Full opinion text
Opinion for the court filed by MacKINNON, Circuit Judge. MacKINNON, Circuit Judge: The Communications Satellite Corporation (COMSAT) was created by the Communications Satellite Act of 1962, 76 Stat. 719, 47 U.S.C. §§ 701-744 (1970), for the purpose of developing a profitable commercial international telecommunications technology using earth satellites to relay signals. The corporation was not to “be an agency or establishment of the United States Government,” 47 U.S.C. § 731, yet it was subject to the regulation of the President, NASA, and the FCC in important specified respects. 47 U.S.C. § 721. As a communications common carrier, COMSAT was placed under the Supervisory authority of the Federal Communications Commission (FCC) in order to guarantee that the rates it charged its customers (all common carriers) were “just and reasonable.” 47 U.S.C.' § 721(c)(2). In June of 1964, COMSAT conducted the only public offering in its career. It sold 50 million shares of common stock to the pub-lie at large, at $20 per share. This 200 million dollar capitalization (less underwriting expenses) was initially devoted to COM-SAT’s pursuit of an international satellite system, but COMSAT was soon able to carry on its international satellite activities (INTELSAT) with less than the 200 million dollars that had been raised. A domestic satellite venture to be carried on by a separate corporate subsidiary, COMSAT General, was approved by the FCC in 1972. It was to this subsidiary that COMSAT devoted the funds not required for INTELSAT. COMSAT General’s operations are not at issue here; the proceedings on review before this court concern only COMSAT’s rates for international satellite telecommunications (INTELSAT) operations. On May 28,1965, COMSAT filed with the FCC its first set of rates for international telecommunications services, pursuant to 47 U.S.C. § 204. Protracted hearings, stays, and delays followed, culminating in the 1975 decision which is the subject of the present review before this court, Communications Satellite Corp., 56 FCC2d 1101 (1975). In that decision, the FCC decided to consider only COMSAT’s future rates, setting a maximum rate of return that COM-SAT may earn and requiring COMSAT to file appropriately lowered rates. COMSAT was permitted to retain the revenues derived from the rates that it had charged in the past. Pursuant to a stay order issued by this court on June 16, 1976, lower rates consistent with the Commission’s decision have not been collected, but the excess payments have been escrowed by COMSAT to protect the interests of the rate payers. COMSAT has appealed the FCC’s decision to this court. Several broadcasting companies have intervened. Jurisdiction is vested in this court by 47 U.S.C. § 402(a) (Supp. V 1975) and 28 U.S.C. § 2342(1) (Supp. Y 1975): The court of appeals has exclusive jurisdiction to enjoin, set aside, suspend (in whole or in part), or to determine the validity of — . . . all final orders of the Federal Communications Commission made reviewable by section 402(a) of title 47 . . The scope of our review is in keeping with the Administrative Procedure Act: conclusions by the Commission will not be set aside unless arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law; findings of fact will not be upset if supported by substantial evidence. I. THE NECESSITY FOR A PRELIMINARY DECISION Initially a question of procedure is raised concerning the Commission’s decision. The rate proceeding was exceptionally drawn out, commencing in June of 1965, postponed and then resumed in 1971, suspended again in 1974, and taken up again for the last time in September of 1974. The 1965 order required that the hearing examiner bypass an initial decision, certifying the record directly to the Commission, but it did provide that the Chief of the Common Carrier Bureau should prepare and issue a recommended decision. (J.A. 124; 38 FCC 1286,1296). The 1971 resumption order reversed the procedure ordered in 1965: the hearing examiner was to prepare an initial decision but the Chief of the Common Carrier Bureau was not. (J.A. 129-130; 27 FCC2d 930-931). The final order, modifying the procedure occurred in 1974. The Commission had interrupted the proceedings earlier that year in the hopes of accommodating a negotiated settlement. (J.A. 135, 45 FCC2d 286). When that did not materialize, it was considered crucial, in order to avoid adding to the already extensive delay, that all intermediate opinions be omitted, and the Commission so ordered. The hearing before the administrative law judge was ordered resumed, and a timetable for finishing imposed: We believe that it is reasonable to require that cross-examination herein be resumed no later than the first week in September, 1974 and that all remaining testimony be completed and the record closed within approximately 3 months thereafter, i. e. no later than December 1, 1974. In this connection, perhaps it is unnecessary to call attention to the powers entrusted to the presiding judge to require, among other things, that testimony be submitted in writing and that cross-examination be limited to that “required for a full and true disclosure of facts.” 5 U.S.C. 556(d). Upon the closing of the record we shall require the judge to certify the record to the Commission for final decision by it. In our opinion this is required under the circumstances of this case for due and timely execution of our functions. Finally, we believe that all proposed findings and briefs and replies should be submitted by no later than February 1, 1975, thereby permitting the Commission sufficient time to have such oral argument as it may deem necessary or desirable and to render its final decision by April 1, 1975. The Commission requests all parties to cooperate fully in adhering to the schedule we have set forth herein. (J.A. 138-139; 48 FCC2d 86, 87-88). COMSAT challenges this procedure bypassing an initial decision by the administrative law judge. The Communications Act and the Administrative Procedure Act are both cited by COMSAT as requiring that the administrative law judge conducting the hearing is obliged to file an “initial, tentative, or recommended decision,” unless the Commission finds on the record “that due and timely execution of its functions imperatively and unavoidably” require that the record be certified to the Commission without initial decision. 47 U.S.C. § 409 (1970); 5 U.S.C. § 557(b)(2) (1970). At the start, it should be noted that COMSAT was afforded a full adversary hearing, with the right of cross-examination as described in the Commission’s order quoted above. What COMSAT did not obtain was the right to object to specific recommendations that might have been made by the administrative law judge. Had COMSAT requested a rehearing under 47 U.S.C. § 405 (1970), of the Communications Act, it would have had an opportunity to rebut specific findings, but it made no such request. However, this is not a case like Pacific Gas Transmission Co. v. FPC, 175 U.S.App.D.C. 366, 536 F.2d 393, cert. denied, 429 U.S. 999, 97 S.Ct. 527, 50 L.Ed.2d 610 (1976), where the statute requires the filing of a petition for rehearing as an exhaustion prerequisite to challenging a Commission order. Hence, while there is no adequate reason given to explain why COMSAT did not seek rehearing if it were truly concerned about its inability to respond to specific findings, and there is no proffer by COMSAT of any information that had not been brought out over the long course of the administrative hearing, that situation does not preclude COMSAT from asserting •a right to an initial decision. An initial decision by the administrative law judge, however, is not required for all Commission determinations. The Administrative Procedure Act calls for an initial decision “when a hearing is required to be conducted in accordance with section 556 of this title.” 5 U.S.C. § 557(a) (1970). Section 556, by its own terms, applies “to hearings required by section 553 or 554 of this title to be conducted in accordance with this section.” 5 U.S.C. § 556(a) (1970). Section 553 specifies “When rules are required by statute to be made on the record after opportunity for an agency hearing, sections 556 and 557 of this title apply instead of this subsection.” Hence, the requirement for an initial decision is imposed in the present case only if the Commission’s action can be termed adjudication, or if the Satellite Act or the Communications Act requires a hearing. The Communications Act of 1934 specifies the following procedure for FCC review of new charges filed with it: Whenever there is filed with the Commission any new charge . . . the Commission may either upon complaint of upon its own initiative without complaint, upon reasonable notice, enter upon a hearing concerning the lawfulness thereof; . . . and after full hearing the Commission may make such order with reference thereto as would be proper in a proceeding initiated after it had become effective. 47 U.S.C. § 204 (1970). This specified procedure does require a decision “made on the record after opportunity for an agency hearing,” so an initial decision is necessary unless the exception applies that “due and timely execution of [the Commission’s] functions imperatively and unavoidably” requires proceeding at once to final Commission decision. 47 U.S.C. § 409 (1970); 5 U.S.C. § 557(b)(2) (1970). We hold that the exception does apply because the Commission specifically found that “under these circumstances due and timely execution of [its] functions imperatively and unavoidably requires, the omission of the Judge’s initial decision.” (J.A. 142; 49 FCC2d 221, 223) (emphasis in original). The reason cited, the exceptional delay that had already plagued the proceedings, was a thorough justification for avoiding additional delay. Nor does the fact that the Commission omitted the precise words “imperatively and unavoidably” in its original order undercut the basis for that order as set forth at the time it issued. The Commission’s explanation-of its concern for delay at the time of the order adequately supports a conclusion that “due and timely execution” of its functions “imperatively and unavoidably” required a streamlined procedure, even if those precise words were not used until later. This is especially true in light of the other procedural shortcuts ordered by the Commission at the same time: taking written testimony; limiting cross-examination, ordering a strict briefing schedule, etc. See quotation at p.-of 198 U.S.App.D.C., p_. 887 of 611 F.2d, supra. Channel 16 v. FCC, 97 U.S.App. D.C. 179, 229 F.2d 520 (1956), is distinguishable, since there the Commission’s insistence on expedition was belied by its contemporaneous procedural orders. (It required an initial decision for five of the six issues in the case, and bypassed that step only for one determination. See 97 U.S.App.D.C. at 182-83, 229 F.2d at 523-24). Here, the Commission’s valid concern with completing the delayed rate-making process was consistently demonstrated. In sum, in the circumstances presented by this greatly prolonged case, there was overwhelming justification to implement the procedural shortcut involved in bypassing an initial hearing by the administrative law judge. II. THE RATE BASE A. “Sustaining Capital” and the Method of Evaluation In June of 1964, the sale of its 10 million shares of common stock at $20 per share netted COMSAT just under 200 million dollars of equity capital. Because of early technological successes with the synchronous satellite concept, and a diplomatic breakthrough as well in the establishment of a multi-member international consortium, COMSAT soon found that it did not require the full 200 million dollars for its INTELSAT (international satellite) operations. As explained above, part of the equity was diverted into COMSAT General. The total amount of equity devoted to INTELSAT, therefore, came to 136 million dollars. It is this sum that COMSAT considers as the foundation of its 1964 rate base. As of 1973, in addition to the value of currently useful equipment, COMSAT wishes to add to the rate base 152 million dollars in “return deficiencies”: these are sums calculated as representing the difference between the actual rate of return that COMSAT realized between 1964 and 1973 and what COMSAT considers should have been a normal rate of return on its rate base over that period. The question of return deficiencies will be considered in the next subsection. Turning our attention to the 136 million dollars in the original rate base, we observe that the Commission disallowed a 25 million dollar item in the account called “sustaining capital.” (J.A. 85; 56 FCC2d at 1185). The principal component of this account, which included some reserve for depreciation as well, was a contingency fund set aside from operating capital, out of which COMSAT, as a self-insurer, planned to provide funds in case of launch failure or similar catastrophe. By 1973, the only remaining item of capital left in the “sustaining capital” account was this catastrophe reserve. The Commission found that COM-SAT had inadequately explained why a line of credit could not have been established to provide the requisite financial security for this contingency. (J.A. 42; 56 FCC2d at 1142). Indeed, COMSAT had been issued a line of credit in 1964 (J.A. 58; 56 FCC2d at 1158). Also, the Commission found that it was unrealistic for COMSAT to have presumed that no other funding would be available to it in the event of catastrophe. Even if COMSAT could not feasibly go into the general debt market at the early stages of its corporate career, it could have sought additional financing in the nature of debt from those with the most serious interest in the financial stability of the company: the shareholders, half of whom were common carriers. One possible plan for such financing is discussed’in the Commission’s opinion. Id. Perhaps most realistic, especially considering COMSAT’s continual insistence that it had a crucial governmental mandate (though this was something short of a guarantee), is the potential for COMSAT to have sought an appropriation from the federal government in the rare circumstance of severe technological failure. Finally, the Commission did allow other expenditures to minimize the risk of launch failure and its deleterious impact on COMSAT, and the Commission allowed these to be recouped. (J.A. 42-43; 56 FCC2d at 1142-43). We hold that there is substantial evidence to uphold the Commission’s decision not to include this 25 million dollars as “sustaining capital” in COMSAT’s 1973 rate base. The discussion of sustaining capital introduces the essential difference between the method of rate-base calculation suggested by COMSAT, and that adopted by the Commission. The Commission measures a public utility’s rate base as “the net book cost of plant service, that is, the total value of utility plant devoted to public service, less accrued depreciation.” (J.A. 19; 56 FCC2d at 1119). The FCC summarized its rationale for employing this method as follows: It has been concluded that by recognition in the rate base of deferred start-up costs, R&D and failed satellites and launches in addition to property “used and useful” in providing service, Comsat’s rate base could fairly be regarded as conventional. We believe this choice to be in furtherance of recognized regulatory principles; it maintains for the benefit of the public a sense of consistency with other monopoly utility operations providing needed public services. We thus determined not to give rate base treatment to the incorporeal and hypothetical claimed assets which, as proposed, constituted approximately one-half of Comsat’s rate base. Rather, in a manner again reflecting established regulatory principles, we determined that to the extent the record justified recognition of elements of risk associated with such items, they should be melded into the determination of Comsat’s rate of return allowance. (J.A. 84; 56 FCC2d at 1184). By contrast, COMSAT claims that its rate base should follow the “prudent investment” theory; that is the term given to the method proposed by the opinion of Justice Brandéis “dissenting from opinion [of the majority]” in Southwestern Bell Telephone Co. v. Public Service Commission, 262 U.S. 276, 290, 43 S.Ct. 544, 547, 67 L.Ed. 981 (1923): The thing devoted by the investor to the public use is not specific property, tangible and intangible, but capital embarked in the enterprise. Upon the capital so invested the Federal Constitution guarantees to the utility the opportunity to earn a fair return, [footnote: Except that rates may, in no event, be prohibitive, exorbitant, or unduly burdensome to the public. . . .] Thus, it sets the limit to the power of the State to regulate rates. The Constitution does not guarantee to the utility the opportunity to earn a return on the value of all items of property used by the utility, or of any of them. The motivation for Justice Brandéis’ opposition to the rate base methodology of reproduction cost, or “trended historical cost” approved by the majority in Southwestern Bell, was the imprecision of that calculation. By using capital embarked on the enterprise, Justice Brandéis hoped to avoid the variability inherent in estimating such cost elements. “The rate base would be ascertained as a fact, not determined as matter of opinion. It would not fluctuate with the market price of labor, or materials, or money.” 262 U.S. at 306-307, 43 S.Ct. at 553. The reliance of earlier cases on other methods was to be explained by the fact that before the growth of public commission regulation, it had not always been easily determinable how much capital had been invested in any given company. 262 U.S. at 309, 43 S.Ct. 544. When understood in its context, therefore, Justice Brandéis’ opinion advocating his dissenting theory might not have objected to the use of book cost less depreciation as the science of accounting has since standardized the various permissible methods of calculating depreciation. Most important of all in this methodology debate, however, is the fact that the “prudent investment” approach has never been adopted by the Supreme Court as the sole method of rate base determination. Southwestern Bell, itself, approved the application of a replacement cost approach. While Justice Brandéis and Holmes concurred in the result, which found the rate of return to be non-compensatory under the circumstances of that case, their opinion was a minority one and was explicitly labeled a dissent from the majority’s reasoning. The position that has been taken by the Supreme Court since at least 1944, and reiterated on several subsequent occasions, is that the widest latitude is to be permitted public regulatory commissions in their determination of a rate base. The Court has recognized that any of a large number of rate base theories are acceptable, and requires only that the chosen theory be consistently applied, and result in a reasonable rate of return. The leading case is FPC v. Hope Natural Gas Co., 320 U.S. 591, 64 S.Ct. 281, 88 L.Ed. 333 (1944). “The Commission, beginning with book cost, made certain adjustments not necessary to relate here and found the ‘actual legitimate cost’ of the plant in interstate service to be [a certain sum]. It deducted accrued depletion and depreciation . . . . And it added [another sum] for future net capital additions . . . .” 320 U.S. at 596, 64 S.Ct. at 284-85 (emphasis added). The described method of rate base determination is largely analogous to the one used by the FCC in the present case. In Hope, “[t]he Circuit Court of Appeals set aside the order of the Commission for the following reasons. ... It held that the rate base should reflect the ‘present fair value’ of the property, that the Commission in determining the ‘value’ should have considered reproduction cost and trended original cost, and that ‘actual legitimate cost’ (prudent investment) was not the proper measure of ‘fair value’ where price levels had changed since the investment.” 320 U.S. at 599-600, 64 S.Ct. at 286. It was this reversal that was set aside by the Supreme Court. The Court held that the public regulatory commission “was not bound to the use of any single formula or combination of formula[s]” in setting a rate base. 320 U.S. at 602, 64 S.Ct. at 287., The determining principle for valuating rate-base schemes announced in Hope is that: Under the statutory standard of “just and reasonable” it is the result reached not the method employed which is controlling. ... It is not theory but the impact of the rate order which counts. If the total effect of the rate order cannot be said to be unjust and unreasonable, judicial inquiry under the Act is at an end. The fact that the method employed to reach that result may contain infirmities is not then important. 320 U.S. at 602, 64 S.Ct. at 287-88. The Commission’s choice in this case of a book-value less depreciation method (the same method, in basic terms, that was approved in Hope) cannot be upset. In 1968, the Court again embraced this principle of wide choice. In the Permian Basin Area Rate Cases, 390 U.S. 747, 767, 88 S.Ct. 1344, 20 L.Ed.2d 312 (1968), the Court cited Hope with approval, and then went on to emphasize that there was a “zone of reasonableness” within which any rate determined by a regulatory commission could not be set aside. Permian Basin did introduce greater detail into the obligations of a reviewing court, but none of these in any way compromised the general rule that a wide variety of rate-base determinations (including the one at issue in Hope and in this case) were permissible. The Court held: It follows that the responsibilities of a reviewing court are essentially three. First, it must determine whether the Commission’s order, viewed in light of the relevant facts and of the Commission’s broad regulatory duties, abused or exceeded its authority. Second, the court must examine the manner in which the Commission has employed the methods of regulation which it has itself selected, and must decide whether each of the order’s essential elements is supported by substantial evidence. Third, the court must determine whether the order may reasonably be expected to maintain financial integrity, attract necessary capital, and fairly compensate investors for the risks they have assumed, and yet provide appropriate protection to the relevant public interests, both existing and foreseeable. 390 U.S. at 792, 88 S.Ct. at 1373. The point to be stressed here is that the Supreme Court leaves entirely up to the Commission the method of regulation to be selected. Permian Basin affords no suggestion whatsoever that the choice of rate-base methodology available to a regulatory commission is restricted to the “capital embarked in the enterprise” or “prudent investment” standard. Nor has subsequent decision law from the Supreme Court narrowed a Commission’s freedom in that regard. On the contrary, the Hope standard has been explicitly reiterated. In FPC v. Memphis Light, Gas & Water Division, 411 U.S. 458, 466, 93 S.Ct. 1723, 36 L.Ed.2d 426 (1973), the Court held that “the broad discretion of the Commission delineated in Hope Natural Gas ” would apply fully, unless there were evidence in the legislative history of a contrary Congressional intention. Most recently, the Court has stated “[Tjhere is no single cost-recovering rate, but a zone of reasonableness: ‘Statutory reasonableness is an abstract quality represented by an area rather than a pinpoint. It allows a substantial spread between what is unreasonable because too low and what is unreasonable because too high.’ Montana-Dakota Util. Co. v. Northwestern Pub. Serv. Co., 341 U.S. 246, 251 [71 S.Ct. 692, 695, 95 L.Ed. 912] (1951).” FPC v. Conway Corp., 426 U.S. 271, 278, 96 S.Ct. 1999, 2004, 48 L.Ed.2d 626 (1976). We therefore affirm the choice of the rate-based determination method adopted by the Commission. Three particular objections to the composition of that rate-base are raised: that the Commission erred (1) in not including a fund for “return deficiencies” — the amount by which previous earnings had fallen short of COMSAT’s concept of the reasonable rate to which it considered itself to be entitled; (2) in its choice of interest rate, in applying the “interest during construction” method of compensating for certain start-up costs; and (3) in requiring the amortization of laboratory investments out of the rate base over the next five years. B. Specific Inclusions 1. Return Deficiencies In the case-law development of the reasonable rate of return concept, a great variety of methodologies have been allowed by courts. This has been in keeping with the Supreme Court’s governing rule established in Hope Natural Gas as detailed above. However, one proposal for rate-base inclusion has met with almost uniform rejection across more than half a century of Supreme Court precedent, and that is the notion that the losses of a utility sustained in previous years must be capitalized into a rate base so that the payments of utility users in future years can help alleviate the earlier deficiencies. In arguing for its “return deficiencies” concept, COMSAT has placed great reliance on the wisdom of Justice Brandéis, in Galveston Electric Co. v. Galveston, 258 U.S. 388, 395, 42 S.Ct. 351, 66 L.Ed. 678 (1922). It is an appropriate starting place, accordingly, to refer to the opinion for the Court of Mr. Justice Brandéis on the question of capitalizing past losses: The fact that a utility may reach financial success only in time or not at all, is a reason for allowing a liberal return on the money invested in the enterprise; but it does not make past losses an element to be considered in deciding what the base value is and whether the rate is confiscatory. A company which has failed to secure from year to year sufficient earnings to keep the investment unimpaired and to pay a fair return, whether its failure was the result of imprudence in engaging in the enterprise, or of errors in management, or of omission to exact proper prices for its output, cannot erect out of past deficits a legal basis for holding confiscatory for the future, rates which would, on the basis of present reproduction value, otherwise be compensatory. 258 U.S. at 395, 42 S.Ct. at 354. The Southwestern Bell dissent of Mr. Justice Brandéis, on which COMSAT premises its claim that a rate base consists of “capital embarked upon an enterprise,” was concurred in by Mr. Justice Holmes. However, Justice Holmes was also quite clear in his belief, expressed for the Court in San Diego Land & Town Co. v. Jasper, 189 U.S. 439, 23 S.Ct. 571, 47 L.Ed. 892 (1903), that “[i]f a plant is built . . . for a larger area than it finds itself able to supply, or . if it does not, as yet, have the customers contemplated, neither justice nor the Constitution requires that, say, two thirds of the contemplated number should pay a full return.” 189 U.S. at 446 — 47, 23 S.Ct. at 574. Whatever their ideas on a proper rate base, both of these jurists were unequivocal in their rejection of the capitalization of past deficiencies. The two foregoing authorities were relied upon in what has become, perhaps, the clearest statement of the Supreme Court’s refusal to require that previous losses be capitalized, FPC v. Natural Gas Pipeline Co., 315 U.S. 575, 62 S.Ct. 736, 86 L.Ed. 1037 (1942): But regulation does not insure that the business shall produce net revenues, nor does the Constitution require that the losses of the business in one year shall be restored from future earnings by the device of capitalizing the losses and adding them to the rate base on which a fair return and depreciation allowance is to be earned. . . . The deficiency may not be thus added to the rate base, for the obvious reason that the hazard that the property will not earn a profit remains on the company in the case of a regulated, as well as an unregulated, business. 315 U.S. at 590, 62 S.Ct. at 745. It is important to observe that the foregoing statement was in the context of the Court’s holding that excess capacity might be defended as part of the rate base as “a part of the utility’s equipment used and useful in the regulated business . . . . When so included, the utility gets its return . provided the business is capable of earning it.” 315 U.S. at 590, 62 S.Ct. at 745. That holding is directly applicable to the COM-SAT situation. COMSAT makes claim to “sustaining capital” to be included in its rate base. That is principally constituted by the reserve for launch failures and other catastrophes. It may be analogized to the excess capacity in Natural Gas Pipeline; both are investments deemed necessary at the start but not actually put into use. Without deciding the question, we can assume for present purposes that the sustaining capital was “used and useful in the regulated business” in some sense. Where the return on the rate base including such an item as sustaining capital is alleged to be deficient, however, the clear holding of Natural Gas Pipeline is that the amount of the deficiency may not be capitalized into the rate base for future years. To do so would unfairly privilege the ratepayers of previous years at the expense of the ratepayers of future years. One or the other must bear the loss, and in the mandate that rates be reasonable there is no justification for shifting that burden. The fairness of not permitting the capitalization of previous earnings shortfalls is further emphasized by the fact that COM-SAT in determining its rate base and as special items for recoupment was allowed liberal expense allowances for many of the factors that contributed to the overall earnings deficiency, including interest during construction, satellite incentive payments, depreciation, and amortization. (J.A. 74; 56 FCC2d at 1174). In all, $91,596,300 of the claimed $91,605,000 losses were allowed. Id. at 75; 1175. Compare FPC v. Hope Natural Gas Co., 320 U.S. at 598-99, 64 S.Ct. 281. In recent years, the Supreme Court has not retreated from its opposition to any requirement that past losses be capitalized. See, e. g., FPC v. Tennessee Gas Transmission Co., 371 U.S. 145, 152, 83 S.Ct. 211, 9 L.Ed.2d 199 (1962). And this court has explicitly endorsed that view as settled law. See, e. g., Payne v. Washington Metropolitan Area Transit Commission, 134 U.S.App.D.C. 321, 330 & n. 39, 415 F.2d 901, 910 & n. 39. We reaffirm that principle today. 2. Interest During Construction Several methods are available to take account of the costs incurred by a regulated industry during its start-up period. The most common alternatives are either to include the plant under construction in the rate base even before it is completed, or to keep account of the interest payable on the funds tied up in construction, and capitalize that account at the end of construction. COMSAT proposed a third approach involving a current expensing of interest, inclusion of plant under construction in the rate base, and the capitalization of the interest account; while recognizing COMSAT’s more complicated proposal as theoretically acceptable, the Commission chose not to follow it. (J.A. 33; 56 FCC2d at 1133). Instead, it decided on the method of capitalizing interest during construction at the time the new plant was brought into service. This choice was entirely proper for the Commission to make and is not challenged by COMSAT. It is objected, however, that the Commission did not correctly apply the method it chose. The advantage of the interest during construction method is that by capitalizing such an account, the future rate-payers will be obliged to subsidize the construction of plant that benefits them; and present rate-payers are not burdened with that cost. The question arises, however, as to what interest rate should be used in computing the total, compounded sum which will be added to the rate base at the time the new plant is ready. The theory behind compensating for interest during construction is that the cost of an addition to the existing plant structure includes payments not only for physical materials but for the finance charges of borrowed money as well. The only question is the means by which, in this theoretical framework, the regulated company is assumed to have borrowed the money: by loans from commercial banks, or by floating debt obligations of its own in the bond market. Each method has its advantages, and the Commission is free to exercise its own judgment as to the most realistic assumption for COMSAT. The most relevant portion of the Commission’s holding on this question is as follows: We are . . . impressed with the argument that the risk associated with these [construction funds] tends to be lower than the investment in plant in service by virtue of Comsat having the benefit of collateral contractual protection from its hardware suppliers. Accordingly, we view the prevailing annual average (a “13-point average”) prime interest rate as the most appropriate rate for Comsat’s IDC [Interest During Construction] account commencing 1974. Clearly, considering Comsat’s minimal business risks . . . the prime rate should invariably exceed the interest rate on future issues of Comsat corporate bonds, [footnote in original: We anticipate that Comsat should readily be regarded as a low risk, prime borrower in the corporate bond markets. See note 117, infra.] We regard application of this prime rate concept as fair to both future authorized users and Comsat alike. J.A. 36, 56 FCC2d at 1136 (emphasis added). Footnote 117 referred to in the foregoing states: We are confident that given Comsat’s present all equity capital structure and its level of performance it would qualify for AA-rated utility bonds, possibly even AAA. Thus we presume that Comsat’s actual cost of debt would in fact be lower than that imputed. J.A. 73, 56 FCC2d at 1173. From these references, it is unmistakable that the Commission was hypothesizing that COMSAT would go to the bond market to raise the funds needed for construction of more plant. The reference to the prime rate in the first quotation indicates that COMSAT would have to pay in the bond market. The immediately following sentence stating the Commission’s belief that “the prime rate should invariably exceed the interest rate on future issues of Comsat corporate bonds” would be meaningless if the Commission were assuming that COM-SAT was to raise funds by borrowing from lending institutions. There was no discussion in the Commission’s opinion of COM-SAT’s credit-worthiness with lending institutions. Both footnotes confirm that COM-SAT’s qualifications as a borrower in the bond market were at issue. The prime rate was serving simply as a reference point. The difficulty that has arisen as a result of this approach is that the Commission’s prediction about the future prime rate has proven inaccurate. COMSAT’s brief to this court states the matter most clearly: The Commission’s justification for requiring Comsat to use the prime rate is simply wrong. The prime interest rate is now 7.25%; during 1975 the yield on new issues of Aaa utility bonds ranged from 8.97% to 9.68%; and the Commission elsewhere in its Decision finds that Comsat’s cost of debt is 10.2%. Thus, the prime interest rate does not exceed even the interest rate on Aaa utility bonds and certainly could not “invariably” exceed the interest rate on Comsat corporate bonds. [Aaa is a rating by Moody’s that corresponds to Standard and Poor’s AAA]. Brief of Petitioner at 39 (footnote omitted). The Commission’s response to this miscalculation has been to attempt to justify the choice of the prime rate in its own right, rather than as a ceiling estimate of COMSAT’s future debt service cost. The Commission offers no response to the error it made in predicting the future relationship of the prime rate vis-a-vis the rate at which high grade utility bonds would be issued. Instead it asserted that such error was harmless in light of the Commission’s available alternative reliance on the theory that COMSAT would borrow from financial institutions rather than in the bond market. See Brief of Respondent at 41, n. 65. But that is not an adequate response. It is the Commission’s own rationale for its decision, not the justification posited by appellate counsel, that must control our consideration. Securities and Exchange Commission v. Chenery Corp., 318 U.S. 80, 95, 63 S.Ct. 454, 87 L.Ed. 626 (1943). Nor is this merely a formalistic insistence. The Commission has given attention to COMSAT’s ability to borrow in the debt market; there is no indication that it has given attention to COMSAT’s ability to borrow from lending institutions. If it gave attention to the latter matter, it might determine that COMSAT did not qualify for the prime rate, or might uncover a wealth of other information potentially applicable to COM-SAT’s commercial borrowing capability. We cannot extrapolate from the Commission’s finding that COMSAT could float high-rated bonds to the conclusion that the record supports the conclusion that COM-SAT could borrow freely at the prime rate. Accordingly, we remand the question of interest during construction to the Commission. The Commission must first determine what the most realistic borrowing assumption for COMSAT was. It might reassess its implicit decision on this record that COMSAT would go to the bond market rather than to commercial banks or institutional lenders. If it decides that the bond market is appropriate, it would have to apply the figure reached elsewhere in the opinion as to what interest COMSAT bonds would have to bear. Reference to corporate bond yields in general is not adequate when the Commission has already estimated the likely cost to COMSAT of issuing its own bonds. If, however, the Commission decides that the lending institution market is appropriate, then it must base its conclusion concerning the interest COMSAT would have to pay on record evidence specifically directed to that issue. 3. Laboratory Costs In establishing the communications satellite system pursuant to the congressional mandate, COMSAT made a rather sizable investment in laboratory plant and equipment. In 1973, over 16 million dollars in the claimed rate base was accounted for by laboratories. This was in keeping with the explicit instruction of the Act: “Included in the activities authorized to the corporation for accomplishment of the purposes indicated . . . are, among others not specifically named ... to conduct or contract for research and development related to its mission.” 47 U.S.C. § 735(b)(1) (1970), 76 Stat. 425 (Aug. 31, 1962). The Commission has ordered COMSAT to amortize its laboratory investment over the next five years. Costs of operating the laboratories will still be permitted as operating expenses in each year, but the intent of the Commission’s order is to remove the investment in laboratories as a permanent rate-base fixture upon which a return would be earned each year. As a reason for requiring the phase-out of laboratory capital, the Commission took note of the fact that “[njeither The Bell Telephone Laboratories nor the R&D laboratories of any other carrier are given rate base treatment, but expenses are allowed.” (J.A. 25; 56 FCC2d at 1125). COMSAT vigorously contests this, citing the Commission’s decision in American Telephone & Telegraph, 9 FCC2d 30, 39 (1967), wherein Bell Telephone Laboratories, Inc., is included in the list'of “subsidiaries not consolidated” in the statement of capital stocks owned by AT&T. However that dispute may be resolved, the Commission does not base its phase-out decision upon a comparison with AT&T. Rather, the Commission’s order to remove laboratories from the rate base “does not rest on any assessment of the value of Comsat’s R&D efforts to the INTELSAT system, but it does lay to rest problems we have noticed in the record, namely that R&D has been allocated to the international ratepayer, when it is clear that the fruits of the R&D are applicable to satellite technology generally.” (J.A. 25; 56 FCC2d at 1125). At the start of COMSAT’s development, international satellite operations were its only concern, so at that time there was no difficulty in including laboratories in the rate base. Whatever the laboratories produced redounded to the benefit of the jurisdictional enterprise. Now that COM-SAT General and foreign subscribers as well as COMSAT’s INTELSAT operations benefit from the laboratory research, it cannot be said that all the benefits go to INTELSAT. Unwilling to attempt an appropriate estimated allocation of the laboratory plant, the FCC has chosen to remove it entirely. In light of the explicit statutory authorization for research and development, and the necessary reliance by COMSAT on innovative technology, it is not inappropriate that COMSAT maintain laboratory plant and equipment in its rate base. It is an inadequate response to refuse inclusion of so expectible an element of plant and equipment merely because of accounting difficulty in estimating a reasonable allocation formula. The Commission has often had to develop such separation estimates where communications companies were involved in both intrastate and interstate operations. See, e. g., American Telephone & Telegraph Co., 9 FCC2d 30, 88 (1967) (discussing separation formulae developed in 1947, 1952, 1956, 1962, 1965, and for 1967). These two factors, COMSAT’s statutory justification and the Commission’s demonstrated expertise, combine to defeat the Commission’s weak suggestion that determining a proper allocation would be administratively burdensome. The FCC’s staff did not object to allocating the cost of COMSAT’s laboratory plant between the various beneficiaries of its activities on the grounds some of the recipients were not involved in this proceeding; and they have made no suggestion that an appropriate allocation formula could not be developed. As we have held in American Smelting & Refining Co. v. FPC, 161 U.S.App.D.C. 6, 24, 494 F.2d 925, 943, cert. denied, 419 U.S. 882, 95 S.Ct. 148, 42 L.Ed.2d 122 (1974), and recently reaffirmed in City of Willcox v. FPC (June 30, 1977), 185 U.S.App.D.C. 288 at 306, 567 F.2d 394, at 413, “The mere fact that the solution is complicated cannot justify the Commission in refusing to provide just and reasonable . . . procedures.” On remand, the Commission will be required to develop an appropriate allocation formula, or base its decision to require the rapid amortization of laboratory investments on a rationale, supported by substantial evidence, other than its own inconvenience. III. RATE OF RETURN The Commission’s conclusion that a 10.8% rate of return on capital, with the possibility of an 11.8% return based on economies achieved by COMSAT, was the product of two separate decisions, each of which is challenged on appeal. The 10.8% figure was the weighted average of a 10.2% cost of debt and an 11.3% rate of return on equity (J.A. 73; 56 FCC2d 1173). The weighting formula was 45% debt; 55% equity: this was a hypothetical capital structure that the Commission felt COMSAT was able to sustain. In light of the fact that COMSAT was actually 100% equity financed, the permissibility of that weighting formula is challenged. Also; the 11.3% figure for equity is objected to; it is COMSAT’s position that a minimum of 15% was necessary to afford a just and reasonable rate of return. (J.A. 46-57; 56 FCC2d 1146-A7) We will first consider COMSAT’s claim that the 11.3% rate of return on equity is inadequate. A. The Equity Rate of Return Several different methods of computation were presented in the evidence before the Commission. Discounted cash flow, an Arthur Anderson study of four public utilities’ authorized rates of return, a “modern” portfolio theory, and a capital asset pricing model were all presented to the Commission, discussed in the opinion, and dismissed as unreliable. (J.A. 63-70; 56 FCC2d 1163-1170). The method that was accepted was described by the Commission as follows: The methodology we employ is to determine as riskless a return on invested capital as we can find, and add to it a risk premium reflecting the risks found present in Comsat’s fulfillment of its statutory mission. We also find it useful, as a yardstick to compare Comsat’s risks and cost of capital to AT&T. On these bases we are of the opinion that the return we are allowing Comsat on its INTELSAT rate base is adequate and fair and that such return, when considered together with the separate and discrete factors underlying Comsat’s capital attraction capability for its non-INTELSAT undertakings, will permit investors to more intelligently evaluate Comsat’s stock as an investment risk. (J.A. 63; 56 FCC2d at 1163). COMSAT has no quarrel with the rate of return evaluation theory employed by the Commission. The Commission’s opinion comments, “It is interesting to note that in its Summary filed May 18,1975 Comsat has almost exclusively focused on, to the exclusion of other empirical evidence it has sponsored, this type of approach.” Id., n. 102. After the Supreme Court’s Hope Natural Gas holding, as re-affirmed in Permian Basin Area Rate Cases, supra, it would have been very difficult to mount a successful argument that the FCC was obliged to use some alternative approach. For years prior to 1973, the Commission estimated a riskless rate of return from long-term U.S. Government bonds and added to it a risk premium in excess of the risk premium estimated for AT&T. As of 1973, however, the Commission found that COM-SAT could no longer be entitled to a higher risk premium than AT&T, and it is here that the crux of COMSAT’s appeal on this point lies. The Commission’s logic proceeds as follows. (1) In 1972, AT&T’s cost of common equity was 10.5%, and “10.5% was a valid assessment into the foreseeable future.” (2) In 1973, U.S. Treasury Bonds were paying 6.5%. (3) This implied that AT&T had a risk premium of 4% in 1973. (4) “By 1973, the year Comsat obtained maturity and the year we have selected for determination of Comsat’s allowable rate base, we find that Comsat’s risks had declined considerably, and the record will no longer support a finding that Comsat was significantly riskier than AT&T. Based on our judgment and analysis of Comsat’s 1973 risks from the record, independently and by way of comparison to 1964, we estimate a risk premium of 4%.” (5) United States Treasury Bond yields rose to an average of 7.3% in 1975. (6) Thus, “Comsat’s current cost of equity is 11.3%.” (J.A. 72-73; 56 FCC2d 1172-1173). Petitioner’s most strenuous objection can be focused upon the one statement in sentence number 4, above, that “the record will no longer support a finding that Comsat was significantly riskier than AT&T.” There is a separate section of the FCC’s opinion just dealing with the comparative risks of COMSAT and AT&T, which also concludes, “Comsat can no longer be regarded as more risky than AT&T with regard to technical and operational problems leading to service outages and revenue loss.” (J.A. 62; 56 FCC2d 1162, footnote omitted). We will shortly deal with this most basic challenge. First, however, it is necessary to consider the findings of the Commission on the elements of COMSAT’s risk. COMSAT has impugned the validity of several of these component findings. As for those risk elements not explicitly addressed, (e. g., launch failures, COMSAT’s cash) our conclusion, after reviewing the record evidence, is that none conclusively demonstrates that COM-SAT is less risky than AT&T, but that each adequately resists the conclusion that COM-SAT is more risky. Thus, the question turns upon the factors about to be addressed. (1) Technical risk. COMSAT emphasizes the novelty of its technology, and the Commission responds with a catalogue of scientific precedent in the communications satellite field. Prior to the formation of COMSAT, practically all the risk in developing the early technology was absorbed by the government. COM-SAT was thus the beneficiary at no cost to it of substantial research and development that was done at the expense of billions of dollars by the United States. Although COMSAT renews its objections in the brief as to the degree of departure from prior technology that the synchronous satellite concept represented, we find that the Commission’s treatment of the question amply satisfies the substantial evidence standard, particularly in this area of complicated scientific mechanics. (See J.A. 48 — 49; 56 FCC2d 1148-49). (2) Business risk. COMSAT alleged that there was cause for concern that overall demand for international telecommunications would not remain high, or that COMSAT’s market share among other modes of commercial telecommunication would fall even if general demand did not. We find more than adequate the record evidence before the Commission regarding estimated overall demand. As for market share, the Commission relied on its own authority to “allocate circuits and facilities between cable and satellite” to guarantee COMSAT’s place, a fair proportion of the available traffic. (J.A. 53; 56 FCC2d at 1153). COMSAT is correct in suggesting, however, that the Commission overstated its case in relying on the “facility mix allocation decision,” which stated, “[W]e will authorize implementation of needed circuit facilities in line with the proposals of the European Administrations looking toward maintenance of reasonable parity between cable and satellite circuits on transatlantic routes.” That decision does not speak to the critical question of revenues, and, as COMSAT’s brief points out, a later “facility mix allocation decision” reintroduced all the uncertainty that the prior statement might have alleviated: “Our primary policy objective has been and remains the achievement and efficient utilization of the lowest cost combination of facilities which can satisfy valid traffic needs and service standards, irrespective of technology or supplier.” Of course, AT&T as an international carrier is subject to precisely the same kinds of overall demand and market share concerns; but AT&T is not solely in the international telecommunications market, as COMSAT’s INTELSAT operations are. Hence, we do find that COMSAT raises a non-trivial objection to this aspect of the Commission’s decision, and that COMSAT has more business risk, in this sense, than AT&T. (3) International risk. In August of 1964, the United States and twenty other nations entered into a consortium that assured COMSAT’s INTELSAT facilities would receive a sustained amount of utilization. The Commission is correct in citing this development as an early risk-reducing factor. However, the 1971 updating of that agreement severely restricted the authority of COMSAT in the international consortium, and also restricted the potential for diversification by INTELSAT. Professor A. Chayes has noted, “In the Definitive Agreements, concluded after more than two years of negotiations, the United States suffered major rebuffs on almost every element of its opening position. The Intelsat consortium was replaced with a formal International Communications Satellite Organization. Comsat was placed under a voting limit of 40% instead of the 50% it proposed and was [thereby] stripped of its veto. . . . ” The Commission’s opinion on this point dwells excessively on COMSAT’s status under the old, Interim Agreement, and takes note of the Definitive Agreements only to recognize, in passing, that “Comsat’s voting strength . . . has declined. . . ” (J.A. 57, 56 FCC2d 1157). However, this was not a trivial change. As compared with AT&T, it must be admitted that COMSAT is subject to a greater degree of risk due to its need to reach agreement with foreign governments. The Commission found that the “moderate institutional risks in 1964 arising from the necessity of foreign cooperation in the establishment and operation of the global satellite system” “declined” with the signing of the Interim Agreement. (J.A. 57, 56 FCC2d at 1157). By the same analysis, it must be admitted that those institutional risks increased, with the substitution of the subsequent Definitive Agreements for the Interim Agreement. We agree with COM-SAT that on this point the Commission underestimated the risk that COMSAT bore relative to AT&T. (4) Regulatory risk. COMSAT seeks a higher return because its regulated status subjects its major decisions to administrative review. But COM-SAT is unable to distinguish effectively its status from that of any other regulated carrier on risk of this character. Indeed, as the Commission points out, a regulatory mandate that COMSAT prosper may be found in “the Satellite Act, the Communications Act of 1934, as amended, and, generally by the record which details the government’s involvement with Comsat’s welfare.” (J.A. 56, 56 FCC2d at 1156). The Congressional declaration of policy and purpose that serves as preamble to the Satellite Act amply demonstrates that it is a weak argument indeed to characterize COMSAT as the forgotten child of the regulated industry family. This brings us to the basis for the Commission’s conclusion that, on net, COM-SAT’s risk is no higher than that of AT&T. The factors discussed above indicate that, despite the Commission’s conclusion of no difference, COMSAT does represent a greater risk in those factors. The principal countervailing factor is that COMSAT is 100% equity-financed. There is no debt in its capital structure. AT&T, on the other hand, had a debt-to-equity ratio of 90.86% in 1973. It is difficult to overstate the importance of this distinction. The shareholders of AT&T are not the first in line to receive earnings that are not retained; debt service has the first priority. And in case of insolvency, it is the shareholders who again line up last; the debt obligations will be paid first out of whatever assets can be garnered. This difference is not rendered academic by the very great probability that AT&T will remain solvent, or by AT&T’s unbroken record of paying dividends, for the size of those dividends will be less, and the freedom of the company to enter into promising new areas will be restricted by the obligation of debt service. Perhaps the clearest statement of the risk-increasing effect of debt came from AT&T itself which, in its 1972 rate hearing, made a plea summarized as follows by the Commission: It is claimed that changes in the capital structure since the Commission decision in Docket No. 16258 [in 1967] alone would call for a substantial increase in Bell’s rate of return on equity. The debt ratio has risen from 31-33 percent to above 45 percent, but its equity earnings in the 9 percent range are still no higher than at the time of the Docket No. 16258 decision. American Telephone & Telegraph, 38 FCC2d 213, 259 (1972). Furthermore, this is not a case of comparing a company with some debt to one with a little more or less; it is a difference in kind between the two capital structures. A company with absolutely no debt is a rare thing, and for a public utility to be without debt is rarer still. The comparison, therefore, is between an established utility with almost half of its capital structure in debt securities and operating in part in an international milieu, and a newer utility, subject fully to the risks of an international business environment, but with strong assurances of government interest, and in the unique position of owing no debt at all. While disagreeing with a few of the Commission’s detailed conclusions, we hold that there was substantial overall evidence to sustain the Commission’s decision that, as of 1973, COMSAT did not deserve a risk premium in excess of that afforded AT&T for the purpose of calculating a just and reasonable rate of return. B. The Hypothetical Capital Structure Even though COMSAT had not issued any debt securities, the Commission postulated that having passed its birth-pain years, COMSAT would by 1973 be able to sustain debt in its capital structure. (J.A. 60, 56 FCC2d at 1160). The Commission was not undertaking to restructure the capital of COMSAT on its own; that was for the COMSAT management to accomplish when it considered such a readjustment appropriate. The Commission’s imputing of debt was an admittedly hypothetical construct, for the purpose of determining the allowable rate of return. COMSAT’s maintenance of an all equity structure resulted in an inordinately high cost of capital, since the cost of equity is generally higher than the cost of debt, and almost all public utilities carry some debt. Indeed, some public utility commissions have held that it is the obligation of a public utility to offer as much debt as is consistent with the sound finance of the company. See, e. g., Re New York Telephone Company, 7 PUR4th 496, 506 (N.Y. Pub. Util. Comm’n 1974). Cf. AT&T, 9 FCC2d 30, 52 (1967). Rate-payers are subjected to an excessive burden when the revenues to be derived from the rates they pay have to be high enough to compensate the cost of a capital structure consisting entirely of equity financing; levering a capital structure with lower-costing debt relieves some of that burden. The authority of a public utility commission, like the FCC, to assume hypothetical debt for a company derives from its jurisdiction over rates charged by the company, that they be “just and reasonable.” The appropriate part of the COMSAT Act providing such power to the FCC is 47 U.S.C. § 721(c)(2): [T]he Federal Communications Commission, in its administration of the provisions of the Communications Act of 1934, as amended, and as supplemented by this chapter, shall . . . insure that all present and future authorized carriers shall have nondiscriminatory use of, and equitable access to, the communications satellite system and satellite terminal stations under just and reasonable charges We reject the Commission’s allegation, made in its brief to this court, that the proper jurisdictional statutory provision in this rate-making proceeding is 47 U.S.C. § 721(c)(8), which provides: “721. In order to achieve the objectives and to carry out the purposes of this act — . . . (c) the Federal Communications Commission in its administration of the provisions of the Communications Act of 1934, as amended, and as supplemented by this act, shall — (8) authorize the corporation [Comsat] ... to borrow any moneys . . . upon a finding that such . . . borrowing is compatible with the public interest, convenience, and necessity and is necessary or appropriate for or consistent with carrying out the purposes and objectives of this act by the corporation.” This statute merely directs the Commission to authorize the borrowing of moneys when a certain showing is made and the managerial decision as to whether the corporation should borrow money remains with COM-SAT. However, it is well settled in public utility law that it is no interference with this management prerogative for a regulatory commission to impute a hypothetical capital structure, whether or not the regulated company increases its debt; for that is done merely in pursuance of the Commission’s legitimate rate-making authority. One of the clearest statements of this principle is afforded by the Supreme Court of New Hampshire, in New England Telephone & Telegraph Co. v. State, 98 N.H. 211, 220, 97 A.2d 213, 220 (1953): Although the determination of whether bonds or stocks should be issued is for management, the matter of debt ratio is not exclusively within its province. Debt ratio substantially affects the manner and cost of obtaining new capital. It is therefore an important factor in the rate of return and must necessarily be considered by and c