Opinion ID: 2633766
Heading Depth: 3
Heading Rank: 6

Heading: Return on Equity

Text: The Carriers argue that RCA departed from precedent without adequate explanation when it expanded its purview beyond principle reliance on a discounted cash flow (DCF) methodology for determining the appropriate rate of return on equity. Instead, RCA averaged the results of four different methodologies. Order No. 151 states in relevant part: The parties largely failed to successfully rebut each other's various approaches to determining return on equity. For the most part, the record fails to provide a theoretical or empirical basis for deciding whether any particular method is more appropriate than another. The record also fails to suggest that any of the expert witnesses have applied their chosen methods inappropriately, or have chosen inappropriate data or parameters. We find Tesoro's expert witness to be the most credible. We base our rate of return findings primarily upon Tesoro's witness's recommendation. Tesoro sponsors multiple methods because it believes investors rely on the widest possible information available. We agree with Tesoro that investors are aware of all the various traditional cost of common equity models discussed in financial literature. Absent good reason for believing that investors weight the results of one method more heavily than another in their assessment of an appropriate rate of return, it is reasonable to hold that investors ascribe weight to them all. We note that the APUC has relied on a variety of methods when those methods were reliable given the specific facts at hand. In addition, we find Tesoro's DCF analysis the most reliable . . . we primarily rely upon Tesoro's recommendation. . . . This passage supports the Carriers' argument that RCA stepped beyond a primary reliance on a DCF methodology to a more catholic acceptance of other methods. But RCA more than adequately explained its reasoning. It found Tesoro's Mr. Hanley to be a compelling expert witness. He, unlike others, testified about how investors actually tick. RCA preferred subtleties of Mr. Hanley's DCF methodology, as compared to other DCF presenters. The quoted excerpt from RCA's rate of return analysis reveals that the area is technical; that competing theoretical models are well developed; that RCA understood what it was doing; and that it was thoughtful, conscientious, and discursive. RCA had a reasonable rather than an arbitrary basis, supported by the record, for its approach. A reviewing court is not entitled to probe further. RCA has adequately explained any departure from agency precedent and is supported by the record in arriving at its rate of return conclusions.