Opinion ID: 1422157
Heading Depth: 1
Heading Rank: 5

Heading: Debt Financing.

Text: Before the commission and before the district court, one of the protestants against the increased rates filed a brief in which it contended that a great saving to the telephone users could be effected by debt financing; that a proper and safe ratio of a funded debt to the entire capital structure was perhaps 30% to 40%; that operating with money thus obtained at a possible interest rate of 3 ¼% to 3 ½%, the telephone users would benefit by the elimination pro tanto of equity capital which might otherwise claim a return of 6% to 7%; that a further saving would be effected through deduction of such interest payments from revenue for income tax purposes. The attorney general, on behalf of the commission, pursued this thought in his cross examination of the utility's witnesses. The utility's reply was that with a financial structure thus weakened, and with danger of not being able to meet interest or principal payments when due and the possibility of a resulting receivership, a return of at least 10% on the equity capital would be necessary to attract investors, and that no saving would result. In its opinion of January 3, 1951, the commission referred to testimony of the expert financial witnesses for the protestants as being too theoretical or academic especially in regard to bond earnings and interest rates to be convincing. It was nevertheless inclined to feel that a funded debt of 40% would be appropriate. It concluded: While we do not, on the showing made, accept the applicant's present capital structure as satisfactory and believe that 40% of funded debt at 3 ¼% or less would save money, it is certain that applicant is constantly advised, if not actually directed, as to its financial operations by the parent company. No part of this situation is in issue before this court, as neither the commission's order nor the court's judgment affirming same seeks any justification or support in the company's complete operation on equity capital, nor did respondent in its brief or oral argument place any reliance on the point. Nor does it appear that the commission took any such possible saving into consideration when it found that 6.47% was a fair return. We therefore refrain from considering it or discussing its merit, if any. But see the opinion of the learned Chief Justice Stanley E. Qua, speaking for the Supreme Judicial Court of Massachusetts in New England Tel. & Tel. Co. v. Department of Public Utilities, 327 Mass. 81, 97 N.E.2d 509. See also Southwestern Bell Tel. Co. v. State, 204 Okla. 225, 230 P.2d 260.