Appeal from the Appellate Court for the First District; heard
in that court on appeal from the Circuit Court of Cook County,
the Hon. Richard L. Curry, Judge, presiding.
MR. JUSTICE MORAN DELIVERED THE OPINION OF THE COURT:
Rehearing denied October 19, 1981.
The plaintiff, Commonwealth Edison Company (Edison), filed a complaint for administrative review in the circuit court of Cook County on November 28, 1978. Edison sought to reverse the assessment for tax purposes of 12 pollution-control facilities located in Cook County, which service Edison's electrical-generating stations. The assessment was made by the defendant Department of Local Government Affairs (Department). The circuit court affirmed the assessment and held that the pollution-control facilities were properly assessed under sections 21a-1 and 21a-3 of the Revenue Act of 1939 (Act) (Ill. Rev. Stat. 1977, ch. 120, pars. 502a-1, 502a-3). The court reasoned that to the extent that pollution-control facilities are included in Edison's rate base from which its rates are determined they are economically productive to their owners. The appellate court reversed and held that the Department's assessment was contrary to the Act, which allows the taxation of pollution-control facilities only to the extent that the facility produces a product or service. (86 Ill. App.3d 768.) We allowed the Department's petition for leave to appeal.
The sole issue is the proper method of assessing Edison's pollution-control facilities under the Act. The Department does not dispute Edison's assertion that the pollution-control facilities in question do not produce a product or service or reduce Edison's cost of production in any manner.
In 1977, Edison filed annual tax returns with the Department. The return form, provided by the Department, requested information concerning each facility's original cost, present fair cash value, and salvage value. The form also asked the following question: "Does the control facility have any enhancement to the manufactured product or is there a by-product derived from the control facility?" Edison responded "No" to this question for each facility. The Department, under the authority of section 21a-1 of the Act, assessed each facility on the basis of the information furnished on the return at 33 1/3% of its present cash value. This section provides:
"Statement of policy. It is hereby declared to be the policy of the State of Illinois that pollution control facilities should be valued, for purposes of the real and personal property tax laws of this State, in relation to 33 1/3% of the fair cash value of their economic productivity to their owners." (Ill. Rev. Stat. 1977, ch. 120, par. 502a-1.)
Section 21a-3 enumerates guidelines by which the Department may assess pollution control facilities.
"Method of valuation for pollution control facilities. For the purpose of determining 33 1/3% of the fair cash value of any certified pollution control facilities in assessing said facilities under the real and personal property tax laws of this State, the Department shall take into consideration the actual or probable net earnings attributable to the facilities in question, capitalized on the basis of their productive earning value to their owner; the probable net value which could be realized by their owner if the facilities were removed and sold at a fair, voluntary sale, giving due account to the expense of removal and condition of the particular facilities in question; and such other information as the Department may consider as bearing on 33 1/3% of the fair cash value, to their owner, of the pollution control facilities in question, consistent with the principles set forth herein." Ill. Rev. Stat. 1977, ch. 120, par. 502a-3.
Edison protested the 1977 assessments and requested a review and correction, claiming that the Department's assessment violated sections 21a-1 and 21a-3 of the Act. It asserted that under the Act assessments were to be based on "economic productivity," taking into account the "productive earning value" of the facilities. In that the facilities produced nothing, Edison claimed that the assessments based on present cash value were erroneous. It further claimed that it was denied equal protection of law in that its pollution-control facilities are assessed by a different method than pollution-control facilities of non-regulated industry.
A hearing was held before the Department on February 8, 1978. The transcript of a hearing concerning the Department's 1977 assessment of Edison's Lake County pollution-control facilities was made part of the record on appeal. Dr. John L. Langum, an economic consultant, testified on behalf of Edison. He stated that "`economic productivity' of property can only mean the contribution by that property to the goods or services produced by that property and sold to customers." He also stated, "Pollution-control facilities of an electric utility have no `economic productivity' because they make no contribution to the kilowatt hours of electricity produced and sold by the utility."
Dr. Langum also explained that Edison's rates are regulated by the Illinois Commerce Commission to allow Edison to recover all of its operating expenses and to earn a fair rate of return on all of its invested capital. Ralph Olson, auditor for the Illinois Commerce Commission, testified that the total cost of all of Edison's pollution-control facilities is included in its rate base on an equal basis with the cost of all other invested capital. That rate base is then used as the foundation for the computation of a fair rate of return on invested capital.
Ron Deloney, an assessor, testified on behalf of the Department. He explained that the Department may utilize either one of two approaches: (1) a cost approach by which the Department assesses the facilities at 33 1/3% of their net salvage value or (2) an income approach by which the facilities are assessed at 33 1/3% of the present fair cash value. He stated that pollution-control facilities of non-regulated industries are normally assessed utilizing the cost approach. Deloney further stated that the income approach is used in assessing pollution-control facilities of utilities since the facilities are included in the base from which rates are determined.
The Department issued its administrative decision on October 27, 1978, and confirmed the assessment. The hearing officer found that utilities "are unique in that they are a monopoly and do receive through rate increases, additional revenues for the investment. * * * The facility produces an extra price increment on the electricity sold." The hearing officer properly characterized pollution-control facilities as one element includable in the utility's rate base for rate-making purposes. The rate base and rate of return, as determined by the Illinois Commerce Commission, are the components used to develop a reasonable return to compensate investors for their capital investments.
This court in Illinois Bell Telephone Co. v. Illinois Commerce Com. (1953), 414 Ill. 275, 286, stated:
"In the final analysis, the rates fixed by [the Commission] * * * should be sufficient to provide for the operating expenses, depreciation, reserves that are necessary in good business judgment and operations and a reasonable return to the ...