415 F.2d 922 (D.C. Cir. 1968), 20200, Williams v. Washington Metropolitan Area Transit Commission

Docket Nº:20200, 20201, 20202.
Citation:415 F.2d 922
Party Name:Richard A. WILLIAMS and Alfred S. Trask, Petitioners, v. WASHINGTON METROPOLITAN AREA TRANSIT COMMISSION, Respondent, D.C. Transit System, Inc., Intervenor. DEMOCRATIC CENTRAL COMMITTEE OF the DISTRICT OF COLUMBIA, Leonard N. Bebchick and Daniel W. Gottlieb, Petitioners, v. WASHINGTON METROPOLITAN AREA TRANSIT COMMISSION, Respondent, D.C. Transit S
Case Date:October 08, 1968
Court:United States Courts of Appeals, Court of Appeals for the District of Columbia Circuit

Page 922

415 F.2d 922 (D.C. Cir. 1968)

Richard A. WILLIAMS and Alfred S. Trask, Petitioners,



DEMOCRATIC CENTRAL COMMITTEE OF the DISTRICT OF COLUMBIA, Leonard N. Bebchick and Daniel W. Gottlieb, Petitioners,



D.C. TRANSIT SYSTEM, INC., Petitioner,



Nos. 20200, 20201, 20202.

United States Court of Appeals, District of Columbia Circuit.

October 8, 1968

Argued Feb. 21, 1967.

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Mr. Leonard N. Bebchick, Washington, D.C., with whom Mr. Stanley O. Sher, Washington, D.C., was on the brief, for petitioners in Nos. 20,200 and 20,201.

Mr. Harvey Mr. Spear, New York City, with whom Mr. Edmund L. Jones, Washington, D.C., was on the brief, for petitioner in No. 20,202 and intervenor in Nos. 20,200 and 20,201.

Mr. Russell W. Cunningham, Arlington, Va., for respondent.

Before BAZELON, Chief Judge, FAHY, (FNa1) DANAHER, BURGER, WRIGHT, MCGOWAN, TAMM and ROBINSON, Circuit Judges, sitting en banc.


In D.C. Transit System, Inc. v. Washington Metropolitan Area Transit Commission (Transit I), 1 we reviewed the Commission's Order No. 245, 2 promulgated after a public hearing in 1963, by which Transit was authorized to raise its token fare for passenger transportation within the District of Columbia and between the District and points in Maryland. 3 We then resolved several subsidiary issues germinated by that order, but were unable to pass judgment as to the legal propriety of the fare increase. The order in that aspect was predicated upon the Commission's finding that a margin of return of $1,480,746, representing a 4.87% Rate of return on Transit's operating revenues, was just and reasonable. 4

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Upon examination of the record, however, we discovered that we had 'no intelligible basis for disposing of the competing claims before us that the return allowed by the Commission is, on the one hand, too high, and, on the other, too low.' 5 Accordingly, we remanded the case to the Commission 'for further proceedings * * * to determine the margin of return over and above operating expenses that Transit should be allowed.' 6

On September 17, 1965, shortly before our remanding order was certified to the Commission, Transit filed a new tariff making numerous fare changes for 1966, 7 including elevations in the District cash fare from 25 to 30 cents, and in the District token fare from 21.25 to 25 cents. 8 Exerting a power conferred by the Washington Metropolitan Area Transit Regulation Compact (Compact), 9 the Commission promptly suspended the new tariff pending a determination as to its reasonableness, and thereafter conducted a public hearing on the proposals it contained.

On January 26, 1966, in purported response to our remand, and without prior notice or further hearing for the purpose, the Commission entered Order No. 563, 10 in supplementation of Order No. 245, reaffirming the return for 1963 the latter had previously allowed. 11 It simultaneously issued Order No. 564, 12 in which it found that a margin of return for 1966 of about $2,000,000 above operating revenues, symbolizing a return rate of 6.03%, would be fair and reasonable, 13 but that the existing fare scale would generate net earnings estimated at only $648,357. 14 The Commission nonetheless felt that a fare increase, save in a minor respect not questioned here, was unnecessary because of the availability of $2,166,933 in a special reserve which had been created in consequence of our decision in Bebchick v. Public Utilities Commission. 15 In lieu of an increase, the Commission permitted Transit to draw upon the reserve for approximately $1,350,000 to accommodate the anticipated deficit in its earnings. 16

Timely petitions for rehearing, 17 denied by the Commission, ripened for our

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present review 18 various issues stemming from these orders. 19 No. 20,200 brings contentions that Order No. 563 is invalid for lack of notice and hearing, and is erroneous on the merits. No. 20,201 presents importantly the claim that the margin of return awarded by Order No. 564 is unreasonable, and it, like No. 20,202, includes attacks upon other Commission findings and conclusions. We proceed now to a consideration of the problems thus engendered, in the sequence 20 we deem best suited to exposition of the reasons for which we set each of the Commission's orders aside.



Following our remand, the Commission promulgated in Order No. 563 its supplemental findings to Order No. 245, and 'affirmed' its earlier finding that a margin of return representing a rate of 4.87% On operating revenues 'was fair and reasonable.' 21 Petitioners in No. 20,200 attack Order No. 563 on the ground that it does not comply with our instructions governing the Commission's task on remand. 22 The disclosures made by the record, now to be delineated, lead us to agree.

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We pointed out in Transit I that the return of 4.87% Possesses no inherent validity, and voiced our 'need to know more than we have been told about why the Commission thought this was the appropriate margin.' 23 We observed that the margin of return properly allowable over legitimate operating expenses is 'the sum of money needed to attract the capital, both debt and equity, required to insure financial stability and the resulting capacity of the utility to render the service upon which the public depends.' 24 And we stressed the necessity for

'inquiries and findings-- judgmental as the latter may often be because ratemakers must be prophets of the future as well as historians of the past--into such things as the capital programs in prospect, what such programs entail in terms of down-payments as well as financing, the cost of borrowing money, working capital needs, the desirable ratio of debt to equity, the incentives required by a stockholder to keep his money in the business and the dividends and growth rates requisite to supply these incentives, the opportunities in these respects provided in comparable businesses, and the related matters which must be prayerfully explored by the conscientious regulator before he can begin to say why he fixed upon 4.87 rather than 6.5 or 3.2.' 25

Despite these explicit guidelines, we search in vain the Commission's supplemental opinion for the vital findings, or for any manifestation that the Commission has made the inquiries referred to.

The bulk of Order No. 563 is devoted to a summary of the testimony of various witnesses given during the 1963 hearing. The summary covers such matters as Transit's rate base; the capital structures of Transit and other utilities; Transit's cost of capital and that of other utilities; the degree of risk borne by Transit shareholders, as compared with other regulated utilities; dividends and earnings of Transit and its parent, 26 and those of other utilities; Transit's estimated debt expense for the future annual period; actual and authorized operating ratios of Transit and other utilities; and the average market prices of the stock of Transit's parent. Having thus reviewed the record in somewhat greater detail than in its original order, the Commission then simply reaffirmed its earlier conclusion on the rate of return in language strikingly reminiscent of that which when remanding we had characterized as 'stock generalizations which serve only to frustrate, rather than illuminate, judicial review:' 27

'We have before us then an abundance of testimony relating to returns authorized and/or earned by transit companies, telephone companies, electric companies, and gas companies. This information allows us to examine earnings on investments carrying, to some degree, a comparable risk, and are of some value when considered in relation to this particular company. No single rate of return is universally applicable to all transit companies in the United States. A fair rate of return varies with the times and conditions of a particular company as these conditions and opportunities exist at the time of the weighing of the facts in the making of a determination. What constitutes a reasonable rate of return is a question of fact, the solution of which calls for the exercise of sound judgment and common sense by the Commission.

'We have weighed very carefully all testimony and exhibits in this proceeding, along with supplemental data where noted. We are of the opinion

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that fares producing an operating ratio in the range of 95 to 95.5 constituted a fair and proper return. The projected net operating income of $1,480,000 was the amount necessary to enable Transit to service its debt, pay reasonable dividends, retain a reasonable portion in its business, and to attract investments of private investors. It was, in addition, the amount necessary to maintain investor confidence and to protect the company from the risks peculiar to the transit industry and to Transit itself.' 28

Dividend Payout

The Commission's opinion is almost wholly devoid of any indication of the method by which it calculated that a margin of return of $1,480,000 was fair and reasonable. The Commission did account for a portion of that sum by finding that a dividend payout of $500,000 would be reasonable-- apparently in response to our observation that 'Transit's annual dividend pay-out of about $500,000 appears to have been treated as if it were a cost of operation, like the annual expenditure for gas and oil, with no...

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