Opinion ID: 1356002
Heading Depth: 3
Heading Rank: 2

Heading: Return on Debt

Text: {20} Zia contends that it was unreasonable and arbitrary for the Commission to determine that the rate of return on debt should be calculated on the imputed average embedded cost of debt. The imputed average embedded cost of debt is the average cost of additional debt for the eight comparison companies, or 8.57%. Thus, the embedded cost of debt used by the Commission was the amount a typical natural gas utility company with existing debt would pay to borrow more money. Zia presented evidence proposing that the Commission use the marginal cost of debt to determine the rate of return on debt. Marginal cost of debt represents the cost of debt if debt were issued to a debtor just entering the market under current interest rates. Zia argues the marginal cost of debt is the correct rate because Zia currently has no existing debt and 9% is the rate on a line of credit on which Zia could presently draw. {21} The Commission used the embedded cost of debt calculation in attempt to find a reasonable rate and pursuant to Rule 630 Schedule G-3 of the Commission Rules. See New Mexico Pub. Util. Comm'n, Code of Rules and Regulations, Rule 630 Schedule G-3 (1988 Annot.) (rule effective June 30, 1988) [hereinafter NMPUC Rules]. In this instance, where a utility's capital structure is inconsistent with the average for its type and size, resulting in unnecessarily high rates, the Commission may determine the cost of debt as if the capital structure were average as long as decisions properly left to management are respected. Therefore it is reasonable and not arbitrary that the Commission rules provide for the use of embedded cost of debt. The Commission's use of an 8.57% rate of return on debt was based on substantial evidence and is not grounds for reversal.