Opinion ID: 1908051
Heading Depth: 2
Heading Rank: 3

Heading: The Return on Equity.

Text: The third issue before us is the propriety of the commission's determination of a return on equity of 11.53%. The company claims this determination was based on faulty and discredited testimony. It is particularly appropriate here to note our limited appellate function. It is not within our province to determine which testimony is the most accurate, believable, or reliable. That is the task of the commission. A rate of return set by the commission is presumptively reasonable; we will not interfere unless the company demonstrates by clear and convincing evidence that it is clearly, palpably and grossly unreasonable. Rhode Island Consumers' Council v. Smith, 111 R.I. at 295, 302 A.2d at 772; Narragansett Elec. Co. v. Kennelly, 88 R.I. 56, 84, 143 A.2d 709, 725 (1958). The commission considered the testimony of John Cogswell, the company's general financial supervisor, and Robert Stich, a professor at the University of Missouri, both of whom testified for the company. It also considered evidence presented by David Kosh and John Wilson, experts called by the administrator of the Division of Public Utilities. Mr. Cogswell and Mr. Stich both recommended a return on equity of between 13% and 14%. The commission found that Mr. Stich's estimate, which was based on the earnings of comparable companies, was flawed because the measuring groups were in fact composed of companies having dissimilar risk characteristics. The commission also concluded that the projected 61/2% growth in earnings per share upon which Mr. Stich's estimate was based was not supported by any evidence. Mr. Cogswell's testimony was rejected for similar reasons. The commission found that Mr. Cogswell had based his analysis of the competition for capital on a group of companies which had atypically high earnings. It also did not agree with the use of bond ratings as a selection factor for comparable companies. The commission relied primarily on the testimony of Mr. Wilson, who used the discount cash flow (DCF) method of analysis. We have previously acknowledged the legitimacy of this method of ascertaining equity cost. Rhode Island Consumers' Council v. Smith, 111 R.I. at 295, 302 A.2d at 771-72. The company argued at great length that Mr. Wilson's testimony was inaccurate in several respects: that the data he used was distorted, that the comparable companies included New England Telephone itself, that some of the comparable rates of return were in fact from companies with preferred stock (of which the company has none), and that the comparable companies had an unreasonable mixture of high and low bond ratings. We have considered these arguments but remain unpersuaded for two reasons. First, they are almost exclusively directed to questions of fact which must be answered by the commission, not by us. The commission found Mr. Wilson's testimony to be well-reasoned and based on sufficient evidence. In reviewing the record, we cannot say that this conclusion is clearly wrong. Second, the company failed to demonstrate that the alleged errors resulted in a cost of equity figure that was grossly and palpably unreasonable. Granted, it may be difficult to prove an inadequate return on capital in the absence of a recent stock issue. See 1 Priest, Principles of Public Utility Regulation at 199 (1969). Nonetheless, the company failed to show that it could not successfully market its stock, or that the interest of present stockholders was in danger of being diluted, or that any other condition existed which demonstrated that 11.53% was an insufficient return on equity. Accordingly, we will not disturb the finding of the commission. We therefore reject the company's contention that the commission misconceived the nature of the gross receipts tax and consequently failed to make an adequate working capital allowance. We also reject the company's contention that the commission adopted a return on equity that was based on faulty and discredited testimony. We sustain the company's contention that the erosion adjustment set by the commission did not adequately reflect the company's post test year experience. We also sustain the company's contention that the commission's selective use of post test year experience in calculating the rate of return was erroneous. The records certified to this court are ordered returned to the commission with our decision endorsed thereon and with a directive that the commission recalculate the erosion adjustment and rate of return in accordance with directions in this opinion.