Opinion ID: 2086798
Heading Depth: 1
Heading Rank: 3

Heading: depreciation and executive salaries

Text: It is recognized that in fixing utility rates, the commission must make provision for operating expenses, depreciation, and reserves which are necessary in good business judgment, ( Illinois Bell Telephone Co. v. Commerce Com. 414 Ill. 275, 286,) and the experience and expert knowledge of the commission and experts who testify before it are important elements in this determination. City of Alton v. Commerce Com. 19 Ill.2d 76, 93. A contention is made by appellants that the order of the commission did not take into consideration the possible value of the plant retired. It is also sought to relate the depreciation period to the term of the REA loan and a contention is made that if the property were depreciated over such 35-year period, the result would be a composite rate of 2.86% instead of 3.6% allowed by the commission. In the finding of the commission, it is pointed out that the evidence shows that the company computes its depreciation in varying rates on the several classes of telephone plant contained in its service account, and that the annual composite rate resulting therefrom amounted to approximately 3.6% on the depreciable assets of the company. Reference is made in the order of the commission to General Order 167, promulgated by the Illinois Commerce Commission, which states in effect that depreciable charges of a telephone utility shall be computed by applying percentage rates considered applicable to the original cost of each class of depreciable telephone plant. These percentage rates are to be based on the estimated service value and estimated service lives developed by the company's history and experience and such engineering and other information as may be available. In defining service value, it is pointed out that this means the difference between the original cost and (1) the salvage value for station apparatus, and (2) the net salvage for other telephone plant. The commission then concluded that the company's annual composite rate of 3.6% in its depreciable assets is reasonable for rate-making purposes. The commission had the right to consider the provisions of its General Order 167 even though it was not formally introduced in evidence. It was not a special order applicable in any particular case or to any particular utility, and such orders are presumed to be known and all parties have equal access and knowledge of them. The company followed this practice, and evidence supports the conclusion that expected salvage value was considered. ( Lindheimer v. Illinois Bell Telephone Co. 292 U.S. 151, 166-7, 78 L.ed. 1182.) Under the record, it is clear that the possibility of salvage was not completely ignored, but that, based upon experience, it was considered to be a very minor factor in operations of the character before us. Similarly, we find no basis for equating the depreciation with the term of the REA loan. (REA Bulletin 463-1). There is no basis for such conclusion nor is there anything in the arrangement for financing which requires the depreciation period to follow such term of years. As a matter of fact, the REA requires 18% of the annual income to be used for maintenance, and either to be spent on the plant or put in the cash reserve account. Actual maintenance expense under the record allowed by the commission in fixing the rate was $66,683, which is approximately $10,000 less than the REA requirement. Under the mortgage, the company is required to reserve that amount or difference and this, potentially, further reduces the net return available to the shareholders. The record shows that the three officers of the company are paid combined salaries of $62,400 a year, and that the company is serving over 5,000 telephones. The president is an attorney with almost 30 years experience in public utility matters and 25 years experience in public utility operations. The vice-president has approximately 50 years experience in public utility management, construction and operation. The secretary-treasurer has more than 30 years experience in public utility operation and management. The officers themselves perform all managerial and supervisory duties, and there is no other managerial personnel. There is no engineer, auditor, general manager or personnel supervisor or other similar supervisory employees, but only maintenance help, clerks and repairmen. In effect, the three officers operate and manage the business, and even all the legal services required by the company in connection with the operation are supplied by the president without extra charge. While it is true that the salaries requested represent an increase over those of former years, the company is practically a new plant developed almost entirely between the years 1952 and 1958. The company did not seek increased rates until practically all of its exchanges were converted to dial operation. Without an increase in rates, the salaries of the officers necessarily remained relatively low, despite the increase in the scope and complexity of their duties brought about by the company's expansion and efforts to provide modern and efficient service to its subscribers. The conclusion of the commission that the record in the case does not show that total operating expenses, including these officers' salaries, are unreasonable or excessive was proper, and will not be disturbed.