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Union Electric Co. v. Commerce Com.





APPEAL from the Circuit Court of Jersey County; the Hon. HOWARD LEE WHITE, Judge, presiding.


The Illinois Commerce Commission (Commission) and certain industrial intervenors timely appeal the trial court's decision remanding the cause to the Commission for reconsideration based on the court's finding that the Commission acted outside the scope of its authority in both determining "value" for rate purposes and setting a rate of return primarily based on a decision of the Missouri Public Service Commission. Due to the substantial issues involved, the facts in the record will be detailed in some length.

On February 11, 1975, Union Electric (UE) filed a tariff with the Commission seeking a general rate increase. Numerous hearings were held between April 11, 1975, and December 16, 1975, when the case was submitted to the Commission after oral argument. On January 9, 1976, the Commission filed its order determining the adjusted original cost rate base for UE's property allocated to Illinois operations to be $197,173,000. The Commission also found a return of approximately 7.83% applied to the rate base (yielding operating income of some $15,429,000) to be fair, just, and reasonable. UE's application for rehearing was denied by the Commission on February 18, 1976.

Union Electric, a Missouri corporation, generates and sells electric energy in Missouri, Iowa, and Illinois. It serves three areas in Illinois, including an area near Keokuk, Iowa, and the cities of East St. Louis and Alton. The Illinois service area has a population of about 262,000, while UE's Missouri and Iowa service areas have estimated populations of 1,943,000 and 47,000, respectively. The bulk of the company's 739,000 electric customers are in Missouri; there are 70,000 Illinois customers, and 16,000 in Iowa.

During the hearings, UE tendered evidence of two proposed rate bases. Exhibit C contained an estimate based on a net "original cost" approach; $204,297,000 was the value given to the company's property attributable to Illinois operations. W.E. Cornelius, executive vice president, testified that the company sought a 9% return on a rate base determined on net original cost. An alternative reproduction cost valuation of UE's property attributable to Illinois operations of $403,082,000 was tendered through exhibit D. This latter figure, based on a "current value" concept, was composed of a "modern substitute plant method" of estimating plant value, a "trended" original cost approach to some nonplant capital items, and the use of original cost for items such as land. UE did not contend that the "current value" rate base be adopted by the Commission en toto. Pertinent parts of Cornelius' testimony follows:

"Q. Has an estimate been made of the fair value of Union Electric's electric properties used to serve customers located in Illinois?

A. Yes. The fair value of these properties at December 31, 1975, is $263,933,000. This figure was arrived at by weighting the $204,297,000 net original cost rate base at 70% and the $403,082,000 current value rate base at 30%. The percentage weightings used are based on our capitalization ratios at December 31, 1975, of 70% fixed dollar capital (bonds and preferred stock) and 30% common equity. The development of the components of fair value, that is, the net original cost and current value rate bases will be covered by subsequent witnesses.

Q. Why did you use your capital ratios in determining a fair value rate base?

A. Since approximately 70% of the funds to finance our properties have come from fixed dollar securities, this percentage of the rate base should be based on original cost. The balance of our funds comes from common equity or risk capital which shares in the gains or losses resulting from changes in price levels. Accordingly, the rate base financed by this type of capital should be based on present price levels."

If the Commission did use the proffered "fair value" estimate based on the 70/30 averaging, Cornelius asked for a 7% rate of return. The witness stated the revenues thus received would approximate a 9% return on the lower net original cost figure. On cross-examination, Cornelius admitted UE was highly leveraged. Due to certain Commission rulings concerning test year data, UE introduced exhibit H, which included a net original cost estimate of $199,085,000, a decrease of over 5 million dollars from its earlier estimate. The Commission adopted a test year ending June 30, 1975, and, after adjustments, determined the value of UE's property attributable to Illinois operations to be the aforementioned $197,173,000. The Commission rejected UE's "current value" evidence and refused to weigh that reproduction cost estimate in its decision on rate base value. The Commission reaffirmed its March 13, 1973, order in the Central Illinois Public Service Co. case (Commission Docket No. 57300 (1973)) that the original cost method of valuation best accomplished the Commission's obligation in fixing rates as low as possible for the consuming public, but, at a sufficient level to provide operating expenses, proper reserves, and a fair and reasonable return to the utility's investor.

In determining the rate of return on the rate base, the Commission admitted a late-filed exhibit (Staff exhibit Z). The exhibit was the Missouri Public Service Commission's order of December 22, 1975, determining UE's Missouri rates. The Commission decided to adopt once again its position stated in an earlier Union Electric decision (Docket No. 57469, April 13, 1973), and noted that while the record contained evidence which could warrant approval of rates by the Illinois Commission which would be higher than those approved in Missouri, UE's Illinois service area is a minor part of the Company's integrated bistate system. After reciting section 38 of the Public Utilities Act (Ill. Rev. Stat. 1975, ch. 111 2/3, par. 38), the Commission stated it was "unwilling" to require Illinois consumers to pay a higher rate than the other 90% of UE's consumers for identical service. It noted that a small minority of Illinois customers should not be put in a position of subsidizing a vast majority of out-of-State consumers. While perceiving the problem to be primarily due to the absence of multistate regulatory schemes, the Commission felt the "necessity" to recognize the Missouri rate structure. The Commission found the peculiar circumstances of the utility's operation in Missouri and Illinois, however, rendered "traditional" rate-making procedures impossible without imposing an unnecessary burden on the Illinois consumer. The Commission, thereafter, adopted rates, for practical purposes, identical to those approved earlier by the Missouri Public Service Commission.

On March 8, 1976, Union Electric timely appealed the denial of the Commission's rehearing application to the circuit court of Jersey County. The industrial intervenors also appeared in circuit court. After thorough briefing and oral argument, the trial court filed its memorandum of opinion on November 17, 1977. The court first adopted the factual findings of the Commission in its order. Then, the court commented upon the Commission's use of the net original cost rate base method in determining value. As the trial court understood Illinois law, "original cost is but one of many factors that should be considered by the Commerce Commission" in arriving at a figure of "value" for rate purposes. The court then stated it appeared the Commission "abandoned" the "present value" concept of rate-making and substituted in lieu thereof the "original cost" theory. This, the court determined, was contrary to law. While it was conceded that evidence on the question of present value had been admitted, the court found it clear that the Commission completely ignored such evidence in arriving at its order.

Turning to UE's objections to the Commission's finding of a rate of return exactly the same as that of the Missouri Public Service Commission, the court stated the Commission did not err in receiving the Missouri Commission's order into evidence but, rather, the Commission did err in the weight given to that order. Relying on language that the Commission was "unwilling" to require higher rates for the Illinois customers of UE and that the Commission would not use normal rate-making procedures due to the particular circumstances of UE's bistate operation, the court found that the Commission had forsaken the "traditional rate-making procedures" as laid down by the Illinois Supreme Court, and had relied so heavily on the Missouri Commission's order that it substituted the judgment of the Missouri Commission in lieu of its own authority. The court further found the Public Utilities Act had no extraterritorial effect. While the trial court was in sympathy with the Commission's plight as a result of UE's operation in more than one State, the court reasoned that Illinois law must still be upheld. The cause was remanded to the Commission to reconsider its order. The Commission timely appealed on December 13, 1977; the intervenors followed suit two days later.

Two issues are presented for review. The first is whether or not the trial court was correct in finding the Commission had acted outside the scope of its authority in basing a finding of value on net original cost and excluding evidence of reproduction costs from any weight in its opinion. The second issue is whether or not the trial court was correct in finding the Commission abandoned its statutory rate-making authority in setting rates for UE's Illinois customers based on the Missouri Public Service Commission's rate of return findings. Also pending before this court is Illinois Bell Telephone Co. v. Illinois Commerce Com. (1978), 64 Ill. App.3d 645, 381 N.E.2d 999, filed simultaneously with this opinion, wherein the same issue of the Commission's use of net original cost to determine value for rate-making purposes is before this court. Therefore, the arguments and supporting authorities brought to the court's attention by the litigants in the Illinois Bell case are noted as this court determines the issue in the instant case.

To better understand the ramifications of the Commission weighing in a "current value" figure to determine "value" in the instant case, one need only consult the record. The value of UE's Illinois property was found by the Commission to be $197,173,000. The proposed "fair value" figure (including a 30% weighing of the "current value" figure of $403,082,000) is $263,933,000. The difference of $66,760,000 is the amount UE argues should be included in the rate base. If the $66,760,000 were added to the rate base approved by the Commission, the resultant revenue increase at a 7.83% rate of return would be $5,227,308.

The Commission and industrial intervenors argue that the court should give great deference to the decisions of the Commission in ascertaining "value" for rate-making purposes and that the Commission is entitled to give "zero" weight to evidence of reproduction cost in determining value. This court is urged to look at the result and not the methodology of how the final figure came to be. Section 68 of the Public Utilities Act (Ill. Rev. Stat. 1975, ch. 111 2/3, par. 72) is cited as authority that this court cannot inquire into the method by which the Commission reaches its determination of value. The Commission and intervenors further argue that the use of reproduction cost is not constitutionally required in the determination of a rate base, that the language of the statute does not require the Commission to use current reproduction costs, and the case law construing the statute does not compel reversal.

The Commission contends evidence of reproduction cost is, at best, hypothetical, whereas original cost of equipment can be easily determined from the Company's books and records. The Commission states use of reproduction cost provides a "windfall" value figure during an inflationary period, results in the utility being granted a return on an investment which it did not make, and raises the utility's operating costs since the extremely expensive reproduction estimates are classified as a proper expense.

UE and Bell argue the Commission's use and finding of value based, in part, upon evidence of reproduction cost is compelled from (1) supreme court authority construing parts of the Public Utilities Act, and (2) the fact that the legislature has not seen fit to amend those sections after the supreme court construction. According to UE and Bell, reproduction cost must be given some weight by the Commission in its figuring of value as a matter of law. Although conceding that use of present value in figuring a rate base is not constitutionally required, the utilities argue the higher rate base arrived at through use of reproduction cost is needed to attract capital, to protect the utility and its shareholders against inflation, and that the Commission must use the higher standard of value since the Commission would not make up for the lower rate base through higher rate of return allowances. Illinois Bell in particular feels that raising this issue is like "kicking a dead horse," since the matter, according to Bell, has been put to rest by the supreme court.

Certain parts of the Public Utilities Act (Ill. Rev. Stat. 1977, ch. 111 2/3, par. 1 et seq.) are relevant to the issue herein raised. They are as follows:

"The Commission shall have power to ascertain the value of the property of every public utility in this State and every fact which in its judgment may or does have any bearing on such value. * * * [T]he burden of establishing such value shall be upon such public utility or utilities." Ill. Rev. Stat. 1977, ch. 111 2/3, par. 30.

"All rates or other charges made, * * * shall be just and reasonable. Every unjust or unreasonable charge made, * * * is hereby prohibited and declared unlawful." ...

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