a d j u s t m e n t a p p l i e d by t h e PSC is i n c o n s i s t e n t w i t h i t s e l f and u n d e r s t a t e s Mountain B e l l ' s revenue r e q u i r e m e n t s i n p a r t by i g n o r i n g t h e p r i n c i p l e s on which t h e "double l e v e r a g e " ad j ustment is based. Mountain B e l l a r g u e s t h a t t h e p r i n c i p l e on which t h e "double l e v e r a g e " a d j u s t m e n t is based is t h a t t h e s o u r c e of f u n d s d e t e r m i n e s its c o s t ; t h a t t h e PSC a p p l i e d its "double l e v e r a g e " a d j u s t m e n t t o r e t a i n e d e a r n i n g s a s w e l l as t o paid-in c a p i t a l of Mountain B e l l ; t h a t PSC m i s a p p l i e d t h e p r i n c i p l e on which t h e "double l e v e r a g e " a d j u s t m e n t is based because t h e s o u r c e of t h e r e t a i n e d e a r n i n g s is n o t AT&T b u t t h e a s s e t s , income, and c a p i t a l s t r u c t u r e of Mountain B e l l ; i n s o doing PSC sourced 88.55% o f Mountain B e l l ' s r e t a i n e d e a r n i n g s to AT&T and a p p l i e d AT&TVs o v e r a l l c o s t of c a p i t a l to t h o s e r e t a i n e d e a r n i n g s . T h i s is i n c o n s i s t e n t w i t h t h e p r i n c i p l e t h a t t h e s o u r c e of funds d e t e r - mines its c o s t , is unsupported by any e v i d e n c e , and is t o t a l l y a r b i t r a r y and i l l o g i c a l , a c c o r d i n g t o Mountain B e l l . The PSC argued t o t h e District Court t h a t t h e t r u e s o u r c e and u l t i m a t e d e s t i n a t i o n of 88.55% o f Mountain B e l l ' s r e t a i n e d e a r n i n g s is AT&T. The c o s t of c a p i t a l a s s o c i a t e d w i t h 88.55% o f Mountain B e l l ' s r e t a i n e d e a r n i n g s is 9.86% ( t h e c o s t of c a p i t a l t o AT&T) because t h a t is t h e cost of c a p i t a l a s s o c i a t e d w i t h t h a t p o r t i o n of Mountain B e l l I s o p e r a t i n g a s s e t s t h a t g e n e r a t e d t h o s e r e t a i n e d e a r n i n g s . I f Mountain B e l l r e t a i n s a p o r t i o n of its e a r n i n g s t h e s e a r e no less t h e c a p i t a l of AT&T t h a n p a i d - i n c a p i t a l . PSC f u r t h e r emphasized t h a t no c o u r t o r commission h a s a c c e p t e d Mountain B e l l ' s argument t h a t t h e s o u r c e of r e t a i n e d ear- n i n g s is t h e s u b s i d i a r y and n o t t h e p a r e n t which c o n t r o l s its s t o c k , o r t h a t a d i s t i n c t i o n should be made between cost of capi- t a l a t t r i b u t a b l e to p a i d - i n c a p i t a l and t h a t a t t r i b u t a b l e to r e t a i n e d e a r n i n g s . Consumer Counsel agreed t h a t t h e r e t a i n e d e a r n i n g s are a r e i n v e s t m e n t by t h e s t o c k h o l d e r s of Mountain B e l l i n t h e company. Consumer Counsel p o i n t e d o u t t h a t b e f o r e Mountain B e l l ' s board of d i r e c t o r s ( c o n t r o l l e d by AT&T by r e a s o n of its m a j o r i t y s t o c k ownership) e v e r r e t a i n e d p a r t of its e a r n i n g s they were a v a i l a b l e to Mountain B e l l 's s t o c k h o l d e r s as d i v i d e n d s . Thus t h e s o u r c e of 88.55% o f Mountain B e l l ' s r e t a i n e d e a r n i n g s is AT&T which h a s complete c o n t r o l o v e r Mountain B e l l 's board of d i r e c t o r s and t h u s complete c o n t r o l o v e r whether its e a r n i n g s are r e t a i n e d by Mountain B e l l or p a i d o u t as d i v i d e n d s . Accordingly, t h e PSC p r o p e r l y included r e t a i n e d e a r n i n g s i n t h e e q u i t y i n v e s t - ment of AT&T i n Mountain B e l l and a p p l i e d AT&T1s c o s t of c a p i t a l t o its e n t i r e e q u i t y investment i n Mountain B e l l . The District Court adopted t h e r e a s o n i n g of B a s i l L. Copeland, Jr. i n h i s article "Double Leverage One More Time," 100 P u b l i c U t i l i t i e s F o r t n i g h t l y 1 9 , i n f i n d i n g i n f a v o r of t h e PSC: " . . . t h e cost of e q u i t y is t h e same whether t h e e q u i t y was r a i s e d i n t h e c a p i t a l market o r e x i s t s i n t h e form of r e t a i n e d e a r n i n g s . I f a s u b s i d i a r y r e t a i n s a p o r t i o n of its e a r n i n g s , t h e e a r n i n g s it r e t a i n s are no less t h e c a p i t a l o f t h e p a r e n t t h a n t h e c a p i t a l recorded on its a c c o u n t s a s ' p a i d in'!" The District Court h e l d t h a t because r e t a i n e d e a r n i n g s are t h e p r o p e r t y of t h e e q u i t y owner (AT&T t o t h e e x t e n t of its 88.55% ownership of Mountain B e l l ' s common s t o c k ) it had a c l a i m a g a i n s t 88.55% of Mountain B e l l ' s r e t a i n e d e a r n i n g s . T h e r e f o r e t h e PSC c o r r e c t l y a p p l i e d its "double l e v e r a g e " a d j u s t m e n t i n o r d e r to r e f l e c t t h e t r u e cost of c a p i t a l a s s o c i a t e d w i t h t h a t p o r t i o n of Mountain B e l l ' s r e t a i n e d e a r n i n g s a t t r i b u t a b l e to t h e p a r e n t The record i n t h i s case shows s u b s t a n t i a l , though con£ l i c t i n g , e v i d e n c e s u p p o r t i n g t h e PSC's a p p l i c a t i o n of t h e "double l e v e r a g e " a d j u s t m e n t . The d i s t r i c t judge based h i s f i n - d i n g s on t h a t e v i d e n c e , and we w i l l n o t o v e r t u r n him. I n sum, t h e D i s t r i c t Court h e l d t h a t PSC1s c o n c e r n w a s to d e t e r m i n e a rate base which r e p r e s e n t s t h e t o t a l i n v e s t m e n t i n p r o p e r t y used and u s e f u l i n r e n d e r i n g u t i l i t y s e r v i c e s and to m u l t i p l y t h a t by a r a t e of r e t u r n s u f f i c i e n t t o g e n e r a t e enough e a r n i n g s t o make t h e r e t u r n on investment f a i r and r e a s o n a b l e . The District Court f u r t h e r h e l d t h a t PSC f u n c t i o n is f u l f i l l e d when it d e t e r m i n e s such total investment and a rate of r e t u r n which w i l l af f o r d a r e a s o n a b l e r e t u r n on t h a t investment . T h i s is a correct s t a t e m e n t and t h e e v i d e n c e shows t h a t t h e PSC a c t e d r e a s o n a b l y and w i t h i n t h e bounds of t h e l a w . I t would appear t h a t t h e PSC a p p l i e d t h e "double l e v e r a g e " a d j u s t m e n t i n o r d e r t o p r o t e c t Montana r a t e p a y e r s from paying e x c e s s i v e u t i l i t y rates. A f a i r o v e r a l l r a t e of r e t u r n to a l l s t o c k h o l d e r s on t h e i r investment was f i x e d and determined, b u t because t h e c a p i t a l s t r u c t u r e of AT&T a f f o r d e d double l e v e r a g e to t h e common s t o c k h o l d e r s of AT&T t h e i r rate of r e t u r n on t h e i r i n v e s t m e n t i n Mountain B e l l would always be g r e a t e r t h a n t h e m i n o r i t y s t o c k h o l d e r s i n Mountain B e l l r e g a r d l e s s of what rate of r e t u r n might be adopted by t h e PSC. T h i s d i s c r e p a n c y is i n h e r e n t i n t h e c a p i t a l s t r u c t u r e of t h e p a r e n t AT&T v i s - a - v i s t h e c a p i t a l s t r u c t u r e of t h e s u b s i d i a r y Mountain B e l l . T h i s c a p i t a l s t r u c t u r e was determined by t h e management of t h e two companies, n o t by t h e rate o r d e r of t h e PSC. The PSC1s f u n c t i o n was f u l f i l l e d when it e s t a b l i s h e d a f a i r and r e a s o n a b l e r e t u r n on Mountain B e l l ' s investment i n p l a n t and equipment used and u s e f u l i n f u r n i s h i n g its s e r v i c e s to t h e p u b l i c . It is a f u n c t i o n of management to d i s t r i b u t e t h a t r e t u r n t o its s t o c k h o l d e r s and i f Mountain B e l l ' s c a p i t a l s t r u c t u r e p r e v e n t s an e q u i t a b l e d i s t r i b u t i o n , t h i s is n o t t h e f a u l t of t h e PSC. To g u a r a n t e e t h e m i n o r i t y s t o c k h o l d e r s t h e 11.25% r e t u r n found to be f a i r and r e a s o n a b l e by t h e PSC would r e s u l t i n an unconscionable and e x c e s s i v e r e t u r n of 14.26% to AT&T common s t o c k h o l d e r s a t t h e expense of Montana r a t e p a y e r s , a l l because of t h e c a p i t a l s t r u c - t u r e of t h e two companies. T h i s i n e q u i t y w i l l not r e c u r i n t h e f u t u r e as Mountain B e l l is now a wholly-owned s u b s i d i a r y of AT&T w i t h no m i n o r i t y s t o c k h o l d e r s i n Mountain B e l l . Affirmed. Chief J u s t i c e Hon. %ark S u l l i v a n , s i t t i n g i n p l a c e of M r . J u s t i c e Shea who deems h i m s e l f d i s q u a l i f i e d .