Iowa-Illinois Gas & Elec. Co. v. City of Fort Dodge

• Decision Date: 17 September 1957
• Docket Number: No. 49239,IOWA-ILLINOIS,49239
• Citation: 248 Iowa 1201,85 N.W.2d 28
• Parties: , 20 P.U.R.3d 159 GAS AND ELECTRIC COMPANY, a corporation, Plaintiff-Appellant, v. CITY OF FORT DODGE, Iowa, Marvin B. Vedvig, Mayor, Walter M. Williams and Frank J. Burns, Councilmen, and with the Mayor constituting the City Council of Fort Dodge, Iowa, Defendants-Appellees and Cross-Appellants.
• Court: Iowa Supreme Court

Page 28

85 N.W.2d 28

248 Iowa 1201, 20 P.U.R.3d 159

IOWA-ILLINOIS GAS AND ELECTRIC COMPANY, a corporation, Plaintiff-Appellant, v. CITY OF FORT DODGE, Iowa, Marvin B. Vedvig, Mayor, Walter M. Williams and Frank J. Burns, Councilmen, and with the Mayor constituting the City Council of Fort Dodge, Iowa, Defendants-Appellees and Cross-Appellants.

No. 49239.

Supreme Court of Iowa.

Sept. 17, 1957.

B. B. Burnquist, of Burnquist, Helsell & Burnquist, Fort Dodge, and David M. Elderkin, of Barnes, Wadsworth, Elderkin, Locher & Pirnie, Cedar Rapids, for plaintiff-appellant.

Donald J. Mitchell, City Atty., and Dwight G. Rider, of Rider, Bastian &amp Beisser, Fort Dodge, and William A. Roberts of Roberts & McInnis, Washington, D. C., for defendants-appellees and cross-appellants.

LARSON, Justice.

The plaintiff, Iowa-Illinois Gas & Electric Company, is a utility incorporated under the laws of the State of Illinois. Its operations include (1) the generation, transmission, distribution and sale of electricity, and (2) the distribution and sale of natural gas. In connection with these operations it sells and services electric and gas appliances.

The company's Iowa territory is divided into five districts: Davenport, Iowa City, Fort Dodge, Cedar Rapids and Ottumwa. In the Fort Dodge District gas is distributed only in the municipalities of Fort Dodge and Manson and in the suburban area adjoining Fort Dodge. Reference is sometimes made to a metropolitan area which is a combination of Fort Dodge and adjacent rural area. A rather extensive statement of facts seems necessary for a clear understanding of the problems and issues involved.

The principal service area in the Fort Dodge District is the City of Fort Dodge, in which gas has been supplied by the company or its predecessors since 1882. Within the city the company was serving as of December 31, 1954, 7,429 residential customers (6,072 used gas for heating in addition to cooking and water heating), 156 commercial customers, 620 commercial heating customers and 5 industrial customers. These are what are known as firm customers, the company being bound to furnish their requirements with the rates therefor being set by the rate ordinances of the City of Fort Dodge.

The company purchases its natural gas from Northern Natural Gas Company under a rate schedule approved by the Federal Power Commission. Being bound to furnish all of the requirements of the foregoing firm customers, the company contracts for the maximum daily quantity needed to supply the requirements of the firm gas customers and that quantity is based on the estimated requirements of the firm customers to be served during the next heating season on a day having an average temperature of 15 degrees below zero, plus the quantity required for normal growth in number of customers to be served. This volume is known as a 'contract' demand for which the company pays a demand 'charge', or minimum price, paid to Northern Natural Gas Company irrespective of the volume purchased. In other words, it is a price paid to Northern Natural Gas Company as a guarantee or assurance that this volume will be available. In addition, what is known as a 'commodity' charge is paid for the volume of gas actually purchased. Northern Natural Gas Company retains the right to curtail deliveries of gas above the contract demand volume, which is known as 'overrun' gas. If overrun gas is authorized to be taken by Northern Natural Gas Company it is paid for at a commodity rate. If overrun gas is taken when not authorized by Northern, a penalty price is imposed.

The demand requirements for the year 1954-55 heating season were determined and the contract entered into in April, 1953.

It is evident that if sales could be made of any of the gas for which a demand price was being paid in any event and which was not needed on any particular day for the use of the firm customer that it would be profitable to the company (and would reduce rates to the firm customers by increasing revenues and thus holding down the company's cost) to sell the gas for such amount as could be obtained over and above the actual cost or 'commodity' cost of the gas.

Sales were thus made by way of contract to 'interruptible customers', generally large volume customers served on a basis that they would have gas only at such time as it was not needed to furnish the requirements of the firm customers. At any time if all of the needs of the firm customers were not met, Northern Natural Gas Company could and would interrupt the service to the 'interruptible' customers. A priority system of interruptibles was set up in six steps with Step 1 interrupted first and Step 6 the last to be interrupted. The usual interruptible customer maintains standby equipment providing for other fuel and if the cost of interruptible gas exceeds the cost of full time service by the other fuel or fuels, a customer will, of course, no longer purchase gas.

As of December 31, 1954, the company served three interruptible (industrial) customers in Fort Dodge. In the rural area adjacent to Fort Dodge, the company also served 197 residential customers, two commercial customers and 27 commercial heating customers and 10 industrial customers on a firm basis, and 8 interruptible customers.

The company also uses interruptible gas in its electric generating station in Fort Dodge.

The demand-commodity type of contract under which the plaintiff company and Northern Natural Gas Company are now operating, under the jurisdiction of the Federal Power Commission, was adopted in December of 1947.

Since the enactment of Ordinance 1026 there have been 6 rate increases imposed upon plaintiff company by Northern Natural Gas Company, and the present rate charged by Northern Natural Gas Company is 79% higher than the rate applicable in October, 1950, when Ordinance 1026 went into effect.

The effect of the increases in cost of gas to plaintiff company was offset somewhat by increased sales of firm gas in the metropolitan area of Fort Dodge and by successive increases in the contract rates with the interruptible customers made each year since 1950.

The company argues it had reached the point where it was serving 82 1/2% of the potential customers in the City of Fort Dodge with space heating, and that the increased cost could no longer be minimized in any way by increased volume. In addition, charges to interruptible customers had been increased 79% over the rates in effect prior to November 1, 1950, and it also appeared that the interruptible rates could no longer be raised by reason of the fact that they had reached the competitive rate of coal, oil and other fuels; that any further raise would result in a loss of interruptible customers, thus increasing the cost to the firm customers.

The company claimed that unless a rate increase was permitted over and above the rates established by Ordinance 1026 for residential, commercial and industrial service in the City of Fort Dodge, that it would operate at a loss, and on February 2, 1954, requested an increase in the rates fixed by Ordinance 1026. After extended negotiations any gas rate increase was denied by formal report and resolution of the City Council of Fort Dodge on July 24, 1954.

On August 2, 1954, plaintiff company filed its petition in this cause seeking a judicial determination of the question whether the rates imposed by Ordinance 1026 of the City of Fort Dodge were confiscatory and deprived the company of a reasonable return on the fair value of the company's property, all in violation of Section 9, Article 1, of the Constitution of the State of Iowa, I.C.A. A temporary injunction was issued under bond in the sum of $300,000 restraining the City of Fort Dodge from enforcing rate Ordinance 1026 and restraining the city from interfering with a new rate put into effect by the company.

Defendants filed a motion to dissolve this temporary injunction which, after hearing, was overruled by the trial court.

Upon the trial of the case plaintiff company introduced evidence showing the original cost of its properties. Its witness Mr. Nemeyer testified that the books and records of plaintiff company were kept in accordance with the Uniform System of Accounts prescribed for natural gas companies by the Federal Power Commission, and stated that the plaintiff company's original cost of its Fort Dodge gas properties had been reviewed by the staff of the Federal Power Commission in 1947, and all property added since that date was recorded at its cost of construction.

William L. Patterson, a principal engineer with Black & Veatch, consulting engineers at Kansas City, Missouri, testified as to the cost of reproduction of plaintiff company's property, and the observed depreciation of the property, and gave his opinion as to the present fair value of plaintiff company's property used and useful in serving metropolitan Fort Dodge. He and his staff made a detailed appraisal of the present day cost of constructing the gas properties used and useful in the metropolitan area of Fort Dodge, as of June 30, 1954. The inventory of the gas system was based upon company records verified by field inspection and study. Field inspections were made at some fifty or sixty points in the City of Fort Dodge to verify location, size, kind of pipe, and to permit a physical inspection of the pipe presently in service. The buildings were field inventoried and the quantities checked with construction plans and company records. A complete listing of names, installations and retirements was taken from company records noting size, kind, location and length of each installation or retirement of main. This information was verified in the field by physical inspection, record maps and working papers of the appraisal of the Fort Dodge gas system made by this same company, Black & Veatch, in 1939. Services were inventoried in the same manner as mains. Meters were inventoried from history cards and...