Opinion ID: 2329066
Heading Depth: 2
Heading Rank: 1

Heading: Hypothetical Capital Structure

Text: One of the commission's essential functions in the ratemaking process is the determination of an appropriate rate of return the utility will be permitted to earn. [15] NET 1982, 448 A.2d at 284. The commission generally determines a company's rate of return by combining the capital structure of the utility with the proper cost of capital. Id. In the case at bar, however, the commission did not rely on Pine Tree's actual capital structure, which included virtually no debt, and instead adopted a hypothetical capital structure of 60% equity and 40% debt. Pine Tree, citing 35-A M.R.S.A. § 1306(1)-(2) (1988), [16] asserts that the commission erred in imposing this hypothetical capital structure without a prior showing that Pine Tree's rates were unreasonable. We disagree. Section 1306(2) expressly provides that if the Commission finds that a term, condition, practice, act or service complained of is unjust, unreasonable, insufficient, unjustly discriminatory or otherwise in violation of this Title, then it may by order establish or change terms, conditions, measurement, practice, service or acts, as it finds to be just and reasonable. 35-A M.R.S.A. § 1306(2) (1988) (emphasis added). Moreover, we have held that: There are two well-recognized circumstances in which a utility commission might disregard a utility's actual capital structure and adopt a hypothetical capital structure for ratemaking purposes. This first occurs when the utility's actual debt-equity ratio may be deemed to be inefficient and unreasonable, because it contains too much equity and not enough debt, thereby necessitating an inflated rate of return.... The second circumstance occurs when the utility is part of a holding company system. New England Tel. & Tel. Co. v. Public Util. Comm'n, 390 A.2d 8, 39 (Me.1978) (hereinafter NET 1978). The commission in the case before us is well-within the first of the two well-recognized circumstances justifying the adoption of a hypothetical capital structure. Pine Tree does not challenge the reasonableness of the hypothetical structure adopted by the commission and the structure adopted was supported by sufficient evidence in the record.