Opinion ID: 372907
Heading Depth: 2
Heading Rank: 3

Heading: The Combined Effect

Text: 129 In part A of this section, we have upheld the Commission's determination that 11.3% Was a fair rate of return to the equity invested by COMSAT's shareholders. In part B, we have remanded the question of imputing debt into the capital structure so that the process may be made gradual. In joining together these two determinations, we must take account of a potential inconsistency. The Commission's conclusion that COMSAT was, as of 1973, no more risky an investment than AT&T was found to be defensible entirely because of COMSAT's all-equity capital structure which had the effect of reducing risk. Yet that all-equity capital structure created an inordinately high cost of capital, imposing an excessive burden on the rate-payers, and it was for that reason that we upheld the hypothetical imputation of debt. If COMSAT moves toward a 45% Level of debt, the Commission will be forced to reconsider its decision that COMSAT is no more risky than AT&T. The presence of any debt in the capital structure undercuts the Commission's 11.3% Rate of return estimate. In only one case will the Commission not be forced to reconsider that estimate: if COMSAT persists in an all-equity structure. 75 If COMSAT does not take steps to lever its capital structure over the time period specified by the Commission upon remand, then it has consciously accepted a lower rate of return for its stockholders (because of the imputed debt) while guaranteeing them minimum risk (because of no actual debt). That could be a proper decision for COMSAT to make.