1. A determination of a reasonable rate base and rate of return.

2. An allocation of the cost of serving the various classes of customers, including the reasonable relationship of charges for general service to those for fire protection service.

3. A determination of the reasonable relationships between rates within the city and rates to suburban resale customers.

The problem then is not one of picking out certain expense items allocable to one class of customers to the exclusion of all other classes, but rather of taking the total operating expenses of $976,369.04, adding thereto allowances for taxes, depreciation, and a reasonable return upon the established rate base, and dividing the sum of these items, or 100 percent of the total cost of operating the utility (excluding for the moment filtration costs), among the four classes of customers noted above. The two major classes of service for which the city of Milwaukee has built a water system are fire protection and general urban service. A part of the water pumped is sold to suburban and county customers, yielding 12 percent of the total revenues, but because of the voluminous evidence submitted as to the costs of suburban service this outside service is treated as a major class of service.

I. RATE BASE

No appraisal has been made by this Commission of the property of the water utility since that of June 30, 1911. In U-3457, In the Matter of the Proposed Filing of Water Rates of the City of Milwaukee as a Water Utility, decided December 9, 1926, an estimate of the cost of reproduction as of January 1, 1925 was introduced on behalf of the city. The book cost of the property on December 31, 1925 was reported to be $17,175,619.30. The utility's estimate of the cost of reproducing the property in the system at the end of 1925, including working capital, was $33,300,000. In that case, after a careful study of all the data presented in the 1926 case, we concluded that $17,000,000 represented the amount on which the utility was reasonably entitled to earn a return.

As before stated, at the hearing and conference held in Milwaukee on November 30 and December 1, 1936 in the

present proceeding it was agreed that computations should be made using as a rate base a value of about $23,000,000. Subsequently a stipulation as to the value was agreed to by all parties except West Allis.

If we add to the book value of December 31, 1925 the net book additions to December 31, 1934 of $10,770,688 and deduct the estimated accrued depreciation, contributions, and special assessments and also the land allocated to nonutility use we have a balance of $19,831,617. With an addition of $687,000 to cover materials and supplies and working capital, a historical cost earning value of $20,518,617 is obtained.

[1] A rate base of $23,000,000 exclusive of filtration plant investment is reasonable for the purposes of this case. The respondent introduced in exhibit 23B an estimate of reproduction cost new, but in the last analysis does not rely on this estimate. A $23,000,000 rate base gives about one-third weight to such estimate in comparison with the audited original cost of the property and our findings in U-3457.

At the time the original $23,000,000 rate base was tentatively agreed upon it was not anticipated that these proceedings would be so prolonged. At the time of the stipulation (Hearings May 24-25-26, 1938) the question was raised whether or not this rate base should be increased by reason of plant additions since 1934. Accordingly the reports of the utility to this Commission have been examined, the last one currently available being for the year ending December 31, 1938. From 1934 through 1938 the reported cost of plant increased, but the great bulk of the reported additions consisted of construction work in progress on the filtration plant and in connection with park lands. Excluding these items of construction work in progress the cost of the used and useful plant has increased only slightly and is more than offset by increased depreciation reserve balances. Hence a book cost rate base at the end of 1938 would be approximately the same or a little less than in 1934. Furthermore, reported operating revenues increased from 1934 to 1938 more than did operating expenses, resulting in larger operating income. Consequently no injustice is done by using a $23,000,000 rate base in determining costs of unfiltered

water.

The consideration of a rate base dwindles to insignificance in the face of exhibit 187. In this exhibit the respondent finally submitted its recommendations of reasonable rates for filtered water designed to yield adequate and sufficient earnings. These recommendations have the approval of the city commissioner of public works and five members of the public utilities-health committee of the Milwaukee common council. According to this exhibit the net earnings believed by the respondent and city officials to be sufficient are so far below what is ordinarily considered a reasonable rate of return for a water utility that the problems of determining a rate base and rate of return thereon become matters merely of academic interest. Since the respondent and the city officials have expressed themselves as satisfied with the earnings shown in exhibit 187 we shall establish rates to yield revenues approximating those in this exhibit, namely, $2,734,302 for filtered water. The respondent's revenue estimate in exhibit 187 appears to be based on 1934 sales of water. The 1938 volume of sales was greater than in 1934. Hence a rate schedule yielding revenues based on 1934 data would bring increased revenues from the greater volume of 1938 sales. These additional revenues constitute an additional margin of safety and enhance the return to the water utility, as indicated by the reported operating income for 1938.

There is now under construction a filtration plant which was originally estimated to cost about $4,875,000 when completed. By the proposed report the staff recommends rates for unfiltered water and tentative rates for filtered water based upon cost estimates derived from the initial estimate of the cost of completing the filtration plant. Exhibit 187 shows the rates recommended by the respondent for filtered water, based apparently upon revised estimates of filtration costs. Since these are the latest data available and the utility estimates a low return requirement for the balance of the property, we shall use them in our calculations. A comparison of filtration costs in the proposed report and the respondent's exhibit 187 follows;

*Adjusted slightly from the figures used in the proposed report to reflect modifications made after oral argument on the proposed report. 1 Column (1): Derived from exhibit A, 1.77% of $5,100,000; Column (2): Computed by deducting staff depreciation of $265,075 from $350,000 depreciation claimed by city in exhibit 187.

2 Column (1): Computed by applying tax rate of $23 21 per $1,000 to $5,100,000; column (2): Computed by deducting adjusted tax expense from proposed report ($552,348) from $650,000 tax expense claimed by respondent in exhibit 187.

3 Column (1): Computed at 51⁄2% of $3,800,000 (estimated cost less Federal grant); Column (2): Derived from Table A, Ex. 187 (interest $123,840 plus retirement of bonds $193,000).

On the basis of exhibit 187, therefore, the respondent estimates its revenue requirements in furnishing unfiltered water at $1,984,885. ($2,734,302 less $749,417 filtration costs.) Our problem then is to determine reasonable and nondiscriminatory rate schedules for the major classes of service designed to yield about $1,984,885 for unfiltered water and $2,734,302 for filtered water. To guide our judgment in this task we have the cost apportionment summarized in the proposed report modified and supplemented to meet legitimate criticisms in the briefs and oral argument.

II. COST APPORTIONMENT

[2] It does not appear necessary to outline in detail the reasons for a division of the property used and useful between the three major classes of service supplied, namely, fireprotection service, urban general service, and suburban resale service. Exhibit 19 outlines the basis followed in our original apportionment. Exhibit 27 indicates the importance of the first-named service. Many exhibits have been introduced relative to the suburban resale service in which class has been included the service to county institutions which are so located as to occasion costs similar to those of the suburbs.

The total annual costs of water service consist of two major groups: (1) fixed charges (depreciation, taxes, and return) and (2) operating expenses. In order to obtain apportion

ment factors for allocating fixed charges to the major classes of service, it is necessary first to segregate the investment in plant and equipment devoted to fire protection service and general service in the high and low service areas, with a further subdivision of high service investment between city and suburban service.

1. Apportionment of Plant and Equipment

[3] Tabulated below are the major classes of plant and equipment as reported at December 31, 1934 and as adjusted by our accountants (exhibits 17 and 17-A). These are the costs of plant subject to apportionment prior to adjustment to the rate base used in this report.

The detailed components of the $9,142,470.60 shown above were first apportioned between low and high service areas on such basic data as pump capacity, peak demands, direct assignment, etc., as appeared reasonable in view of the nature of the property units considered. The detailed data were further apportioned among the major classes of service supplied, principally upon a demand and pump capacity requirement basis.

The property up to the so-called discharge end of the pumps as assigned to the classes of service enumerated is shown by the following summary: