Davenport Water Co. v. Iowa State Commerce Commission

REYNOLDSON, Justice

(dissenting).

The majority opinion rightly states our task in this litigation is to determine whether the Commission acted in violation of applicable constitutional standards; unreasonably, arbitrarily, or capriciously; or in excess of statutory authority. We approach the case from the standpoint of these considerations.

I. Applicable constitutional standards. In Iowa-Illinois Gas & Electric Co. v. Fort *614 Dodge, 248 Iowa 1201 , 85 N.W.2d 28 (1957) this court examined in depth the application of Iowa constitutional provisions to the utility rate problem. The holding in Fort Dodge was reaffirmed in our subsequent rate case opinions. Iowa-Illinois Gas and Electric Company v. Iowa City, 255 Iowa 1341 , 124 N.W.2d 840 (1963); Iowa Public Service Company v. Sioux City, 256 Iowa 547 , 128 N.W.2d 248 (1964). The unanimous decision in Fort Dodge is cited in the majority opinion and, with divergent interpretations, by both parties to this litigation. No constitutional amendments in this area have been enacted since that case was filed, and it thus remains as an authoritative interpretation of the impact of Iowa constitutional guarantees on the process of rate regulation in Iowa.

Did Fort Dodge involve a constitutional question, and if so, how was it answered? The holding in any opinion is frequently best determined by identifying the issues which were presented to the court. The allegations of plaintiff utility’s petition are in part set out in the decision ( 248 Iowa at 1217 , 85 N.W.2d at 37 ):

“Plaintiff further alleged the defendant’s refusal was illegal in that 'defendants have deprived, are continuing to deprive, and will deprive the plaintiff of its property without due process of law and without just compensation, all as provided by and in violation of Section 9, Article I, of the Constitution of the State of Iowa,’ thus clearly raising a constitutional issue.” (Emphasis supplied)

The thrust of the utility’s propositions on appeal constituted a complaint of inadequate weight allocation to reproduction cost. One of the propositions relied on by the defendant city on cross-appeal was,

“1. The trial court erred in refusing to take into consideration only evidence of original costs in considering what was a just and reasonable rate base, for the reason that only speculative opinion testimony of reproduction costs was introduced by the company.” ( 248 Iowa at 1215 , 85 N.W.2d at 36 )

The issues before it as defined by this court in Fort Dodge were stated in the opinion, 248 Iowa at 1219 , 85 N.W.2d at 38 :

“What, then, is the material and competent evidence the courts of Iowa should receive to determine the mixed question of fact and law as to whether or not the rates, legislatively established, are confiscatory? Must it tend to establish fair present value?”

What the court there held is this: the rate to be applied must take into consideration those factors which affect the present value of the property devoted to public use.

“ * * * [Ajnything less than a fair return upon the fair value of the property devoted to public use is confiscation and unconstitutional under the Constitution of the State of Iowa.” (Emphasis supplied)

( 248 Iowa at 1227 , 85 N.W.2d at 43 )

The decision further makes clear beyond dispute the property is to be valued at the time of the test period. The word “present” is adjectively employed to describe the property “value” sought to be ascertained and this expression appears at least 15 times in the body of the Fort Dodge opinion, i. e. “present value”, “fair present value”, “present fair value”.

We may agree with the defendants and the majority Fort Dodge does not mandate the use of reproduction cost to determine present value. However, we did say the constitution required there be at some time a recognition of the present value of the property to avoid confiscation.

“Indeed, this court does not perceive how any calculations of depreciation, legitimate financial expenses or indeed other calculations indispensable to regulating the rates of a public utility company without violating its rights under the due process clause can proceed with *615 out giving consideration to the somewhat baffling, but nevertheless unavoidable problems attendant upon ascertaining a rate base reflecting, to avoid confiscation, the fair present value of the property.” (Emphasis supplied)

( 248 Iowa at 1222-1223 , 85 N.W.2d at 40 )

We there indicated in the hands of qualified experts price indices and the application of trended percentages to original cost might supply the factor usually furnished by consideration of reproduction costs. We further held “original cost depreciated” is not a valid test except in a period of fairly constant dollar values “almost unknown in this generation” and we prophetically observed “[w]ith the high government debt and other spiraling costs, new values seem to be well established for some time to come.” ( 248 Iowa at 1238 , 85 N.W.2d at 49 ). Fourteen years later, today’s conditions insistently compel application of the constitutional safeguards laid down in Fort Dodge. In that case and in many other rate cases we did not merely hold our constitution precluded confiscation of property by anything less than a fair return on investment, as stated by the majority. If that were true, original cost less book depreciation would have been approved by this court in Fort Dodge , this being the measure of that utility’s investment. The opposite was true: we held our constitution required a fair return on the present value of the property. The logic of that reasoning is simply illustrated. If the state, even in the absence of constitutional provisions specifically governing condemnation, were to legislate the sole basis of damages for property to be condemned was to be the original cost less book depreciation, all would concede a violation of the Iowa Constitution, Art. I, § 9 (deprivation of property without due process). Similarly, we believe the State of Iowa cannot, without violating due process, legislatively restrict the income from identical property by using a rate base grounded solely on original cost less book depreciation.

The majority opinion quotes extensively from and relies for authority on Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591 , 64 S.Ct. 281 , 88 L.Ed. 333 (1944). That case, which appeared to adopt an “end result” concept of rate fixing, was decided before Fort Dodge and was extensively analyzed and rejected by us in the latter opinion as faultily reasoned. We said it was not binding on us in construing the Iowa Constitution.

Even a cursory inspection of the record in this case, the Order of the Commission, and the trial court’s ruling, forces the conclusion Commission and trial court repudiated the constitutional mandate laid down in Fort Dodge: the rate base adopted must give effect to inflationary or deflationary changes occurring after original costs incurred. That other jurisdictions, interpreting other constitutions, may reach the Hope case result should not deter us from maintaining our steadfast adherence to our own constitutional safeguards as construed by this court. In so doing, we continue pitching our tent in the cantonment where we have always sheltered and in the company of many jurisdictions holding present value may be considered, including most of our neighboring states. See State v. Southern Bell Telephone and Telegraph Company, 274 Ala. 288, 295-298 , 148 So.2d 229, 236 , 47 P.U.R.3d 65, 72 (1962); Application of Wilmington Suburban Water Corporation, 203 A.2d 817, 825 (Del.Super.1964), modified by State Supreme Court at 211 A.2d 602 (1964) (with same position in regard to “fair value” meaning “present fair value”). See also 26 Del.C. §§ 126, 155; Illinois Bell Telephone Company v. Illinois Commerce Commission, 414 Ill. 275, 290-291 , 111 N.E.2d 329, 336-338 , 98 P.U.R. (n. s.) 379, 389-390 (1953); Public Service Commission v. City of Indianapolis, 235 Ind. 70, 95 , 131 N.E.2d 308, 315 (1956); Chesapeake and Potomac Telephone Company of Maryland v. Public Service Commission, 230 Md. 395 , 187 A.2d 475 (1963); Minneapolis Street Railway Company v. City of Minneapolis, 251 Minn. 43, 71-72 , 86 N.W.2d 657, 676 (1957); State v. Tri-State Telephone and Telegraph Company, 204 Minn. 516 , 284 N.W. 294, 301 *616 (1939); State ex rel. Dyer v. Public Service Commission, 341 S.W.2d 795, 798-799 , 37 P.U.R.3d 507 , 511-512 (Mo.1961); State ex rel. Olsen v. Public Service Commission, 131 Mont. 272, 276-277 , 309 P.2d 1035, 1038-1039 (1957); approved in Cascade County Consumers Association v. Public Service Commission, 144 Mont. 169, 196 , 394 P.2d 856, 874 (1964); Application of Skeedee Independent Telephone Company, 166 Neb. 49, 54-55 , 87 N.W.2d 715, 719 , 23 P.U.R.3d 471 , 475 (1958); State Corporation Commission v. Mountain States Telephone and Telegraph Company, 58 N.M. 260, 276 , 270 P.2d 685 (1954) interpreting N.M.Stat.Ann. § 68-5-14; State ex rel. North Carolina Utilities Commission v. Piedmont Natural Gas Company, 254 N.C. 536, 550 , 119 S.E.2d 469, 479 (1961). See also G.S. North Carolina § 62-133 and State ex rel. Utilities Commission v. Lee Telephone Company, 263 N.C. 702 , 140 S.E.2d 319, 323-324 (1965); Ohio Edison Company v. Public Utility Commission, 173 Ohio St. 478 , 485, 184 N.E.2d 70 , 76, 45 P.U.R.3d 1 , 7 (1962) interpreting Ohio Revised Code § 4909.15; Scranton Steam Heat Company v. Pennsylvania Public Utility Commission, 405 Pa. 397, 402 , 176 A.2d 86, 88-89 (1962); Railroad Commission v. Houston Natural Gas Corporation, 155 Tex. 502, 522, 525 , 289 S.W.2d 559 , 571, 573 (1956). The present value of the property not the remaining balance of the company’s original investment of other-era dollars is the constitutional foundation upon which rate base must be developed in Iowa. As this case comes before us with rate restrictions imposed in violation of applicable constitutional standards, it should be reversed and remanded.

II. Commission's conduct as unreasonable, arbitrary or capricious.

It was obvious from the outset the Commission and its staff intended to overthrow the constitutional standards Fort Dodge mandated in developing a rate base. The Commission later criticized relatively inconsequential items in reproduction cost, actual depreciation, and obsolescence deduction evidence developed by experts for the utility. At the hearing, however, the position of the Commission staff was made obvious by the objection urged to testimony of plaintiff’s reproduction cost experts, whose qualifications in the field were not questioned. The objection urged, “reproduction cost is not in any circumstance a relevant, material or competent factor of value * * *. The end result is what will determine whether the rates fixed by this Commission are just and reasonable * * ”.

In Fort Dodge we noted reproduction cost less actual depreciation and obsolescence necessarily involved estimates and judgmental decisions. But we approved the method there and in later decisions as one logically employed in combination with original cost depreciated to reflect spiraling costs and to arrive at present value of the property.

The concept of reproduction cost less actual depreciation and obsolescence is well known in this and in other areas of our law. The Iowa legislature gave it statutory recognition in § 441.21(1) (b), Code, 1971 as a means of arriving at property actual value where such value could not be readily established in another way: “The assessor may consider * * * its cost, physical and functional depreciation and obsolescence and replacement cost * Reproduction or replacement cost reduced by factors of physical depreciation and functional depreciation has been recognized as a means of arriving at actual value in tax assessment cases. Dull v. County Board of Review, Plymouth County, 260 Iowa 828 , 150 N.W.2d 91 (1967); Chicago & N. W. Ry. Co. v. Iowa State Tax Com’n, 257 Iowa 1359 , 137 N.W.2d 246 (1965); Deere Manufacturing Company v. Zeiner, 247 Iowa 1364 , 78 N.W.2d 527 (1956).

The reproduction cost method is accepted in our insurance law as a factor in arriving at the value of property which has no recognized market value. In Britven v. Occidental Ins. Co., San Francisco, Cal., 234 Iowa 682 , 13 N.W.2d 791 (1944), we collected many decisions supporting the following statement,

*617 “These and other authorities recognize that the principal factors in determining the actual value of a building are usually the original cost, the cost of replacing it, and a proper allowance for depreciation from use, age and other like causes.” ( 234 Iowa at 687 , 13 N.W.2d at 794 ).

See also Group Von Graupen v. Employers Mutual Fire Ins. Co., 259 F.Supp. 934 (D.P.R. 1966).

Similarly, theoretical reproduction or reconstruction cost has been approved by this court and other authority as competent evidence in the field of tort where damages result from property destruction, State v. Urbanek, 177 N.W.2d 14 (Iowa 1970); Restatement of Torts, § 911 (1939); and in condemnation awards, 4 Nichols, Eminent Domain, § 15.41(3), p. 819-820 (3d ed. 1962).

We thus reach the issue whether basic and settled rules of evidentiary law long recognized by our decisions can be summarily rejected, now and in the future, by an “expert” Commission.

The intent and purpose of the majority of the Commission is made evident by the language of the order. “This case * * * marks the Commission’s first formal opportunity to state its philosophy which governs the exercise of its rate-making authority * * *. The Commission recognizes that the utilities must have * * * revenues * * * to enable them to pay a reasonable return on their stockholders’ investments. * * * The staff advocates that the Commission adopt the so-called ‘prudent investment’ or ‘net investment’ rate base method as being the most reasonable means of determining value for rate-making purposes. * * * Under the investment rate base method, the rate base usually consists of the original cost of the property devoted to public service (i. e., the cost to the first person devoting the property to public service) less accumulated depreciation and contributions in aid of construction plus working capital * * *. [T]he legislature has authorized us to choose the rate base method to be employed in Iowa * * *. [W]e find and determine that reproduction cost is not probative evidence of value and is, therefore, not a factor * * * this Commission is required to consider * * *. [T]he ‘fair value’ method is unsound, its results unreliable, and * * * is unduly time-consuming and expensive. * * * [W]e are not merely dealing with deficiencies and defects that can be cured and a probative result secured. 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.” (Record Vol. I, part 1, pp. 44-66, emphasis supplied).

It is not apparent why the Commission, which now condemns reproduction cost as wasteful of time and money, did not under its rule making power (§ 490A.2, Code, 1971) promulgate its philosophy so the same could be subjected to prior judicial review. Still more obscure is Commission’s reasoning that the reproduction cost method, held in Fort Dodge and subsequent decisions to be competent evidence when rate regulation was the responsibility of novices at the municipal level, now becomes too complex for Commission’s professional experts.

Laying these inquiries aside, we consider the question of the reasonableness of Commission’s approach to rate regulation. If in any other economic context we were to say to the owner of functioning and productive property he was not entitled to derive income from it for the sole reason its cost was depreciated out on his books, the unreasonableness of our edict would be obvious. Carried to its logical conclusion, this is the ultimate effect of the “net investment” rate base method adopted by Commission.

It does not suffice to say present value of a functioning plant cannot be ascertained because it is affected by rate manipulations of the regulatory body. This was the circular reasoning of the Hope case, *618 supra, quoted and relied on by the majority. It is another way of stating the income from property will affect its market value. But in the rate base field no one contends market value per se is the measure — all concede, for example, no factor of “going enterprise” or good will can be considered. This should not preclude a determination, based on sound judgment and reason, of the present value — the present intrinsic worth — of productive property by the same means value of property is ascertained in all of the other law areas (tax, insurance, tort, condemnation) where no market value is ascertainable.

The rejection of these concepts, in the light of the failure of the Commission to consider or apply any other factors to measure the strident facts of inflation or present value of these facilities, was unreasonable, arbitrary and capricious and we should so hold.

III. Commission’s conduct in excess of statutory authority.

We agree with majority our duty is to determine whether the Commission acted in excess of statutory authority.

Section 490A.8 relevantly provides:

“Every public utility is required to furnish reasonably adequate service and facilities. * * * In determining reasonable and just rates, the commission shall consider all factors relating to value and shall not be bound by rate base decisions or rulings made prior to the adoption of this chapter.” (Emphasis supplied)

In first construing this legislation two basic rules apply. It is a cardinal principle a statute should be interpreted in such a way as to avoid any doubt as to its constitutionality. Jacobs v. Miller, 253 Iowa 213 , 111 N.W.2d 673 (1961); Kerr v. Chilton, 249 Iowa 1159 , 91 N.W.2d 579 (1958); Gilchrist v. Bierring, 234 Iowa 899 , 14 N.W.2d 724 (1944). The second principle provides when any rule of law has become established, a new statute dealing with the same subject matter, if capable of more than one construction, will be interpreted consistently with the established law. 82 C.J.S. Statutes, § 362, p. 794 ; 50 Am.Jur., Statutes, § 340, p. 333.

Turning to the statute, the direction that the Commission shall consider all factors relating to “value” must indicate a valuation, among other things, of the “facilities” referred to in the same section. It seems clear the legislature was here enacting a standard beyond the mere requirement for a “reasonable and just” rate to define the boundaries of commission authority. The Montana Supreme Court, faced with the construction of analogous statutory provisions, has said:

“Any order made by the commission must be just and reasonable. What is a reasonable charge, or a just and reasonable order, must depend upon the facts in each case. What a utility is entitled to demand in order that it may have just compensation is a fair return upon the reasonable value of the property at the time it is being used for the public * * ”. (State ex rel. Olsen v. Public Service Commission, 131 Mont. 272 at 278 , 309 P.2d 1035 at 1039 ).

We indicated in Division I the due process clause of the Iowa Constitution as construed by this court requires the rate base to be foundationed on present value of the property. This is also the interpretation given our prior case law by authorities in the field. Professor of Law Clarence M. Updegraff, in his article “ ‘Present Value’ The Iowa Rate Base for Public Utilities— The Recent Fort Dodge Decision”, 43 Iowa L.Rev. 317, said at pages 333-334:

“It is almost too obvious to state that even a public service commission statute creating a commission and delegating regulatory and full procedural authority to it, would not and could not deprive any regulated public utility of its basic constitutional rights. Prominent among these rights are those of all property owners that property may not be taken without due process, that is to say, confiscated, and all are entitled to equal pro *619 tection of the laws. Confiscation may operate by either refusing to recognize a ‘present value’ rate base or by refusing to allow a rate high enough to yield a fair return upon the base.” (Emphasis supplied)

A. J. C. Priest (Law Professor, University of Virginia), quoted extensively by the majority, criticized the original cost less depreciation rate base as not permitting appropriate accommodation for steadily expanding inflation. But more pertinently, he commented on chapter 490A, Code, 1971, as affected by this court’s construction of our constitution:

“The subsequent (1963) statute, which authorized the Iowa state commerce commission to regulate electric, gas, communications, and water rates and services, provides that in determining utility rates, the commission ‘shall consider all factors relating to value’ and ‘shall not be bound by rate base decisions or rulings made prior to the adoption of this chapter.’ The latter declaration may not be particularly significant, since the Port Dodge and Iowa City opinions have constitutional predicates. Iowa seems clearly to remain a ‘fair value’ state.” (Emphasis supplied) (“The Public Utility Rate Base”, 51 Iowa L.Rev. 283, 298) (1965)

Under principles of statutory construction defined above, and the mandate of our Constitution, “value” as used in § 490A.8 must be interpreted to signify the present value of the property or facilities devoted by the utility to public use. Only by this construction is the statute constitutional. The Commission in the case before us made no pretext of incorporating in its rate base any concept of present value of utility’s property. It does not equate its cost depreciated with value. Here is the testimony of Martin Toscan Bennett, consulting engineer and industrial economist, the Commission’s expert witness:

“Under competitive circumstances, ‘cost’ is a good measure of ‘value’ at that time, at that place, and in that quantity. ‘Fair value’ is a legal term which in my observation in most regulatory jurisdictions lies somewhere between depreciated original cost and present value, however that may be measured. ‘Present value’ reflects the willing buyer and willing seller concept but its most significant characteristic lies in the word ‘present’. Usually cost is value at the time it is incurred but present value may be more or less than original cost." (Record Volume II, part II, p. 643, emphasis supplied)

We adopt the Commission expert’s definitions ignored by the Commission. The Commission’s approach is to compute original cost less depreciation and the result is “value”. Is cost the same as value because this Commission says it is? Admittedly, words are quicksilver slippery, but we are irresistably reminded of a literary analogy:

“ ‘When I use a word,’ Humpty Dumpty said, in a rather scornful tone, ‘it means just what I choose it to mean — neither more nor less.’

‘The question is,’ said Alice, ‘whether you can make words mean so many different things.’

‘The question is,’ said Humpty Dumpty, ‘which is to be the master— that’s all.’ ” ⅞

—Carroll, Through the Looking Glass, The Annotated Alice, 669 (1960)

The majority opinion reasons if the legislature meant “fair value” in § 490A.8 it would have so stated, and not merely used the word “value”. Two observations are pertinent here. At no place in the section do the words “investment” or “original cost” appear, and these are the cornerstones of majority’s rationale. Second, we need not refer to “actual value”, “fair value”, or “present value”. We need only to consider the word which was used— “value” — and note its common dictionary definition, “the monetary worth of a thing.” Neither the Commission nor the majority contends the relationship between depre *620 ciated original cost and the monetary worth of a thing is more than coincidental. When the Commission assumes the posture depreciated original cost is the only factor to be used in determining value, it is not only acting unreasonably, arbitrarily and capriciously as we have said above, but in excess of statutory authority.

The legislature which by this act authorized the Commission to employ “professionally trained engineers, accountants, attorneys, and skilled examiners and inspectors” will, we suggest, be surprised to find the Commission adopting as its value measure a rate base which could be computed by any knowledgeable mathematician. Obviously this was not the legislative intent.

The clause in § 490A.8, “shall not be bound by rate base decisions or rulings made prior to the adoption of this chapter”, logically means the Commission is not bound by any prior decision or ruling with regard to percentage weights to be given original cost vis-a-vis reproduction cost, or reproduction costs per se if other reasonable indices or trending factors can be expertly formulated to convert ancient original cost depreciated to present value of the property.

Insofar as they are constitutionally grounded, Fort Dodge and our prior rate base decisions requiring a rate base incorporating present value of the property, cannot be overruled by statute. 16 C.J.S. Constitutional Law, § 13, p. 65; 16 Am.Jur. 2d, Constitutional Law, § 58, p. 230. As the majority so aptly puts it, “questions relative to constitutionality of legislation * * * stand as law issues determinable by the judiciary alone.” In so stating, we do not intimate we believe the legislature intended to overrule those decisions. Rather, we believe this legislation was enacted with full knowledge of the requirements of the Iowa Constitution as interpreted by this court.

The Commission made no attempt to arrive at the present value of the property and in its action thus violated the legislative standard. It acted in excess of its statutory authority. Stated conversely, Commission did not “consider all factors relating to value” — and the legislature, by the use of that language, surely did not intend to give the Commission carte blanche to consider and reject value-affecting factors.

In summary, a reading of the record reveals Commission rejected reproduction cost evidence which had probative force as a factor affecting value. The truth of the matter is this was done not because of fatal defects in utility’s evidence per se but because the Commission adopted the original cost depreciated method. That method, which makes no pretense of deriving present value of facilities of the utility, does not meet the constitutional test mandated by Fort Dodge . The effect of the majority opinion and its language is unfortunately fourfold. First, it merely puts Commission on notice that what it has done here will not necessarily be tolerated again. Second, it deprives plaintiff utility of its constitutional right to earn income based on present value of its property. Third, it leaves this arena in a state of chaos in which neither the utilities nor the Commission will know how to chart the course of future rate litigation. Lastly, it effectively drains the constitutional life blood from the Fort Dodge decision without the mercy of administering the coup de grace.

For the above reasons I respectfully dissent from all that part of the majority opinion contained in Divisions I through IX. I also dissent from Divisions XI (Working Capital — Offset) and Division XII (Charitable Contributions). I concur with respect to Divisions X (Committed Construction), XIII (Property Taxes), XIV (Rate Case Expense), XV (Depreciation), XVI (Income Taxes), and XVII (Refund Order).

STUART and REES, JJ., join in this dissent.