APPEAL from the Circuit Court of Rock Island County; the Hon.
A.J. SCHEINEMAN, Judge, presiding.
MR. JUSTICE DAVIS DELIVERED THE OPINION OF THE COURT:
In February, 1958, the Iowa-Illinois Gas and Electric Company, filed revised rate schedules with the Illinois Commerce Commission which would have provided increased revenues of approximately $530,000 from the sale of electric power in Rock Island, Henry and Whiteside counties.
The Commission suspended the proposed rates and held hearings which culminated in the Commission's order of December 22, 1958, canceling the proposed rates and directing the filing of another revised rate schedule which would increase gross electric revenue approximately $269,500 for 1958. Upon appeal by the company, the circuit court of Rock Island County reversed and set aside the order of the Commission. The case comes before us on appeal by the Commission from the ruling of the trial court.
The company supplies electric service to the cities of Rock Island, Moline, East Moline, Silvis and Milan, and neighboring rural areas as well as to a substantial area in Iowa. Generating plants in Iowa and Illinois are connected by transmission lines, and interconnected with the systems of other electric utilities.
Between the years 1953 and 1958, the company made net additions to property purportedly serving the Illinois territory in an amount of approximately $8,500,000. During the same period the customers of the company increased from 43,758 to 46,827, with a 21 per cent increase in maximum kilowatt demand from 75,596 to 91,302 and an 18.6 per cent increase in sales from 313,812,292 to 372,270,124 kwh.
The original cost of the electric properties on the company's allocation to Illinois as of December 31, 1957, was $29,963,195 and the depreciated original cost, stated to be $23,536,035. After allowance for the net additions made in 1958, the depreciated original cost with construction work in progress was estimated to be $25,547,452 as of December 31, 1958.
Evidence was submitted on reproduction cost. It was estimated that the reproduction cost new as of December 31, 1957, was $58,174,680 and reproduction cost depreciated $43,847,417. The reproduction cost study according to the engineers who prepared it, was developed by repricing certain items of property and by trending the original cost of the balance. Both physical and functional depreciation was purportedly assessed through a physical inspection of the parts of the plant and through the use of survivor curves on the life of other parts of the property. The depreciated reproduction cost was finally based upon "a condition per cent of the property items."
The system employed by the company to allocate property between Iowa and Illinois for the production and transmission facilities was based upon the noncoincident peak demands of the respective service areas, i.e., Illinois, Davenport, Iowa City and Fort Dodge. A floor space basis was used for the administration properties while general plant equipment was allocated on a meter relationship. On the basis of the company computation, 38.4 per cent of all generating property both in Illinois and Iowa and 45 per cent of the transmission property in the Quad-Cities area was allocated to Illinois. Other methods of allocation could have been adopted and if the basis had been kilowatt hours used, the allocation to Illinois would have been between 33.9 and 38.4 per cent.
The company offered evidence on rate of return by submitting a study of the return on twenty industrial income stocks which show a return of over 7 per cent. Its witness also gave his opinion on the present day costs of money and concluded that a fair return to the company would be in excess of 6.4 per cent. An exhibit prepared by the staff of the Commission showed that the company was already obtaining a return from its Illinois properties on the basis of equity capital employed of 14.53 per cent, and if the proposed increased rates were allowed that return would go to 17.37 per cent. Another exhibit showed that on the same computation basis as used in connection with the industrial stocks, the return on the company's investment was 6.57 per cent for 1957, on the old rates, as compared to 7.67 per cent for the industrials. The annual report reflected that the company had no immediate requirement for any refinancing of bonds since its first bond maturities were in 1977; that, for the years 1955 through 1957, it had annually increased its net income; and that the estimate of such income for 1958 showed an increase over 1957.
The evidence showed that the company's revenue from its Illinois properties for the year 1956 was $7,474,876, while the 1957 revenue was $7,975,743, an increase of over $500,000. While operating expenses for 1957 were larger than in 1956, $6,284,428 as opposed to $5,874,007, there was still an increase in net income of $100,000. Based on the 1958 estimated increased revenue and expenses, the company would still gain in net revenue.
The actual figures for the first five months of 1958 showed an increase in net income of 5.1 per cent over the budget figure which the company had set. The revenue for the entire year of 1958 was estimated to be $8,340,000, approximately $360,000 over the 1957 revenue, and with the $269,570 increase in rates allowed by the order, the total increased revenue over the test year of 1957 would actually be $630,000. In proposing the new schedule of rates seeking a $530,000 increase the company did not reflect any increase in sales or revenue but merely added the $530,000 to the actual figures of 1957 in making its projected rate requirements.
At the conclusion of the hearings, the commission found that, based on the method of allocation of facilities between Iowa and Illinois submitted by the company, the depreciated original cost of the property serving Illinois would be $25,547,452 as of December 31, 1958. The depreciated reproduction cost was found to be $46,092,122. After considering all factors of valuation the commission found that the fair value of the property serving Illinois was $31,600,000 including a $1,000,000 allowance for working capital, materials and supplies. The order further found 5.85 per cent to be a fair rate of return and ordered that new rates be filed to produce a $269,570 increase in revenue rather than the company's proposed increase of $530,000.
This order was set aside by the circuit court of Rock Island County, from which decision the Commission prosecuted this appeal. It is the contention of the company, supported by the trial court, that the order of the Commission was unreasonable in that the Commission failed to give proper consideration to reproduction costs in arriving at a rate base of $31,600,000, and that the rate of return of 5.85 per cent is against the manifest weight of the evidence. The Commission argues that ...