Davenport Water Co. v. Iowa State Commerce Commission

Decision Date27 September 1971
Docket NumberNo. 54512,54512
PartiesDAVENPORT WATER COMPANY, Appellant, v. IOWA STATE COMMERCE COMMISSION et al., Appellees.
CourtIowa Supreme Court

March 1, 1967, Commission ordered hearings to commence April 4, 1967. They were concluded October 12, the same year.

The transcript of oral testimony consists of almost 4000 pages. Eighty-four exhibits were also introduced in evidence, comprising another 1000 pages.

By Commission's final order, issued October 9, 1968, Utility's proposed rates were held unreasonable.

Commission, with one of three members dissenting, accordingly cancelled Utility's proposed rate revision, authorized filing of new schedules providing an annual revenue increase of approximately 23 percent, as best determinable from the record, and directed that Utility submit a customer refund plan as to all collections in excess of Commission authorized rates, plus associated sales taxes, with interest at seven percent per annum.

November 4, 1968, Utility appealed to Scott County District Court and obtained a stay order under bond. May 15, 1969, hearing was held on that appeal, absent new or additional evidence. July 23, 1969, district court affirmed Commission on all points, except interest on customer refunds was ordered reduced from seven percent to five percent per annum. Appeal by Utility to this court followed.

As a preface to further consideration of this case it is appropriate to here circumscribe some of the basic terms presently involved.

'Rate base' represents the total investment in property, used and useful at time of the rate inquiry, in rendering a designated utility service. That figure is multiplied by a percentage called 'rate of return' which orthodox regulation allows the utility to earn. See Pacific Telephone and Telegraph Company v. Hill, 229 Or. 437, 365 P.2d 1021, 1024; Application of Northwestern Bell Telephone Co., 78 S.D. 15, 98 N.W.2d 170, 176--177; 43 Am.Jur., Public Utilities and Services, § 82; 51 Iowa L.Rev. 283.

The methods most commonly employed in ascertaining a rate base are, (1) 'original cost depreciated or prudent investment', (2) 'present reproduction cost or fair value.'

A rate base determined by 'original cost depreciated or prudent investment' usually consists of original cost of the property used or useful in rendering services, plus working capital, less accumulated depreciation and contributions to construction and capital. This is ordinarily determined by an analysis of the utility's books and records. See, Hope Natural Gas Co. v. Federal Power Commission, 134 F.2d 287, 300--301 (4 Cir.); 2 Pond, Public Utilities, § 593 (4th ed. 1932); 51 Iowa L.Rev. 283.

Under 'present reproduction cost or fair value' method the rate base is customarily derived by considering and evaluating original cost of a utility's existing facilities devoted to public service, present reproduction cost new of the facility less depreciation, and the amount and value of outstanding stocks and bonds. In effecting this computation, estimates based in part on price and labor indices, and extant values are commonly put to use. See Smyth v. Ames, 169 U.S. 466, 18 S.Ct. 418, 42 L.Ed. 819; Iowa-Illinois Gas & Electric Co. v. Fort Dodge, 248 Iowa 1201, 1229, 85 N.W.2d 28; 2 Pond, Public Utilities, § 594 (4th ed. 1932); 51 Iowa L.Rev. 284.

Commission instantly determined 'fair value' testimony offered by Utility was too indefinite, speculative and uncertain to be of any probative force or effect, then applied the 'original cost or prudent investment' formula. By so doing it concluded Utility's rate base was $10,237,844, and allowed thereon a return of seven percent or $716,649 annually, with operating expenses, including depreciation and taxes of $1,491,139. The foregoing rate base consisted of $11,589,729 underpreciated original cost of the plant in service December 31, 1966. From this there was deducted $4,861 representing contributions in aid of construction; $6,500 nonutility plant; $102,593 accumulated deferred investment tax credits; $1,237,931 depreciation recorded on Utility's books, adjusted, for acquisition of the Bettendorf property.

On appeal to us, Utility contends trial court erroneously affirmed Commission in these respects:

A. FAIR VALUE ISSUE

1. Rates allowed in such final judgment and order do not afford Utility a reasonable return upon the fair value of its property devoted to public service, are confiscatory, and cause Utility to be deprived of property without due process of law, in violation of Iowa Const., art. I, § 9.

2. Commission and district court, in adopting and approving a rate base for Utility, rejected all evidence regarding value of Utility's property devoted to public use, and instead employed the so-called investment rate base method, in violation of The Code 1966, Section 490A.8.

3. By rejecting all Iowa decisional rate-making precedents, and imposing confiscatory rates in violation of the Constitution and statutes of the State of Iowa, Commission and district court have denied Utility any relief from the debilatory effects of the long-continued and still-continuing inflation in the general economy.

B. REPRODUCTION COST ISSUE

District court erred in affirming the following determination by Commission that reproduction cost evidence is Per se incompetent:

'Finally, on this aspect of the case, we find and determine that reproduction cost evidence is not probative evidence of value and is, therefore, not a factor relating to value that this Commission is required to consider in fixing just and reasonable rates.'

'The deficiencies and defects of reproduction costs are inherent in such appraisals and render them, and the 'fair value' method which depends on them, unworkable and unsound.'

C. ARBITRARY AND CAPRICIOUS ACTION ISSUE

District court erred in affirming the following rulings made by Commission which were arbitrary and capricious or otherwise illegal under § 490A.17 of the Iowa Code, because

1. Commission erroneously understated Utility's rate base in these particulars:

(a) By denying an appropriate addition to the rate base for the non-income-producing portion of Utility's committed construction program at end of the test year;

(b) By excluding from the rate base any allowance for materials and supplies.

2. Commission erroneously overstated the amount of operating income which Utility would receive from rates approved by Commission in the following particulars:

(a) By refusing to consider any deduction therefrom for Utility's charitable donations and contributions;

(b) By understating the amount of Utility's property taxes to be deducted therefrom through demonstrable error in calculation;

(c) By understating Utility's rate case expense to be deducted therefrom by calculating a federal income tax saving resulting from such expense at a higher rate than that found applicable to Utility by Commission;

(d) By understating Utility's federal income tax to be deducted therefrom by including as deductible in the computation of said tax the depreciation on property excluded by Commission from the rate base.

D. TAX NORMALIZATION ISSUE

District court erred in affirming the disallowance by Commission of Utility's deduction for deferred federal income taxes, thereby further overstating operating income which would be produced by the rates approved by Commission.

E. RATE REFUND ISSUE

District court erred in affirming Commission's order which required a rate refund for the entire period from November 15, 1966, to October 9, 1968, although Commission, under § 490A.6 of the Iowa Code, lacked any rate refund jurisdiction over the period from August 1, 1967, to October 9, 1968, since Commission's power to suspend rates ceases 12 months from the date such rates would have become effective if not suspended.

I. Utility Rates--Legislative Function. At one time the various municipalities in Iowa were granted exclusive nonadministrative authority to fix local utility rates. The Code 1962, Chapter 397. See Iowa-Illinois Gas & Electric Co. v. Fort Dodge, 248 Iowa 1201, 1227--1228, 85 N.W.2d 28.

In 1963 this, as an administrative power, legislative in nature, was delegated to the Iowa State Commerce Commission. Regular Session, Sixtieth General Assembly, Chapter 286, presently identified as The Code 1971, Chapter 490A. See Iowa-Illinois Gas & Electric Co. v. Iowa City, 255 Iowa 1341, 1348, 124 N.W.2d 840; Iowa-Illinois Gas & Electric Co. v. Fort Dodge, Supra, 248 Iowa at 1216--1217, 85 N.W.2d 28; Arizona Corporation Commission v. Superior Court, 107 Ariz. 24, 480 P.2d 988, 990--991; Pacific Telephone & Tel. Co. v. Public Utilities Com'n, 62 Cal.2d 634, 44 Cal.Rptr. 1, 401 P.2d 353, 360; 73 C.J.S. Public Utilities § 16a; 43 Am.Jur., Public Utilities and Services, § 83. See generally Davis, Administrative Law Text, § 5.01; 3 Pond, Public Utilities, §§ 892, 903 (4th ed. 1932); cf. Elk Run Telephone Co. v. General Telephone Co., 160 N.W.2d 311, 314--317 (Iowa).

II. Judicial Review. First to be determined is the scope of our review.

At the threshold The Code 1966, Section 490A.8, provides in material part: 'The burden of proof shall be on the public utility to prove that no unreasonable profit is made.'

This must mean, a presumption of reasonableness attends Commission's determined rate return, and the burden is upon Utility to prove otherwise.

As 43 Am.Jur., Public Utilities and Services, § 186, states:

'In general, a rate fixed by an authorized rate-making body for a public utility is presumed to be valid and reasonable. Accordingly, the courts will not enjoin or interfere with the collection of rates established under legislative sanction unless they are plainly and palpably unreasonably, confiscatory, or excessive, and clearly proved to be such, or unless there was fraud or arbitrariness in fixing such rates.

'It must be shown by a preponderance of the evidence that the legislation...

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