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Generally, a regulated company may only charge customers
what the regulatory authority deems to be a fair rate of return
on the company’s investment. Such companies usually are
regulated because they have a captive market and are in a
monopoly position to supply needed services; thus, their cost of
capital should be considerably lower than that of an average
company. Therefore, allowed rates of return for regulated
companies are viewed as reasonable benchmarks for a minimum
boundary of the overall cost of capital. See Pratt et al.,
Valuing a Business 179 (3d ed. 1996).
In addition, we find Mr. Gustavson’s 14-percent discount
rate to be reasonable given that the Scotia reports used a 10-
percent discount rate to value True Oil under the DCF method and
that Mr. Gustavson’s rate is substantially higher than the 6- to
6.75-percent interest rate charged to Belle Fourche by its
shareholders for outstanding debt during the relevant period.
Finally, we agree, in theory, with petitioners’ observation
that Mr. Gustavson should have consulted with management to
support his throughput, net revenue, and discount rate estimates.
However, in this case, Mr. Gustavson’s oversight does not
significantly undermine his conclusions of value because he was
conservative in his estimates, and he reasonably relied on public
information from a highly regulated industry to derive his
projections.
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