(dissenting).
As correctly stated in the majority opinion, there is no standard rate of return applicable to all utilities. The basic reason for this is that the rate issue is a question of fact. Hence, it must be resolved by a detailed consideration of the evidence in each proceeding.
In the instant case, the only serious issue is the cost of common stock equity, a component of the over-all rate of return in a cost-o f-capital analysis.
The record reflects that in making a determination of this cost, the staff of the Louisiana Public Service Commission utilized the earnings-price ratio. While this technique has shortcomings, it is designed to reflect investor opinion as to the attractiveness of the common stock as an investment. It represents an evaluation of the stock by the investor. By relating the current price 1 of the common stock to the current earnings,2 the staff constructed an earnings-price ratio of 6.6%. The ratio was rounded to 7% for the following cost-o f-capital determination :
Indicated Cost Rate of
Per Cent Per Cent Return
Common equity: 38.938% N 7.00% = 2.73%
Preferred stock: 15.330% X 5.59% = .86%
Bonds: 45.731% X 4.24% = 1.94%
Over-all cost of capital 5.53%
The Southwestern States Telephone Company likewise utilized the cost-of-capital approach in its presentation of evidence. Differently, from the Commission staff, however, Southwestern examined the stock issues from 1943 to 1959 and related the earnings per share at the date of the sale by the company of each issue to the proceeds to the company from the sale. Using this method, Southwestern constructed a ratio of 9.11’%, which it termed a weighted earnings-price ratio.
It can be perceived that the ratio developed by Southwestern cannot truly reflect investor opinion as to the attractiveness of the common stock, or the current cost of equity capital. Hence, in my opinion, the Commission very properly rejected it.
I cannot subscribe to the view of the majority that since “these methods [of ascertaining the earnings-price ratio] are different and irreconcilable, it is the duty of this Court to fix a rate of return which will strike a reasonable medium.” When the Commission was faced with a choice between the two competing ratios, it very properly approved the one which constituted the more reliable evidence of the cost of common equity. This was the ratio developed by the Commission staff in accordance with the methods used by the Commission in previous rate hearings. In my opin*555ion, this Court should likewise approve the ratio.
A review of the record has convinced me that the rate of return approved by the Commission3 of 5.53%, which includes 7% on the common stock equity, is not unreasonable. It evidences no abuse of power by the Commission. This is true, in my opinion, despite the fact that the enhancement by the Commission of the earnings-price ratio was only .34%, achieved by the rounding of figures. The rate of 7'% on common stock is certainly realistic. The cost included for preferred stock and bonds is compensatory, for it has a contractual basis. The over-all rate will enable the company to operate successfully, to maintain its financial integrity, and to compensate its investors for the risks assumed.
The majority has adopted an over-all rate of return of 6%. When this is differentiated according to the standard method, it reflects a cost of 8.21% for common stock. This represents a rather drastic increase. Moreover, it follows a substantial increase in rates granted by the Commission to Southwestern on August 21, 1958.
Rate-making involves a delicate balancing of investor and consumer interests. The consumer interest cannot be submerged without detriment to the concept of legislative rate regulation. The cost of living, of which the Court can take judicial cognizance, is now at a record height. Since Southwestern has few, if any, long distance lines emanating from the affected area, the full impact of the rate increase will fall upon local service to the residential and business subscribers. Hence, the escalation of tariffs to these subscribers for their local service will be extensive. Moreover, as the evidence discloses, the subscribers of Southwestern are already paying higher tariffs than are those in the surrounding area connected with other telephone systems.
Based upon the evidence in the instant case, I would adopt the 7% cost of the common stock and fix the over-all rate of return at 5.53%, as approved by the Louisiana Public Service Commission. If this rate of return proves inadequate in the future, the doors of the Commission are open to Southwestern for further rate adjustments.
I respectfully dissent.
. Based on the final 6 months of 1960. (The rate hearing commenced on June 7, 1961).
. Based upon the 12 months ended June 30, 1960.
. But withheld because of inadequate service by the telephone company.