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City of Alton v. Commerce Com.

OPINION FILED JANUARY 22, 1960

THE CITY OF ALTON ET AL., APPELLEES,

v.

THE COMMERCE COMMISSION ET AL. — (ALTON WATER COMPANY ET AL., APPELLANTS.)



APPEAL from the Circuit Court of Madison County; the Hon. JAMES O. MONROE, JR., Judge, presiding.

MR. JUSTICE SCHAEFER DELIVERED THE OPINION OF THE COURT:

Rehearing denied March 30, 1960.

The Illinois Commerce Commission granted the Alton Water Company an increase in its rates, which was set aside upon review in the circuit court of Madison County. The Commission and the Company have appealed. The case involves some problems that are unique to this utility, and some that are of more general interest.

The Alton Water Company furnishes water services to approximately 14,000 customers, including many industrial users, in Alton and neighboring areas. Its distribution system has approximately 165 miles of underground mains, and it includes several large standpipes, an elevated tank, booster stations in outlying areas, and a purification plant and pumping station near the source of supply, the Mississippi River. The plant was originally installed in 1876, and from time to time it has been enlarged, improved and renovated. Since 1953, almost one million dollars has been expended for additions.

All of the Company's common stock is held by the American Waterworks Company. Sixty per cent of American's stock is owned by Northeastern Water Company which in turn is almost wholly owned by two individuals.

In 1952 the Company obtained a forty per cent increase in all of its rates. The present proceeding was instituted five years later, on February 5, 1957, with the filing of rate schedules by which the Company proposed a fifty per cent increase in rates for all service except municipal fire protection, to be effective March 8, 1957. The Commission suspended the schedules and held hearings during the summer and autumn of 1957. Municipalities and many industries served by the Company intervened to oppose the increase. The Commission found the fair value of the Company's plant to be $4,000,000 and added $100,000 as an allowance for working capital, to establish a rate base of $4,100,000. It also found a return of 5.6 per cent on this value to be fair and reasonable, and established a rate schedule which would produce this rate of return. This new schedule effected an increase of 47 1/2 per cent over the rates adopted in the 1952 proceeding and established rates 106 1/2 per cent higher than those existing in 1951.

The intervenors appealed to the circuit court which set aside the Commission's order. The court held that the Commission's rate base determination was against the weight of the evidence, (1) because it was based in part upon a reproduction cost figure which included an unjustified expense item of 15 per cent for general construction overheads, (2) because an insufficient rate of depreciation was deducted from reproduction cost, and (3) because it included $67,500 to cover cash working capital requirements although moneys collected from consumers and held for future tax payments were available for this purpose. The court also disallowed the rate of return established by the Commission upon the ground that it would in fact give a 17 per cent return to the common stockholder. In addition, the court found that the rate schedule adopted by the Commission would produce more net revenue than the amount found by the Commission, (1) because the Commission erroneously allowed as present expenses Federal taxes which were deferred until future years by the Company's use of accelerated depreciation under section 167 of the Internal Revenue Code of 1954, and (2) because the Commission failed to account for increased revenue which would result from improved meter maintenance and from changes from flat rates to metered rates.

From this judgment the Company and the Commission appeal. They contend not only that all of the circuit court's holdings were erroneous but also that the court exceeded the proper scope of judicial review. The Commission objects particularly to setting aside its order because of purported errors in computing reproduction value less depreciation when the final fair value determination is not challenged as unreasonable. It argues that if the final determination is reasonable the courts should not inquire into the separate elements of value which are considered in reaching that finding. This position ignores the right of the parties and the public not just to a reasonable determination but rather to a determination which arises from sound and lawful analysis of the problems presented. Without power to review the intermediate steps in the administrative decision-making process, effective judicial review would be extremely difficult if not impossible. Neither the statute nor this court's decisions in the rate regulation field indicate that such a result is intended. This court has not confined its review to the Commission's final order but rather, when called upon to do so and with respect for the Commission's expert judgment, it has reviewed the elements of value considered by the Commission in computing present fair value. (See Peoples Gas Light & Coke Co. v. Slattery, 373 Ill. 31, 51-56.) Accordingly we turn to a consideration of the specific problems presented.

THE RATE BASE

General Overhead Expenses. In determining the fair value of the Company's plant, the Commission properly considered evidence and made findings on the original cost less depreciation and reproduction cost new less depreciation. In their computation of reproduction cost new before depreciation, both the Company's witness, Louis R. Howson, and the Commission's witness, Gordon Cavanagh, added to the basic cost of reproducing all of the company's physical assets, an item of expense for "general overheads" amounting to 15 per cent of that cost. Howson listed the overhead expenses as follows:

1. Organization expense 1%

2. Engineering and supervision during design and ...


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