MOUNTAIN STATES TELEPHONE v DEPT

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No. 80-99 IN THE SUPREME COURT OF THE STATE OF MONTANA 1981 MOUNTAIN STATES TELEPHONE AND TELEGRAPH COMPANY, a Colorado corporation, Plaintiff and Appellant, VS. THE DEPARTMENT OF PUBLIC SERVICE REGULATION, MONTANA PUBLICE SERVICE COMMISSION et al., Defendants and Respondents. Appeal from: District Court of the First Judicial District, In and for the County of Lewis and Clark. Honorable Peter Meloy, Judge presiding. Counsel of Record: For Appellant: Hughes, Bennett, Kellner and Sullivan, Helena, Montana J. Walter Hyer argued, Denver, Colorado For Respondents: Calvin K. Simshaw argued, M.P.S.C., Helena, Montana James C. Paine Montana Consumer Counsel Counsel, Helena, Montana John Allen argued, Consumer Counsel, Helena, Montana Submitted: January 12, 1981 Decided : Filed: - FEB 5 l9%l M r . Chief J u s t i c e Frank I . H a s w e l l d e l i v e r e d t h e Opinion of t h e Court. T h i s is a n a p p e a l by M o u n t a i n S t a t e s T e l e p h o n e & Telegraph Company ( M o u n t a i n B e l l ) f r o m a j u d g m e n t o f t h e D i s t r i c t C o u r t i n a u t i l i t y rate case. The Montana P u b l i c S e r v i c e Commission (PSC) g r a n t e d Mountain B e l l an a n n u a l rate i n c r e a s e t o t a l l i n g $ 3 , 0 9 7 , 0 0 0 a s compared t o t h e $ 1 1 . 8 3 m i l l i o n s o u g h t . District Court concurred. The W e affirm. M o u n t a i n B e l l p e t i t i o n e d t h e PSC f o r u t i l i t y r a t e i n c r e a s e s t h a t would g e n e r a t e $ 1 1 . 8 3 m i l l i o n a d d i t i o n a l y e a r l y r e v e n u e s f r o m i t s Montana c u s t o m e r s . PSC g r a n t e d i n t e r i m r a t e i n c r e a s e s o f $ 2 , 3 2 6 , 0 0 0 p e n d i n g i t s f i n a l d e c i s i o n which a r e n o t a t issue i n t h i s appeal. PSC's f i n a l o r d e r g r a n t e d M o u n t a i n B e l l a n a n n u a l r e v e n u e i n c r e a s e of $ 3 , 0 9 7 , 0 0 0 i n increased charges f o r i t s s e r v i c e s t o i t s Montana c u s t o m e r s . M o u n t a i n B e l l p e t i t i o n e d t h e D i s t r i c t C o u r t o f L e w i s and C l a r k County f o r j u d i c i a l r e v i e w o f P S C ' s f i n a l o r d e r p u r s u a n t to t h e Montana A d m i n i s t r a t i v e P r o c e d u r e s A c t . Subsequently Mountain B e l l e l e c t e d t o p r o c e e d u n d e r Montana P u b l i c U t i l i t i e s A c t ( S e c t i o n 69-3-401, MCA e t s e q ) . o r d e r n a r r o w e d t h e i s s u e s t o two: The D i s t r i c t C o u r t ' s p r e t r i a l (1) PSC's a p p l i c a t i o n of t h e " d o u b l e l e v e r a g e " a d j u s t m e n t i n d e t e r m i n i n g t h e c o s t of c a p i t a l i n Mountain B e l l ' s rate b a s e , ( 2 ) PSC's "NARUC" tax adjustment. The D i s t r i c t C o u r t r e c e i v e d t h e t r a n s c r i p t of p r o c e e d i n g s b e £ o r e t h e PSC, h e a r d a d d i t i o n a l e v i d e n c e , and remanded t h e case t o t h e PSC f o r r e c o n s i d e r a t i o n on t h e b a s i s o f t h e a d d i t i o n a l evidence. The PSC r e c o n s i d e r e d , a £ f i r m e d i t s p r e v i o u s f i n a l o r d e r , and r e t u r n e d t h e case t o t h e D i s t r i c t C o u r t . The D i s t r i c t C o u r t a f f i r m e d PSC's f i n a l o r d e r h o l d i n g (1) t h a t t h e " d o u b l e l e v e r a g e " c o n c e p t was l a w f u l , was a p p l i e d w i t h i n t h e s t a t u t o r y a u t h o r i t y o f t h e PSC, and was s u p p o r t e d by s u b s t a n t i a l e v i d e n c e , a n d ( 2 ) t h a t t h e "NARUC" t a x a d j u s t m e n t was w i t h i n t h e s t a t u t o r y a u t h o r i t y o f t h e PSC and was s u p p o r t e d by s u b s t a n t i a l e v i d e n c e . M o u n t a i n B e l l a p p e a l e d from t h e j u d g m e n t of t h e D i s t r i c t C o u r t , a b a n d o n i n g t h e i s s u e of t h e "NARUC" t a x a d j u s t m e n t . The sole i s s u e on a p p e a l i s t h e l e g a l i t y of P S C 1 s " d o u b l e leverage'' a d j u s t m e n t i n d e t e r m i n i n g t h e cost of c a p i t a l i n Mountain B e l l ' s rate base. B e f o r e c o n s i d e r i n g t h e arguments of Mountain B e l l , a n u n d e r s t a n d i n g of t h e c a p i t a l s t r u c t u r e o f M o u n t a i n B e l l and i t s p a r e n t company, AT&T i s n e c e s s a r y . The " d o u b l e l e v e r a g e " a d j u s t m e n t , as a p p l i e d h e r e , is p r e m i s e d o n t h e PSC1s cons i d e r a t i o n of t h e p a r e n t - s u b s i d i a r y f i n a n c i a l r e l a t i o n s h i p and i t s e f f e c t o n t h e c o s t of c a p i t a l i n M o u n t a i n B e l l ' s r a t e b a s e . I t i s a b a s i c p r i n c i p l e of u t i l i t y r e g u l a t i o n t h a t a u t i - l i t y is e n t i t l e d t o r e c e i v e a f a i r and r e a s o n a b l e r a t e of r e t u r n o n i t s i n v e s t m e n t i n p l a n t and e q u i p m e n t u s e d t o p r o v i d e i t s serv i c e s to t h e p u b l i c . I n d e t e r m i n i n g a f a i r and r e a s o n a b l e r a t e o f r e t u r n , it is n e c e s s a r y t o d e t e r m i n e w h a t it c o s t s t h e u t i l i t y t o secure the required c a p i t a l t o finance its operations. This " c o s t o f c a p i t a l " approach to u t i l i t y ratemaking i n v o l v e s d e t e r m i n i n g t h e c o m p o s i t e c o s t o f t h e s e v e r a l t y p e s of t h e u t i l i t y ' s c a p i t a l , p r o p e r l y weighted on t h e b a s i s of a n a p p r o p r i a t e c a p i t a l structure. New England Telephone & T e l e g r a p h Co. v . P u b l i c U t i l i t y Commission ( 1 9 7 8 ), Me. , 390 A.2d 8, 3 2 . The " c o s t of c a p i t a l " involves not o n l y t h e i n t e r e s t t h e u t i l i t y must p a y o n i t s borrowed c a p i t a l ( d e b t ) , b u t a l s o t h e cost of a t t r a c t i n g p u r c h a s e r s o f i t s common s t o c k ( e q u i t y ) . A regulatory c o m m i s s i o n s u c h as t h e PSC m u s t a u t h o r i z e u t i l i t y rates s u f f i c i e n t t o c o v e r t h e u t i l i t y ' s c o s t o f d e b t and c o s t o f e q u i t y , b u t no more, o r t h e u t i l i t y ' s c u s t o m e r s w i l l be p a y i n g e x c e s s i v e r a t e s f o r the services the u t i l i t y provides. I n t h i s case M o u n t a i n B e l l ' s c a p i t a l s t r u c t u r e as r e f l e c t e d i n i t s books i n d i c a t e s t h a t it is f u n d e d 44.65% b y b o r r o w e d f u n d s ( d e b t ) a n d 55.35% b y s a l e of i t s common s t o c k (equity). B e c a u s e M o u n t a i n B e l l is p a r t i a l l y f i n a n c e d by d e b t and p a r t i a l l y f i n a n c e d by e q u i t y , M o u n t a i n B e l l ' s common s t o c k h o l d e r s a r e s a i d t o be " l e v e r a g e d " t o t h e e x t e n t t h a t t h e c o s t o f i t s d e b t i s l e s s t h a n t h e ( w e i g h t e d ) c o s t of i t s c a p i t a l . I n o t h e r w o r d s , M o u n t a i n B e l l ' s common s t o c k h o l d e r s a r e " l e v e r a g e d " b e c a u s e M o u n t a i n B e l l i s p a y i n g l e s s i n t e r e s t on i t s b o r r o w e d f u n d s t h a n t h e r e t u r n i t makes on t h e u s e of i t s borrowed f u n d s . T h i s is l e v e r a g e # l . B u t i n t h i s c a s e t h e r e i s a s e c o n d or " d o u b l e l e v e r a g e " e n j o y e d by t h e common s t o c k h o l d e r s of AT&T a r i s i n g o u t of t h e parent-subsidiary r e l a t i o n s h i p b e t w e e n AT&T and M o u n t a i n B e l l . When t h i s c a s e was h e a r d by t h e PSC, ATbT owned 8 8 . 5 5 % o f t h e common s t o c k of M o u n t a i n B e l l , w i t h t h e b a l a n c e b e i n g h e l d by minority stockholders. "double leveraged": Thus t h e common s t o c k h o l d e r s of AT&T a r e f i r s t , b e c a u s e t h e c o s t of d e b t i n A T & T 1 s c a p i t a l s t r u c t u r e is less t h a n t h e r e t u r n it makes on t h e u s e of i t s borrowed f u n d s ; and s e c o n d b e c a u s e it d e r i v e s t h e b e n e f i t of s i m i l a r l e v e r a g e i n M o u n t a i n B e l l ' s own c a p i t a l s t r u c t u r e by r e a s o n of i t s 8 8 . 5 5 % o w n e r s h i p of M o u n t a i n B e l l ' s common s t o c k . The PSC found t h a t i f t h e " c o s t of c a p i t a l " i n M o u n t a i n Bell's r a t e b a s e was c o n s i d e r e d i n i s o l a t i o n w i t h o u t r e g a r d t o t h e " d o u b l e l e v e r a g e " e n j o y e d by A T & T 8 s common s t o c k h o l d e r s , it would r e s u l t i n a n e x c e s s i v e r e t u r n t o AT&T's common s t o c k h o l d e r s a t t h e e x p e n s e of Montana u t i l i t y r a t e p a y e r s . To c o r r e c t t h i s i n e q u i t y , t h e PSC a p p l i e d a " d o u b l e l e v e r a g e " a d j u s t m e n t i n d e t e r m i n i n g t h e " c o s t of c a p i t a l " i n M o u n t a i n B e l l ' s r a t e b a s e . I n summary f o r m , t h e PSC a p p l i e d t h e " d o u b l e l e v e r a g e " a d j u s t m e n t i n t h i s manner: (1) PSC d e t e r m i n e d t h a t t h e c a p i t a l s t r u c t u r e of M o u n t a i n B e l l was composed of 4 5 . 6 5 % d e b t ( b o r r o w e d f u n d s ) and 5 5 . 3 5 % e q u i t y (common s t o c k ) a s r e f l e c t e d i n i t s b o o k s . ( 2 ) PSC d e t e r m i n e d t h a t a n 1 1 . 2 5 % r e t u r n on t h e c a p i t a l i n v e s t e d i n M o u n t a i n B e l l was a f a i r and r e a s o n a b l e r a t e of return. ( 3 ) PSC d e t e r m i n e d t h a t i f ~ o u n t a i nB e l l had b e e n f u n d e d i n t h e open market t h e weighted c o s t of Mountain B e l l would h a v e b e e n 9 . 4 7 3 , capital I s f i g u r e d as f o l l o w s : Weighted Cost Type - -o f C a p i t a l % o - -f C a p i t a l i z a t i o n Cost Debt 44.65% X 7.26% = 3.24% 55.35% 100.00% X 11.25% = 6.23% 9.47% Common S t o c k ( 4 ) PSC d e t e r m i n e d t h a t 8 8 . 5 5 % o f M o u n t a i n B e l l ' s e q u i t y i s owned by AT&T whose w e i g h t e d c o s t o f c a p i t a l is 9.86% f i g u r e d as f o l l o w s : Weighted Cost Type - -o f C a p i t a l % - of C a p i t a l i z a t i o n Cost Debt 23.1% X 6.47% = 1 . 4 9 % 8.0% X 7.82% = Preferred Stock .63% Common S t o c k ( 5 ) PSC d e t e r m i n e d t h a t 8 8 . 5 5 % o f M o u n t a i n B e l l ' s e q u i t y s h o u l d be s o u r c e d t o AT&T b e c a u s e it owned 88.55% o f M o u n t a i n Bell's s t o c k ; and A T & T t s c o s t of c a p i t a l o f 9.86% s h o u l d be a p p l i e d t o such 88.55%. The r e m a i n i n g 1 1 . 4 5 % o f M o u n t a i n B e l l ' s e q u i t y h e l d by m i n o r i t y s t o c k h o l d e r s was a l l o w e d a c a p i t a l c o s t ( 6 ) PSC d e t e r m i n e d t h a t t h e c o m p o s i t e w e i g h t e d c o s t of c a p i t a l t o M o u n t a i n B e l l was 8 . 7 8 % b a s e d o n t h e f o l l o w i n g computation : Weighted Type - -o f C a p i t a l - -f C a p i t a l i z a t i o n % o Cost Debt 44.65 X 7.26% = 3.24% E q u i t y s u p p l i e d by AT&T (88.55% x 55.35%) 49.01 X 9.86% = 4.83% Cost E q u i t y s u p p l i e d by minority stockholders The u s e of 8 . 7 8 % a s t h e w e i g h t e d c o s t o f c a p i t a l of M o u n t a i n B e l l w i l l r e s u l t i n a r e t u r n of 1 0 . 0 1 % t o i t s m i n o r i t y s t o c k h o l d e r s r a t h e r t h a n t h e 1 1 . 2 5 % f o u n d to r e a s o n a b l e r e t u r n by t h e PSC. be a f a i r and The D i s t r i c t C o u r t q u i t y was t h e r e s u l t o f t h e c a p i t a l s t r u c t u r e of h e l d t h i s ineAT&T and M o u n t a i n B e l l r a t h e r t h a n t h e PSC's r a t e o r d e r . The District C o u r t p o i n t e d o u t t h a t t h e PSC's f u n c t i o n was f u l f i l l e d when it e s t a b l i s h e d a f a i r and r e a s o n a b l e r a t e of r e t u r n o n t h e u t i l i t y ' s i n v e s t m e n t r e g a r d l e s s o f how t h e u t i l i t y ' s management d i s t r i b u t e d t h a t r e t u r n among i t s s t o c k h o l d e r s . Mountain B e l l advances t h r e e p r i n c i p a l arguments a g a i n s t t h e PSC1s a p p l i c a t i o n o f t h e " d o u b l e l e v e r a g e " a d j u s t m e n t i n d e t e r m i n i n g t h e cost o f c a p i t a l i n M o u n t a i n B e l l ' s r a t e b a s e : (1) t h a t it is n o t s u p p o r t e d by s u b s t a n t i a l e v i d e n c e , (2) that t h e " d o u b l e l e v e r a g e " a d j u s t m e n t as a p p l i e d by t h e PSC is i n c o n s i s t e n t within i t s e l f , i g n o r i n g t h e v e r y p r i n c i p l e s o n which it i s b a s e d , and ( 3 ) i t is p r e m i s e d o n a d i s r e g a r d of a p p l i c a b l e law i n t h a t t h e m i n o r i t y s t o c k h o l d e r s w i l l n o t r e c e i v e t h e r e t u r n on t h e i r i n v e s t m e n t f o u n d t o be f a i r and r e a s o n a b l e by t h e PSC. A t t h e o u t s e t we n o t e t h a t Mountain B e l l ' s t h i r d argument i s now m o o t . The m i n o r i t y s t o c k h o l d e r ' s i n t e r e s t s i n M o u n t a i n B e l l h a v e b e e n p u r c h a s e d by AT&T. M o u n t a i n B e l l i s now a w h o l l y - owned s u b s i d i a r y o f AT&T. M o u n t a i n B e l l c o n t e n d s f i r s t t h a t PSC's u s e of t h e " d o u b l e l e v e r a g e " a d j u s t m e n t m u s t be s e t a s i d e as u n s u p p o r t e d by s u b s t a n t i a l evidence. Mountain B e l l urges t h a t t h e u n c o n t r a d i c t e d e v i - d e n c e shows t h a t M o u n t a i n B e l l ' s c a p i t a l s t r u c t u r e a p p r o p r i a t e l y c o n s i s t s o f 44.65% d e b t , b u t by u s e of t h e " d o u b l e l e v e r a g e " a d j u s t m e n t , t h e PSC r a i s e d M o u n t a i n B e l l ' s d e b t r a t i o to 5 5 . 9 9 % , w i t h o u t a n a n a l y s i s of t h e e f f e c t o n t h e c o s t of e q u i t y . The a d d i t i o n o f 1 1 . 3 4 % d e b t i n t o t h e c a p i t a l s t r u c t u r e m u s t be accmp a n i e d by a c h a n g e i n t h e c o s t of e q u i t y , i n order t o provide a r e t u r n t o equity reflecting the increased risk. The r e s u l t i s a s u b s t a n t i a l u n d e r s t a t e m e n t of Mountain B e l l ' s revenue requirements--a r e s u l t w h i c h is c o n t r a r y t o t h e f i n a n c i a l p r i n - c i p l e s r e l i e d on by t h e p a r t i e s , a c c o r d i n g to M o u n t a i n B e l l . The e v i d e n c e p r e s e n t e d by t h e PSC e s t a b l i s h e d t o t h e s a t i s f a c t i o n of t h e d i s t r i c t judge t h a t t h e "double l e v e r a g e " a d j u s t m e n t w a s based on s u b s t a n t i a l e v i d e n c e . The D i s t r i c t C o u r t found t h a t t h e double l e v e r a g e adjustment simply e s t a b l i s h e d t h e t r u e c o s t o f t h a t p o r t i o n o f M o u n t a i n B e l l ' s e q u i t y (common s t o c k ) a t t r i b u t a b l e t o AT&T's f i n a n c i n g ( 8 8 . 5 5 % ) . The PSC e s t a b l i s h e d 9 . 8 6 % a s t h e t r u e cost by w e i g h i n g t h e t h r e e a s s o c i a t e d c o s t s making up AT&T1s c a p i t a l s t r u c t u r e - - d e b t , s t o c k and common s t o c k . preferred C o n t r a r y to what Mountain B e l l a s s e r t e d , t h i s a d j u s t m e n t d i d n o t i n f u s e a d d i t i o n a l d e b t i n t o Mountain B e l l ' s capital structure. The e a r n i n g s of M o u n t a i n B e l l w i l l be s u b j e c t t o t h e same d e b t o b l i g a t i o n s r e g a r d l e s s of t h e s o u r c e o f t h e equity investment. T h e r e is no i n c r e a s e i n t h e f i n a n c i a l r i s k n o r any change i n t h e p r i o r i t y of t h e Mountain B e l l s t o c k h o l d e r s ' claim t o t h e a s s e t s o r income o f M o u n t a i n B e l l . T h e r e f o r e , t h e M o u n t a i n B e l l s t o c k h o l d e r s are n o t e n t i t l e d t o a g r e a t e r r a t e o f r e t u r n b e c a u s e t h e r i s k of t h e s t o c k h o l d e r s h a s n o t been i n c r e a s e d . Here t h e r e t u r n t o t h e s t o c k h o l d e r s of M o u n t a i n B e l l c a p i t a l is i n £ l u e n c e d b e c a u s e t h e c a p i t a l s t r u c t u r e o f t h e c o n s o l i d a t e d B e l l S y s t e m h a s v a r y i n g a m o u n t s of d e b t i n t h e c a p i t a l s t r u c t u r e o f b o t h AT&T a n d M o u n t a i n B e l l , n o t b e c a u s e t h e "double l e v e r a g e " a d j u s t m e n t h a s i n c r e a s e d t h e r i s k to s t o c k h o l d e r s i n Mountain B e l l . W e n o t e t h a t t h e "double leverage" adjustment h a s pre- v i o u s l y b e e n r e c o g n i z e d by r e g u l a t o r y c o m m i s s i o n s i n s i t u a t i o n s i n v o l v i n g a p a r e n t and a wholly-owned subsidiary: Re General T e l e p h o n e Company o f W i s c o n s i n ( 1 9 6 0 ) , 34 PUR3d 497, 515-519; R e Hawkeye S t a t e T e l e p h o n e C o . ( 1 9 7 4 ) , 2 PUR4th 1 6 6 , 180-181; Re U n i t e d T e l e p h o n e C o . o f N e w J e r s e y ( 1 9 7 4 ) , 2 PUR4th 299, 307-310; R e Midstate Telephone Co., Inc. ( 1 9 7 5 ) , 1 0 PUR4th 8 8 , 95-96; Re C o n t i n e n t a l T e l e p h o n e C o . o f M i n n e s o t a , I n c . ( 1 9 7 6 ) , 1 4 PUR4th 3 1 0 , 315-317; R e B l a c k s t o n e V a l l e y E l e c t r i c Company ( 1 9 7 8 ) , 24 PUR4th 3 0 9 , 321-323. I t h a s been recognized b u t denied a p p l i c a - t i o n i n t h e o n l y a p p e l l a t e d e c i s i o n c i t e d i n v o l v i n g a p a r e n t corp o r a t i o n owning 8 6 % o f t h e s t o c k o f t h e s u b s i d i a r y . New England Telephone & T e l e g r a p h C o . v . P u b l i c U t i l i t i e s Commission, s u p r a , , Me. 389 A.2d a t 39-43. T h a t c a s e is c l e a r l y d i s t i n g u i s h a b l e , i n t h a t t h e M a i w C o m m i s s i o n f a i l e d t o adeq u a t e l y c o n s i d e r t h e e f f e c t o f " d o u b l e l e v e r a g e " on b o t h t h e m a j o r i t y and m i n o r i t y s h a r e h o l d e r s so as t o e n a b l e t h e c o u r t t o d e t e r m i n e t h e r e a s o n a b l e n e s s of t h e r e s u l t ; a d d i t i o n a l l y t h e method o f a p p l y i n g d o u b l e l e v e r a g e by t h e MaineCommission was n o t s u p p o r t e d by s u b s t a n t i a l e v i d e n c e and was i n c o n s i s t e n t w i t h t h e C o m m i s s i o n ' s own d e c l a r a t i o n c o n c e r n i n g t h e " d o u b l e l e v e r a g e " concept. None of t h e s e f a c t o r s is p r e s e n t i n t h e i n s t a n t case. The D i s t r i c t C o u r t f o u n d t h a t " t h e a p p l i c a t i o n o f ' d o u b l e l e v e r a g e ' d o e s n o t c a u s e a n i n c r e a s e i n f i n a n c i a l r i s k and t h e r e i s , t h e r e f o r e , no i n c r e a s e i n t h e c o s t o f e q u i t y " and " t h e r e b e i n g no c h a n g e i n p r i o r i t i e s [ t h e p r i o r i t y o f c l a i m s o f M o u n t a i n B e l l s t o c k h o l d e r s t o t h e a s s e t s and income of M o u n t a i n B e l l ] t h e r e is no c h a n g e i n f i n a n c i a l r i s k and no c h a n g e i n t h e c o s t o f equity. " ( B r a c k e t e d material i n s e r t e d . ) W e h o l d t h a t t h e PSC's o r d e r w a s l a w f u l and was s u p p o r t e d by s u b s t a n t i a l evidence. A c c o r d i n g l y , we af f i r m t h e D i s t r i c t C o u r t on t h i s i s s u e m i n d f u l o f o u r r o l e i n r e v i e w i n g cases u n d e r t h e Montana P u b l i c U t i l i t i e s A c t ( s e c t i o n s 69-3-401, MCA e t s e q . ). Our r e v i e w i n u t i l i t y r a t e cases is l i m i t e d t o d e t e r m i n i n g w h e t h e r t h e PSC o r d e r (1) e x c e e d s t h e c o n s t i t u t i o n a l o r s t a t u t o r y p o w e r s o f t h e PSC o r ( 2 ) i s b a s e d upon a m i s t a k e of l a w . Cascade C o u n t y C o n s u m e r ' s A s s ' n v. PSC ( 1 9 6 4 ) , 1 4 4 Mont. 1 6 9 , 1 9 2 , 394 P.2d 8 5 6 , 868. The Commission i s t h e j u d g e of t h e f a c t s and t h e c o u r t o n l y d e c i d e s q u e s t i o n s of l a w . N e w England T e l e p h o n e & T e l e g r a p h C o . v . P u b l i c U t i l i t i e s Commission, s u p r a , 390 A.2d a t 1 5 . Me. I I n d e c i d i n g q u e s t i o n s o f l a w , t h i s C o u r t may d e t e r m i n e w h e t h e r t h e PSC a c t e d a r b i t r a r i l y and u n r e a s o n a b l y w i t h o u t s u f f i c i e n t e v i d e n c e to s u p p o r t its f i n d i n g s , or e x e r c i s e d i t s a u t h o r i t y u n r e a s o n a b l y , o r s e t t h e u t i l i t y rates s o l o w t h a t t h e y a r e con£ i s c a t o r y and d e p r i v e t h e u t i l i t y of i t s p r o p e r t y w i t h o u t due p r o c e s s of l a w . PSC, supra. C a s c a d e C o u n t y Consumers A s s ' n v. T h i s C o u r t on a p p e a l c a n n o t s u b s t i t u t e i t s j u d g m e n t f o r t h a t o f t h e PSC. S t a t e v. P u b l i c S e r v i c e Comm. 1 3 1 Mont. 272, 280-281, 309 P.2d (1957), 1035, 1040. Mountain B e l l n e x t contends t h a t t h e "double l e v e r a g e " a d j u s t m e n t a p p l i e d by t h e PSC is i n c o n s i s t e n t w i t h i t s e l f and u n d e r s t a t e s M o u n t a i n B e l l ' s r e v e n u e r e q u i r e m e n t s i n p a r t by i g n o r i n g t h e p r i n c i p l e s on w h i c h t h e " d o u b l e l e v e r a g e " ad j u s t m e n t is b a s e d . M o u n t a i n B e l l a r g u e s t h a t t h e p r i n c i p l e on w h i c h t h e " d o u b l e l e v e r a g e " a d j u s t m e n t is b a s e d is t h a t t h e s o u r c e of f u n d s d e t e r m i n e s i t s c o s t ; t h a t t h e PSC a p p l i e d i t s " d o u b l e l e v e r a g e " a d j u s t m e n t t o r e t a i n e d e a r n i n g s a s w e l l as t o p a i d - i n c a p i t a l of M o u n t a i n B e l l ; t h a t PSC m i s a p p l i e d t h e p r i n c i p l e o n w h i c h t h e " d o u b l e l e v e r a g e " a d j u s t m e n t is b a s e d b e c a u s e t h e s o u r c e of t h e r e t a i n e d e a r n i n g s is n o t AT&T b u t t h e a s s e t s , s t r u c t u r e of Mountain B e l l ; i n c o m e , and c a p i t a l i n s o d o i n g PSC s o u r c e d 8 8 . 5 5 % o f M o u n t a i n B e l l ' s r e t a i n e d e a r n i n g s t o AT&T a n d a p p l i e d A T & T V s o v e r a l l c o s t of c a p i t a l to t h o s e r e t a i n e d e a r n i n g s . T h i s is i n c o n s i s t e n t w i t h t h e p r i n c i p l e t h a t t h e s o u r c e of f u n d s d e t e r m i n e s i t s c o s t , i s u n s u p p o r t e d by a n y e v i d e n c e , and is t o t a l l y a r b i t r a r y and i l l o g i c a l , a c c o r d i n g t o M o u n t a i n B e l l . The PSC a r g u e d t o t h e D i s t r i c t C o u r t t h a t t h e t r u e s o u r c e a n d u l t i m a t e d e s t i n a t i o n of 8 8 . 5 5 % o f M o u n t a i n B e l l ' s r e t a i n e d e a r n i n g s is AT&T. The c o s t o f c a p i t a l a s s o c i a t e d w i t h 8 8 . 5 5 % o f M o u n t a i n B e l l ' s r e t a i n e d e a r n i n g s i s 9 . 8 6 % ( t h e c o s t of c a p i t a l t o AT&T) b e c a u s e t h a t is t h e cost of c a p i t a l a s s o c i a t e d w i t h t h a t p o r t i o n of M o u n t a i n B e l l retained earnings. I s operating a s s e t s t h a t generated those I f M o u n t a i n B e l l r e t a i n s a p o r t i o n of its e a r n i n g s t h e s e a r e no l e s s t h e c a p i t a l of AT&T t h a n p a i d - i n capital. PSC f u r t h e r e m p h a s i z e d t h a t no c o u r t o r c o m m i s s i o n h a s a c c e p t e d M o u n t a i n B e l l ' s a r g u m e n t t h a t t h e s o u r c e of r e t a i n e d earn i n g s is t h e s u b s i d i a r y and n o t t h e p a r e n t which c o n t r o l s i t s s t o c k , o r t h a t a d i s t i n c t i o n s h o u l d be made b e t w e e n cost of c a p i t a l a t t r i b u t a b l e to paid-in c a p i t a l and t h a t a t t r i b u t a b l e t o retained earnings. Consumer C o u n s e l a g r e e d t h a t t h e r e t a i n e d e a r n i n g s a r e a r e i n v e s t m e n t by t h e s t o c k h o l d e r s of M o u n t a i n B e l l i n t h e company. Consumer C o u n s e l p o i n t e d o u t t h a t b e f o r e M o u n t a i n B e l l ' s b o a r d o f d i r e c t o r s ( c o n t r o l l e d by AT&T b y r e a s o n of i t s m a j o r i t y s t o c k o w n e r s h i p ) e v e r r e t a i n e d p a r t of i t s e a r n i n g s t h e y were a v a i l a b l e t o M o u n t a i n B e l l 's s t o c k h o l d e r s as d i v i d e n d s . Thus t h e s o u r c e o f 8 8 . 5 5 % o f M o u n t a i n B e l l ' s r e t a i n e d e a r n i n g s is AT&T w h i c h h a s c o m p l e t e c o n t r o l o v e r M o u n t a i n B e l l 's b o a r d of d i r e c t o r s and t h u s c o m p l e t e c o n t r o l o v e r w h e t h e r i t s e a r n i n g s a r e r e t a i n e d by M o u n t a i n B e l l o r p a i d o u t as d i v i d e n d s . Accordingly, t h e PSC p r o p e r l y i n c l u d e d r e t a i n e d e a r n i n g s i n t h e e q u i t y i n v e s t m e n t o f AT&T i n M o u n t a i n B e l l and a p p l i e d AT&T1s c o s t of c a p i t a l t o its e n t i r e e q u i t y investment i n Mountain B e l l . The D i s t r i c t C o u r t a d o p t e d t h e r e a s o n i n g of B a s i l L . C o p e l a n d , J r . i n h i s a r t i c l e "Double L e v e r a g e One More Time," 1 0 0 P u b l i c U t i l i t i e s F o r t n i g h t l y 1 9 , i n f i n d i n g i n f a v o r of t h e PSC: ... " t h e c o s t o f e q u i t y is t h e same w h e t h e r t h e e q u i t y was r a i s e d i n t h e c a p i t a l m a r k e t o r e x i s t s i n t h e form of r e t a i n e d e a r n i n g s . If a s u b s i d i a r y r e t a i n s a p o r t i o n of i t s e a r n i n g s , t h e e a r n i n g s it r e t a i n s a r e no less t h e c a p i t a l o f t h e p a r e n t t h a n t h e c a p i t a l r e c o r d e d on i t s accounts a s 'paid in'!" The D i s t r i c t C o u r t h e l d t h a t b e c a u s e r e t a i n e d e a r n i n g s a r e t h e p r o p e r t y o f t h e e q u i t y owner (AT&T t o t h e e x t e n t of i t s 8 8 . 5 5 % o w n e r s h i p o f M o u n t a i n B e l l ' s common s t o c k ) i t had a c l a i m a g a i n s t 8 8 . 5 5 % of M o u n t a i n B e l l ' s r e t a i n e d e a r n i n g s . T h e r e f o r e t h e PSC c o r r e c t l y a p p l i e d i t s " d o u b l e l e v e r a g e " a d j u s t m e n t i n o r d e r to r e f l e c t t h e t r u e cost o f c a p i t a l a s s o c i a t e d w i t h t h a t p o r t i o n of Mountain B e l l ' s r e t a i n e d e a r n i n g s a t t r i b u t a b l e to t h e p a r e n t The r e c o r d i n t h i s case shows s u b s t a n t i a l , t h o u g h con£ l i c t i n g , e v i d e n c e s u p p o r t i n g t h e PSC's a p p l i c a t i o n of t h e "double leverage" adjustment. The d i s t r i c t j u d g e b a s e d h i s f i n - d i n g s on t h a t e v i d e n c e , and w e w i l l n o t o v e r t u r n him. I n sum, t h e D i s t r i c t C o u r t h e l d t h a t PSC1s c o n c e r n w a s to d e t e r m i n e a r a t e b a s e which r e p r e s e n t s t h e t o t a l i n v e s t m e n t i n p r o p e r t y u s e d and u s e f u l i n r e n d e r i n g u t i l i t y s e r v i c e s and to m u l t i p l y t h a t by a r a t e of r e t u r n s u f f i c i e n t t o g e n e r a t e e n o u g h e a r n i n g s t o make t h e r e t u r n o n i n v e s t m e n t f a i r and r e a s o n a b l e . The D i s t r i c t C o u r t f u r t h e r h e l d t h a t PSC f u n c t i o n is f u l f i l l e d when it d e t e r m i n e s s u c h t o t a l i n v e s t m e n t and a r a t e of r e t u r n which w i l l a f f o r d a r e a s o n a b l e r e t u r n on t h a t i n v e s t m e n t . T h i s is a c o r r e c t s t a t e m e n t and t h e e v i d e n c e shows t h a t t h e PSC a c t e d r e a s o n a b l y and w i t h i n t h e b o u n d s of t h e l a w . I t would a p p e a r t h a t t h e PSC a p p l i e d t h e " d o u b l e l e v e r a g e " a d j u s t m e n t i n o r d e r t o p r o t e c t Montana r a t e p a y e r s from p a y i n g e x c e s s i v e u t i l i t y rates. A f a i r o v e r a l l r a t e of r e t u r n t o a l l s t o c k h o l d e r s o n t h e i r i n v e s t m e n t was f i x e d and d e t e r m i n e d , b u t b e c a u s e t h e c a p i t a l s t r u c t u r e o f AT&T a f f o r d e d d o u b l e l e v e r a g e to t h e common s t o c k h o l d e r s o f AT&T t h e i r r a t e of r e t u r n o n t h e i r i n v e s t m e n t i n M o u n t a i n B e l l would a l w a y s be g r e a t e r t h a n t h e m i n o r i t y s t o c k h o l d e r s i n M o u n t a i n B e l l r e g a r d l e s s of w h a t r a t e of r e t u r n m i g h t be a d o p t e d by t h e PSC. T h i s d i s c r e p a n c y is i n h e r e n t i n t h e c a p i t a l s t r u c t u r e o f t h e p a r e n t AT&T v i s - a - v i s t h e c a p i t a l s t r u c t u r e of t h e s u b s i d i a r y Mountain B e l l . This c a p i t a l s t r u c t u r e was d e t e r m i n e d by t h e management o f t h e two c o m p a n i e s , n o t by t h e r a t e o r d e r o f t h e PSC. The PSC1s f u n c t i o n was f u l f i l l e d when i t e s t a b l i s h e d a f a i r and r e a s o n a b l e r e t u r n o n M o u n t a i n B e l l ' s i n v e s t m e n t i n p l a n t and e q u i p m e n t u s e d and u s e f u l i n f u r n i s h i n g i t s s e r v i c e s to t h e p u b l i c . I t i s a f u n c t i o n of management t o d i s t r i b u t e t h a t r e t u r n t o i t s s t o c k h o l d e r s and i f Mountain B e l l ' s c a p i t a l s t r u c t u r e p r e v e n t s an e q u i t a b l e d i s t r i b u t i o n , t h i s is n o t t h e f a u l t of t h e PSC. To g u a r a n t e e t h e m i n o r i t y s t o c k h o l d e r s t h e 1 1 . 2 5 % r e t u r n f o u n d to be f a i r and r e a s o n a b l e by t h e PSC would r e s u l t i n a n u n c o n s c i o n a b l e and e x c e s s i v e r e t u r n o f 1 4 . 2 6 % t o AT&T common s t o c k h o l d e r s a t t h e e x p e n s e o f Montana r a t e p a y e r s , a l l b e c a u s e of t h e c a p i t a l s t r u c t u r e o f t h e two c o m p a n i e s . This inequity w i l l not recur i n the f u t u r e as M o u n t a i n B e l l is now a wholly-owned s u b s i d i a r y of AT&T w i t h no m i n o r i t y s t o c k h o l d e r s i n M o u n t a i n B e l l . Affirmed. Chief J u s t i c e Hon. % a r k S u l l i v a n , s i t t i n g i n p l a c e o f M r . J u s t i c e S h e a who deems himself disqualified.

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