Leonard N. Bebchick v. Public Utilities Commission

318 F.2d 187, 115 U.S. App. D.C. 216

• Court: Court of Appeals for the D.C. Circuit
• Decided: May 13, 1963
• Docket: 16454
• Status: Published

Opinions

FAHY, Circuit Judge, with whom BAZELON, Chief Judge, and EDGER-TON, WASHINGTON and WRIGHT, Circuit Judges, join.

On March 2, 1960, the Public Utilities Commission of the District of Columbia, after a hearing which is not challenged proeedurally, by order No. 4631 authorized an increase in the cash fare of Transit users from 20 cents to 25 cents, effective March 6, 1960. The Commission denied Transit’s petition for a greater increase, thus continuing the token rate of five tokens for a dollar, the 10 cent school fare and other transportation charges not relevant to a discussion or decision of this case. On March 31, 1960, the Commission issued its opinion, setting forth the reasons for its action. Transit in the meantime had placed in effect the increase in cash fare by a new tariff of March 6,1960.

The Commission used the year ending September 30, 1959, as the period for determining Transit’s past earnings, and the calendar year 1960 was selected as the test period for future earnings, account being taken of changes in the level of revenues and expenses. No question is made as to the appropriateness of the test periods.

Present appellants in this court, whose standing to challenge the order was upheld in Bebchick v. Public Utilities Commission, 109 U.S.App.D.C. 298, 287 F.2d 337 (1961), appealed to the District Court under § 43-705, D.C.Code.¹ The District Court dismissed the appeal and affirmed the order of the Commission. The case is before us on appeal from this action of the District Court. A division of our court, one judge dissenting, affirmed the order of the District Court, followed, however, by grant of appellants’ petition for rehearing en banc. There ensued reargument and submission of the appeal to the full court, which brings us to the present posture of the case. A majority of the court now decide that the order of March 2, 1960, must be set aside insofar as it granted an increase in the cash fare to 25 cents.

We consider first Transit’s suggestion that the ease is moot due to supersession of the order of March 2,, 1960, by the Commission’s order No. 4735 of January 18, 1961. The latter order, however, continues in effect a. cash fare of 25 cents. A rate order such. as the one before us is not mooted by another which has the effect of keeping the controversy alive. Southern Pacific Terminal Co. v. Interstate Commerce Commission, 219 U.S. 498, 31 S.Ct. 279, 55 L.Ed. 310 (1911); Eastern Airlines, Inc. v. Civil Aeronautics Board, 87 U.S. App.D.C. 331, 185 F.2d 426 (1950). Moreover, the validity of the order of March 2, 1960, during the time it was in effect before it was superseded, remains in controversy; for the disposition of any excess funds which might have accumulated prior to January 18, 1961, by reason of the invalidity of the increase, remains for decision. So we hold that the case is not moot.

Our consideration of the merits must take account of two statutes. The first is § 43-706 of our Code, which provides:

“In the determination of any appeal from an order or decision of the Commission the review by the court shall be limited to questions of law, including constitutional questions; and the findings of fact by the Commission shall be conclusive unless it shall appear that such findings of the Commission are unreasonable, arbitrary, or capricious.”

The other statute which is particularly important is the Act of July 24, 1956, 70 Stat. 598, known as the Franchise Act, § 4 of which reads as follows:

“It is hereby declared as a matter of legislative policy that in order to assure the Washington Metropolitan Area of an adequate transportation system operating as a private enterprise, the Corporation, in accordance with standards and rules prescribed by the Commission, should be afforded the opportunity of earning such return as to make the Corporation an attractive investment to private investors. As an incident thereto the Congress finds that the opportunity to earn a return of at least 6% per centum net after all taxes properly chargeable to transportation operations, including but not limited to income taxes, on either the system rate base or on gross operating revenues would not be unreasonable, and that the Commission should encourage and facilitate the shifting to such gross operating revenue base as promptly as possible and as conditions warrant; and if conditions warrant not later than August 15, 1958. * * * ”

In reference to this provision we note that the Commission, we think properly, did not consider a return of 6½ per centum net to be required, if less were reasonable and met the need to attract private investors. With the increase allowed in cash fare the Commission found that Transit would have a net operating income of $1,143,249, and gross operating revenues of $27,872,478. The system rate base was found to be $16,016,810. According to these calculations it was found that the fare increase would enable Transit to earn a return of 4.10% on gross operating revenues, or 7.14% on the system rate base. The Commission held that a rate which netted such earnings “falls within the range of what we consider to be a fair return.”

Our difficulty with the foregoing is that because of errors in two respects to be discussed the net operating income is made by the Commission to appear less than the amount which was actually available therefor. A third defect in the decision might cause the inaccuracy to be still greater. Correction of the errors would show a substantially greater amount available as net operating income, with corresponding increase in the rates of return.

We interpolate here that we do not disagree with the use made of the gross operating revenue method, authorized by Congress in the terms set forth in Section 4 of the Franchise Act. The Commission’s opinion adequately explains its use of this method, with, however, the system rate base method also being used to test the reasonableness of the rates. The Commission states:

“Although we have concluded that the gross operating revenue method should be utilized to fix rates in this proceeding, we do not agree with the contention that the gross operating revenue method should be the sole determinant of the reasonableness of rates. The gross operating revenue method and the ‘rate base-rate of return’ method are both valuable in-dices of the reasonableness of the earnings of a transit company. We have long recognized that the theory employed in determining the amount of revenue required by a transit company is immaterial so long as the end result- — the amount allowed — is adequate to enable the company to meet its interest requirements, to pay reasonable dividends, to permit retention of a reasonable proportion of earnings in the business, to provide a margin for unforeseen contingencies, and to attract the necessary capital to meet its future capital requirements. In utilizing the gross operating revenue method we fully recognize the need for checking the reasonableness of the return earned under that method. * * * Where a rate base is available, as in the case here, such a check can be readily made, thereby furnishing an appropriate means of measuring the reasonableness of the rate of return computed under the gross operating revenue method. On the basis of the foregoing, the Commission finds that the ‘rate base-rate of return’ method for fixing rates affords a sound basis for testing the reasonableness of the rate of return computed under the gross operating revenue method of fixing rates, and concludes that the ‘rate base-rate of return’ method should be employed in this proceeding to test the reasonableness of the rate of return computed under the gross operating revenue method. Accordingly, we deem it necessary in this proceeding to make a rate base determination.”

One further more or less preliminary matter should be mentioned. One of the principal items of operating expense allowed by the Commission in the process of arriving at net operating income is the expense of fulfilling Transit’s obligation of track removal and repaving in converting its transportation system from a street car to a bus operation. The Commission found that this cost would be $10,441,958, and that allocations should be made therefor spread equally over a ten-year period from August 15, 1956, or $1,044,196 annually for ten years, the transition to be completed by August 15, 1966. Appellants contend that this item was erroneously treated by the. Commission as an operating cost. They say that track removal and repaving is a burden which was assumed by the investors of Transit under section 7 of the Franchise Act. In appellants’ language, “it is unreasonable and unlawful to require the farepayers to make contributions of capital to Transit by the device of an allowance for track removal and repaving.” Appellants seek to support this position by pointing out that Transit purchased the properties for $10,000,000 less than their book value, and that this was due to Transit’s assumption of the track removal and repaving obligation. Upon consideration again of this problem, now by the court en banc, we think the Commission has met in a reasonable manner the substance of appellants’ contentions on this aspect of the case. The Commission used the $10,339,041 “acquisition adjustment” — the amount paid for the properties below their book value — as a basis for reducing depreciation. As the Commission states:

“Briefly, the credit for amortization of acquisition adjustment in the amount of $1,033,904 is the annual write-off of the total amount of $10,339,041, which is the excess of depreciated original cost of road and equipment acquired by D. C. Transit System, Inc. from Capital Transit Company over that portion of the purchase price assignable to road and equipment. The record shows that the amortization of this excess over a ten-year period was adopted in lieu of distributing the purchase price of the property over all of the items of property acquired. That is to say, the property is recorded on the books of D. C. Transit System, Inc. at original cost to Capital Transit Company, in accordance with the provisions of the Uniform System of Accounts, and depreciation is accrued on the basis of original cost, with an off-setting credit for amortization of the acquisition adjustment to effectively reduce the provision for depreciation to the basis of depreciation of the purchase price of the property.”

In this manner the Commission gave •consideration to the reduced purchase price paid by Transit. The farepayers will receive benefit in the form of reduced depreciation in the total amount •of $10,339,041, to be written off annually in the amount of $1,033,904.

This brings us to the three matters which lead us to conclude that the order •of the Commission should be set aside.

1. Accruals as operating expenses of the estimated cost of track removal and repaving.

Section 7 of the Franchise Act places upon Transit the obligation to convert its street railway operations to bus operations within seven years from July 24, 1956, unless extended by the Commission. And see the District of Columbia Appropriation Act, 1942 (55 Stat. 499, 533). In connection with this transition the 'Commission states as follows:

“Provision for track removal and repaving in the amount of $1,044,-196 represents the annual provision for the cost of track removal and repaving estimated at a total cost of $10,441,958, said total cost to be provided equally over a ten-year period from August 15, 1956. The estimated total cost of track removal and repaving is based on the aver.age of a Company estimate of $11,-883,916 and an estimate by the staff of the Commission of $9,000,000, in both instances contemplating complete removal of the entire track structure.

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“A question has also been raised with respect to the adequacy or inadequacy of the provision that is presently being made for track removal and repaving. Up to the present time, there has been only a limited amount of track removal and repaving work undertaken, so that sufficient data are not now available for testing the adequacy or inadequacy of the provision. The Commission recognizes that the provision now being made is based on engineering estimates which may prove to be either excessive or deficient by actual experience. We have indicated our intention of keeping this matter under study with a view to making such adjustments as might be found appropriate in the future. Pending further experience, we find for purposes of this proceeding that the annual provision of $1,044,196 for track removal and repaving is reasonable.”

We accept the Commission’s estimate that if Transit were to remove all tracks and do all the repaving consequent thereupon the total cost would be approximately $10,441,958. But if the conclusion of the Commission that Transit was actually to incur the total amount of this cost be considered a finding of fact we think that on the present record it is unwarranted and, therefore, unreasonable, and if it be considered a legal conclusion we think it is erroneous. Section 7 of the Franchise Act reads as follows:

“The Corporation shall be obligated to initiate and carry out a plan of gradual conversion of its street railway operations to bus operations within seven years from the date of the enactment of this Act upon terms and conditions prescribed by the Commission, with such regard as is reasonably possible when appropriate to the highway development plans of the District of Columbia and the economies implicit in coordinating the Corporation’s track removal program with such plans; except that upon good and sufficient cause shown the Commission may in its discretion extend beyond seven years, the period for carrying out such conversion. All of the provisions of the full paragraph of the District of Columbia Appropriation Act, 1942 (55 Stat. 499, 533), under the title ‘Highway Fund, Gasoline Tax and Motor Vehicle Fees’, subtitle ‘Street Improvements’, relating to the removal of abandoned tracks, regrading of track areas, and paving abandoned track areas, shall be applicable to the Corporation.”

These provisions contemplate that Transit’s program of track removal and repaving shall be coordinated with the highway development plans of the District of Columbia, resulting in economies implicit in such coordination. And the Appropriation Act of 1942 referred to in Section 7, while it obligates Transit to pay the entire cost of removing such tracks as are removed, and to repave the area when the street is not being paved, requires it to pay only one-half the cost of repaving the track areas when roadway repaving is there being carried out by the Highway Department pursuant to its road maintenance program. No allowance is made by the Commission for these important factors which would reduce the cost to Transit of track removal and repaving. In recognition that its estimates of the total cost might prove to be either excessive or deficient the Commission expressed its intention to keep the matter under study with a view to making such adjustments as might be found appropriate. This is not a sufficient justification for an increase in the cash fare on March 6, 1960, on the assumption that the full estimated cost would be incurred or, if so, would fall entirely upon Transit. At the time of the order there had already accumulated more than $3,000,000 as a reserve for track removal and repaving. Only $61,-338 had been expended for that purpose in, 1958 and 1959. A large part of the program could be borne by this reserve while the Commission gained greater experience in aid of making adjustments.² The existing reserve was available well into the future. While it was being utilized experience could be gained with respect to economies due to coordination of the program with the highway development plans of the District of Columbia, and with respect also to economies due to recapping tracks instead of removing them. We think in these circumstances it was unreasonable for the Commission in March, 1960, to authorize an increase in fare on the theory that all tracks would be removed and the area they had occupied repaved and, also, that Transit alone would be required to meet the full cost of such a program.

We are not advised by the record or in the Commission’s decision of any thorough inquiry about the economies contemplated by the Franchise Act.³ Such inquiry would have enabled the Commission to reach an informed judgment with regard to such economies, removing much of the speculation upon which the fare increase rests. In any event the Commission could have provided that the increase, insofar as it was based upon the cost of track removal and repaving, was conditioned upon the need therefor as this might appear upon review of the situation before the large reserve available in March, 1960, approached exhaustion. It simply cannot be said that the record then showed the need for an increase in fare to provide annually over a ten year period for more than a million dollars as an operating expense for this item of track removal and repaving. The order should have taken into account the probability that economies would make the actual cost much less; for it was clearly contemplated by the Franchise Act that all taxpayers, through plans shared by the District of Columbia, with perhaps Federal assistance, would assume some of the cost. Yet the present order proceeds on the theory that the entire cost would fall upon Transit. In some reasonable manner the situation we have outlined should have been reflected in the decision of the Commission. It is no answer to say that the company might at some unforeseeable future time be obliged to remove tracks which might currently be paved over. The increase is during a ten year period which is still current. While we recognize there were uncertainties in the situation, in our view it was not consistent with consumer interests to .resolve so many of the doubts in favor of a fare increase not shown to have been necessary. Since something-less than complete and total removal and repaving would be an operating expense of Transit the Commission could not reasonably act on the basis that Transit would be obliged to remove all tracks and also bear the cost of all repaving.

2. The allowance of depreciation for buses.

Depreciation for buses was allowed on the basis of a study made by the Commission in 1953. ■ The company was allowed to accrue depreciation annually at seven per cent of the original cost of the buses to the first owner who put them into public service. This gave each bus a service life of fourteen years. The Commission used the “group method.” This method rests on the theory that although some buses would be used and depreciated for more than fourteen years, others for one reason or another would not last out fourteen years and thus the average life of the buses would approximate fourteen years. But depreciation on this theory cannot be squared with the facts of the present case. Depreciation continued to be allowed on so many buses beyond the theoretical service life of fourteen years as to distort this item of operating expense. By 1959 the reserve accumulated in this manner had resulted in an excess accrual of approximately $1,200,000 over and above the original cost of the buses. Accruals on the same basis were made also during the test period and charged against Transit’s gross revenues as operating expense, thereby understating Transit’s net income. The justification offered is that no change should be made from the group method until a complete study of the problem had been undertaken. Although no doubt such a study would be advisable this did not justify in March, 1960, the continuation of this deduction from gross revenues in arriving at the net operating income actually available.⁴ The record fails by far to demonstrate that the average theory was working.

The Chief Accountant of the Commission, in answer to a question whether any properties are retired from the bus account under 14 years said: “They would be very minor. There are a few buses that were retired by reason of accidents in the past prior to 14 years, but I think generally in the last 10 years I don’t recall of any appreciable number of buses retired prior to a 14 year life.” Testimony of the Vice-President and Comptroller of Transit shows that of 50 buses retired in 1958 all but two were 17 years old or older. In 1959, of 43 retired or scheduled for retirement all were 17 years old or older. This same officer was asked, “Does the company plan to retire at any time in the future buses which are less than 14 years old?” He replied, “Not so long as they are capable of being maintained in good, safe, operable condition, no.”

We hold that the substantial inflation of operating costs due to excessive depreciation of buses is unlawful.

3. Depreciation accruals on abandoned rail properties.

The Commission’s treatment of depreciation on abandoned rail properties is not supported by the record. The record discloses that the net undepreciated cost of Transit’s rail facilities as of December 31, 1959, was $5,121,644, and further that Transit, by January 3,1960, had abandoned 49.40 per cent of its rail facilities. These factual findings are accepted by us. Transit contended that it should be allowed to recover the entire cost during the remaining 43.5 months of the conversion period, that is, from January 1, 1960, through August 15, 1963. The staff agreed that Transit was entitled to recover this cost over some future period but thought that to increase the normal depreciation rates so that depreciation could be completed within the remaining conversion period would unduly burden Transit’s customers. The staff recommended and the Commission approved an additional annual depreciation allowance of $295,500 based upon the track facilities actually abandoned by Transit on January 3, 1960. The undepreciated cost of these facilities would amount to $2,530,092. Pending further study the Commission declined to make any further provision for extraordinary retirement loss beyond this annual provision of $295,500.

The justification for a depreciation allowance on abandoned property depends upon wdiether Transit’s investors have in the past been compensated for assuming the risk that the property would have to be abandoned before the investment in the property was entirely recovered. In Washington Gas Light Co. v. Baker, 88 U.S.App.D.C. 115, 123, 188 F.2d 11, 19 (1950), cert. denied, 340 U.S. 952, 71 S.Ct. 571, 95 L.Ed. 686 (1951), we said:

It thus becomes relevant to determine whether or not investors have, during the useful life of this [abandoned] property, been compensated for assuming the risk that it would become inadequate or obsolete before the investment in it was entirely recovered.

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“It is not for us to say * * * whether or not the risk of obsolescence * * * was borne by the investor in the past and whether he was compensated for it. That is an inquiry which must be made in the first instance by the Commission.”

In this case the conversion from a street railway system to buses brings into play the same principle as though the matter were one of obsolescence. The present decision of the Commission does not meet the requirements of Baker. The allowance for depreciation of abandoned rail properties is not supported by a finding, in turn supported by evidence, that the “risk of obsolescence [abandonment] * * * was borne by the investor in the past and [he was not] compensated for it.” It is not merely a question of findings. It is, more importantly, a matter of substance. It is our view that the requirements of Baker must be met in any new order.

The Commission found that for the future test period the net operating income of $1,143,249 which would result from the authorized increase in fare would provide a fair rate of return as measured by the gross operating revenue method or by the rate base-rate method. As we have said, it found that a net operating income of $1,143,249 provided a rate of return of 4.10'% on gross operating revenues or 7.14% on the rate base of $16,016,810, and that this rate of return fell within a range the Commission considered to be fair, enabling the Company “to meet its interest requirements, to pay reasonable dividends, to permit retention of a reasonable proportion of earnings in the business, to provide a margin for unforeseen contingencies, and to attract the necessary capital to meet its future capital requirements.” ⁵ In reaching these conclusions the Commission also found that without the increase in fare the net operating income would be only $660,146, insuring a rate of return of only 2.47% on gross operating revenues and of 4.12% on the rate base. For the reasons we have given in discussing the expense items for track removal and repaving and for bus depreciation, items deducted by the Commission in arriving at net operating revenues, the errors in these items are reflected in the findings of the Commission of net operating income of only $1,143,249 with the increase, and of only $660,146 absent the increase. Accordingly we cannot accept those findings of net operating income. The calculations of net operating income, and resulting rates of return, would be shown to be substantially larger but for the errors referred to. This is aside from the result which might follow reconsideration of the depreciation accruals on abandoned rail properties. The present record accordingly does not support the reasonableness of the end result reached by the Commission.

We come to our conclusion not without awareness that we are not the regulatory body having primary responsibility for utility rate regulation in this jurisdiction. Yet in the performance of our review responsibility we cannot on this record find adequate basis for an increase on March 6, 1960, of Transit’s cash fare to 25 cents.

We do not enter our judgment simultaneously with the issuance of this opinion. The parties are requested within ten days to submit memoranda of their views as to the form of judgment appropriate to carry out this opinion.

1 . Transit’s petition to the District Court for relief was later dismissed on stipulation.

2 . This would be true even if the larger estimate of the company, $11,883,916, should turn out to have been more accurate than the figure of $10,441,958 found by the Commission to be the cost of total removal and repaving if Transit paid the total.

3 . The Commission in its brief states: “There is no definite schedule for track removal and repaving * *

4 . In a subsequent rate proceeding the Commission has adopted the unit method of bus depreciation in lieu of the group method. The utilization of the unit method in the interest of preventing future excess depreciation accruals fortifies the view that the continued excess depreciation accruals permitted by the Commission in the proceeding under review was unsound.

5 . The interest charges during 1960 approximated $317,000. If dividends were to be maintained at the current level it was estimated that $500,000 additional would be required.