Opinion ID: 1106788
Heading Depth: 1
Heading Rank: 4

Heading: Cost of Debt Capital.

Text: Southern Bell's long term debt comprises debenture bonds bearing various rates of interest. The latest issue (as shown by this record) in the amount of $70,000,000 was sold to the public in June, 1957 at an interest cost of 4.93%. Notwithstanding this the Commission for purposes of this proceeding adopted a range of 4% to 4.1% as the current cost of debt capital which it applied to the incremental debt capital necessary to raise the Company's debt ratio to the level of 45%. In contending that the rate of interest should be 5%, Southern Bell in its brief complains: This unrealistic rate of interest of 4% is immediately applied by the Commission to $37 million of fictitious long term debt which would require a period of years to actually raise but which the Commission arbitrarily substituted for some of the Company's present capital stock. While the Commission may be theoretically right in that Southern Bell, according to the formula, should have always maintained a debt ratio of 45%, and should have sold its bonds while interest rates were lower, we agree with the Company that this is unrealistic, in that Southern Bell must raise this additional money at current and future cost, in order to meet the new formula and in order that it may carry out the vast expansion program so necessary in this state. Even the Commission's expert witness Hirsch used 5% and 5.1% in certain instances in setting up hypothetical debt ratios. We believe this complaint is well founded, and that on the record before us the cost of debt capital should be fixed at 5%. Indeed, when the Commission reconsiders the matter, it may well find that intervening experience justifies an even higher rate of interest than 5%.