No. 51455. Appeal from the Appellate Court for the Fourth
District; heard in that court on appeal from the Circuit Court of
Jersey County, the Hon. Howard Lee White, Judge, presiding.
No. 51476. Appeal from the Appellate Court for the Fourth
District; heard in that court on appeal from the Circuit Court of
Sangamon County, the Hon. Simon L. Freidman, Judge, presiding.
MR. JUSTICE RYAN DELIVERED THE OPINION OF THE COURT:
Rehearing denied November 30, 1979.
Donald H. Sharp, Thomas P. Hester, John W. McNulty, and Edward Butts, of Chicago (Ensel, Jones, Blanchard & LaBarre, of Springfield, of counsel), for appellant.
William J. Scott, Attorney General, of Springfield, and Bernard Carey, State's Attorney, of Chicago (Richard K. Means and Hercules F. Bolos, Special Assistant Attorneys General, and Thomas J. Swabowski, Assistant Attorney General, all of Chicago, and Michael L. Ginsberg, of Springfield, of counsel), for appellee Illinois Commerce Commission.
William R. Quinlan, Corporation Counsel, of Chicago (Daniel Pascale, Edmund Hatfield, and Bernard Rane, Assistant Corporation Counsel, of counsel), for appellee city of Chicago.
These consolidated cases involve the validity of rates established for two public utilities by the Illinois Commerce Commission. The primary issue concerns the elements used by the Commerce Commission in establishing the rate base of each utility. The order of the Commission in each case rejected the "fair value" concept as the appropriate method of determining the rate base and instead computed the rate base by applying the "original cost" method. The circuit court of Jersey County in cause No. 51455, involving Union Electric Company, and the circuit court of Sangamon County in cause No. 51476, involving Illinois Bell Telephone Company, reversed the Commission's orders and held that the "fair value" method must be followed. The appellate court reversed the circuit courts and upheld the orders of the Commission, with one justice dissenting in each case. (64 Ill. App.3d 700; 64 Ill. App.3d 645.) We granted leave to appeal and consolidated the cases in this court. In addition to the rate-base issue, cause No. 51455 (Union Electric) also involves the question of whether the Commerce Commission erred in admitting into evidence a schedule of rates that had been recently established by the Missouri Public Service Commission for the customers of this utility in Missouri, and whether the Illinois Commerce Commission, by establishing the same rates for this utility's customers in Illinois as the Missouri Commission had established for those customers in Missouri, erred. The circuit court of Jersey County also held the Commerce Commission erred in this respect, and the appellate court, also with one justice dissenting on this issue, reversed the trial court and upheld the Commission's action. 64 Ill. App.3d 700.
Section 30 of the Public Utilities Act (Ill. Rev. Stat. 1975, ch. 111 2/3, par. 30) grants to the Commission the power "to ascertain the value of the property" of a public utility. Section 32 of the Act requires that all the rates received by the utility "shall be just and reasonable." Section 36 of the Act provides that the utility is entitled to a "reasonable return on the value of the property of said public utility as found by the Commission." This court, in a series of cases beginning almost 60 years ago, has consistently interpreted "value" in the statute to mean "fair value" and not "original cost."
In State Public Utilities Com. ex rel. City of Springfield v. Springfield Gas & Electric Co. (1919), 291 Ill. 209, this court, in considering the Commission's power and duty to fix reasonable rates, stated:
"The basis of all calculations as to the reasonableness of rates to be charged by a corporation maintaining a public utility under legislative sanction must be the fair value of the property being used by it for the convenience of the public, and in order to ascertain that value the original cost of construction, the amount expended in permanent improvements, the present cost of construction, the probable earning capacity of the property under the particular rates prescribed by statute, and the sum required to meet operating expenses, are all matters for consideration and are to be given such weight as may be just and right in each case." (State Public Utilities Com. ex rel. City of Springfield v. Springfield Gas & Electric Co. (1919), 291 Ill. 209, 219.)
In Springfield Gas the contention was that value for rate-making purposes should be determined by the cost of reproduction new, less depreciation. This court rejected that contention and adopted the fair-value test, stating:
"Therefore it cannot be laid down as a rule without qualifications that cost of reproduction new, less depreciation, is the only basis of valuation for rate-making purposes. It is equally true that the original cost of construction, less depreciation, cannot be held to be the only proper basis for determination of valuation for rate-making purposes. * * * [E]very element having any bearing on the situation must be considered in the investigation and then sound business judgment applied to the determination of a valuation that is fair and just to the consumer and the utility." State Public Utilities Com. ex rel. City of Springfield v. Springfield Gas & Electric Co. (1919), 291 Ill. 209, 222.
Smyth v. Ames (1898), 169 U.S. 466, 42 L.Ed. 819, 18 S.Ct. 418, cited as authority in Springfield Gas, appears to have fathered the "fair value" approach to rate-base determination, an approach now apparently abandoned by the Supreme Court. The court in Smyth v. Ames was considering a constitutional due process question and was not construing a statute. In Missouri ex rel. Southwestern Bell Telephone Co. v. Public Service Com. (1923), 262 U.S. 276, 67 L.Ed. 981, 43 S.Ct. 544, the Supreme Court, in reversing an order of the Missouri Public Service Commission, stated that it is impossible to ascertain what will amount to a fair return upon properties of the utility devoted to public service without taking into consideration current costs. In a concurring opinion, Mr. Justice Brandeis criticized the fair-value rule of Smyth v. Ames and suggested that the rate of return be computed on the amount of capital prudently invested in the utility. It is this prudent-investment theory of Mr. Justice Brandeis which has fathered what is now commonly referred to as the "original cost" method of computing the rate base upon which a reasonable return is to be allowed. In Federal Power Com. v. Natural Gas Pipeline Co. (1942), 315 U.S. 575, 86 L.Ed. 1037, 62 S.Ct. 736, the court, in considering a statute, moved away from Smyth v. Ames and held that the Federal Power Commission, under the Natural Gas Act, was not bound to use any set formula in determining rates. In that case Mr. Justices Black, Douglas, and Murphy filed a concurring opinion again criticizing the fair-value principle of Smyth v. Ames, and voiced concern lest fair value be perpetuated in the judicial review provided in the Act. Finally in Federal Power Com. v. Hope Natural Gas Co. (1944), 320 U.S. 591, 88 L.Ed. 333, 64 S.Ct. 281, the court reversed a court of appeals holding which had found that the rate base established by the Federal Power ...