APPEAL from the Circuit Court of Iroquois County; the Hon.
DAVID E. ORAM, Judge, presiding.
MR. JUSTICE DAILY DELIVERED THE OPINION OF THE COURT:
Appellants, the villages of Milford, Cissna Park, Woodland, Ogden, Philo, Pesotum and Royal, appeal from a judgment of the circuit court of Iroquois County which confirmed an order of the Illinois Commerce Commission, entered April 8, 1959, allowing an increase in rates of the Champaign County Telephone Company. The latter and the commerce commission are the appellees.
Champaign County Telephone Company, to which we shall refer as the company, is a public utility engaged in the telephone business through 17 exchanges located in the rural areas of Champaign, Iroquois and Vermilion Counties. Organized in the early 1930's, the company originally owned but two small exchanges in Champaign County but, by 1952, had acquired some 15 small, independent exchanges in surrounding villages and counties. Most of the properties were in poor condition, equipment was obsolete, subscribers were interested in better service, and the postwar years brought a rapid increase in the demands for service. In 1952, the company instituted a program of expansion and improvement. Money was borrowed from the Rural Electrification Administration (REA) from time to time in amounts totaling $2,000,000, and such loans were secured by mortgages bearing 2% interest. In addition, the mortgages contain restrictions which preclude the payment of dividends until such time as the equity is at least 10% of the total indebtedness, which require that 18% of the annual income be set aside in a reserve fund for maintenance, and which relate to depreciation reserves.
Between 1952 and 1958, and thus at the time this proceeding was commenced, all of the exchanges of the company but two, (those located at Ludlow and Seymour,) had been converted to automatic dial operation, and we think it significant to note that no increase in rates was requested until after the improvements had been made. The exchanges at Ludlow and Seymour remained on manual operation, but at the date of the hearings plans and the necessary financing had been arranged for their conversion to automatic systems.
On September 6, 1958, the company filed proposed rates with the commission, which were suspended in accordance with the usual practice, and after several hearings an order was entered granting an increase in rates of $120,000, or 42%. After such increase, the net rates result in a one-party residential line at $5.50 per month, a rural multi-party residential rate of $4.25 a month, and an urban business rate of $8 per month. Upon appeal by appellants, the circuit court of Iroquois County affirmed the order of the commission and this further appeal has followed, with defendants contending that the new rates are unreasonable and unjust for the following reasons: (1) that the rates require consumers to provide for illegal and unreasonable and excessive salaries of the executive officers of the company; (2) that the rates require consumers to provide for unreasonable and unlawful depreciation expenses; (3) that since the company borrowed over $2,000,000 from the Rural Electrification Administration at 2% interest, rates providing for the rate of return under consideration violate the Federal statute pertaining to Rural Electrification Administration loans; (4) that the rates would require subscribers to contribute and pay for a return on the properties used for the benefit of the Ludlow and Seymour exchanges for which exchanges no increased rates were sought; and (5) that the rates were based upon the book cost of the entire company and not the fair value of that part of the company properties serving subscribers for whom rates were increased, and that the record contains no competent evidence of fair value of the properties of the company.
The limits of judicial review in public utility rate cases, as well as the reasons for such limits, have been fixed by many decisions of this court and we see no useful purpose in unduly extending this opinion by repeating them here. Suffice it to say we have recognized that the determination of rates is not a matter of formulas but one of sound business judgment which has been committed by the legislature to the expert judgment of the commission and, in deference to the judgment of the commission, we have consistently held that its orders in such respect will not be disturbed unless the findings upon which they are based are arbitrary or against the manifest weight of the evidence, or unless in contravention of some established rule of law or constitutional right. (See: Iowa-Illinois Gas and Electric Co. v. Commerce Com. 19 Ill.2d 436; Illinois Bell Telephone Co. v. Commerce Com. 414 Ill. 275; Produce Terminal Corp. v. Commerce Com. ex rel. Peoples Gas Light and Coke Co. 414 Ill. 582; Peoples Gas Light and Coke Co. v. Slattery, 373 Ill. 31; Public Utilities Com. ex rel. City of Springfield v. Springfield Gas and Electric Co. 291 Ill. 209; Ill. Rev. Stat., 1959, chap. 111 2/3, par. 72). No claim is made here that constitutional rights have been violated, and with the issues for review thus narrowed it is the position of appellees that the commission's finding of fair value is reasonable and supported by substantial evidence; that the rate of return of 4.04% allowed by the commission is just and reasonable and necessary to enable the company to meet REA requirements; that the allowance for operating expenses is reasonable and based upon substantial evidence; and that the allowance for depreciation expenses is reasonable and supported by uncontroverted evidence.
ON THE QUESTION OF FAIR VALUE
The exhibits, testimony of the company's accountant, and the evidence of the accountant for the commission, who made an independent investigation and who testified in this cause, showed the original cost of the plant to be $2,135,136.37 and the net original cost after depreciation to be $2,027,331.67. This figure was not specified as a "book value" figure but as actual cost. Construction work in progress as of the date in question amounted to $16,056.31 and the fair value was determined, as of the date of the proceeding, (including $30,500 for working capital and materials and supplies) to be $2,073,887.98. While we do not approve so-called "original cost" rate base, the commission properly gave it consideration in connection with "reproduction cost" in determining fair value. There was evidence that the present cost would, for all practical purposes, be substantially the same as original cost because the plant was newly built at current prices and only a small per cent of the original plant, with perhaps a higher reproduction cost, was retained. There was testimony that in excess of 95% of the total amount in the plant account represented the cost of plant installations made within the past five years. The fair value as found by the commission is therefore supported by the evidence and the finding was not contrary to the interests of appellants.
It is an unquestioned principle that the commission has the duty and responsibility of fixing rates which will provide a reasonable return on the present value of a utility's property and, in such regard, we have held there can be no particular rate which, in all cases and in all parts of the country, will be regarded as sufficient for the capital invested, but that the compensation must depend on the facts and circumstances in each case. (Public Utilities Com. ex rel. City of Springfield v. Springfield Gas and Electric Co. 291 Ill. 209.) Here, the commission fixed the rate of return at 4.04%, and it is our opinion that such a rate is neither unreasonable or unjust, nor against the manifest weight of the evidence. Cf. Iowa-Illinois Gas and Electric Co. v. Commerce Com. 19 Ill.2d 436; where a rate of return of 5.85% was fixed, and City of Alton v. Commerce Com. 19 Ill.2d 76, where a 5.6% rate of return was approved.
Appellants' principal objection to the rate of return in this case is predicated on the fact that the company has borrowed $2,000,000 from the Rural Electrification Administration at the rate of 2% per annum. They reason that because funds obtained from the agency are public funds to be used only for specific public purposes, it is improper to permit a rate of return which will accrue to the private profit of the stockholders. There is nothing in the record, however, which in any manner indicates that the company is not making the service available to the widest practicable number of rural users in accordance with REA objectives, and from the rate of return approved it appears that the commission took into account the fact that the company had obtained funds on the loan at 2% interest. Moreover, it appears from the record that the company sought no allowance for going concern value, asked for nothing for meeting the expenses of unitization of its plant in accordance with a commission general order, sought no allowance for expense in this rate case, and took no allowance for extraordinary expense of storm damage and amortization. These omissions were beneficial to the consumers and, together with the net rates the subscribers now enjoy, cause us to conclude appellants have shown no basis for finding a rate of return of 4.04% to be excessive.
DEPRECIATION AND EXECUTIVE SALARIES
It is recognized that in fixing utility rates, the commission must make provision for operating expenses, depreciation, and reserves which are necessary in good business judgment, (Illinois Bell Telephone Co. v. Commerce Com. 414 Ill. 275, 286,) and the experience and expert knowledge of the commission and experts who testify before it are ...