Democratic Cent. Com. of DC v. Washington Met. AT Com'n, 24398

• Citation: 485 F.2d 886,158 US App. DC 107
• Decision Date: 28 June 1973
• Docket Number: 24415 and 24428.,No. 24398,24398
• Parties: DEMOCRATIC CENTRAL COMMITTEE OF the DISTRICT OF COLUMBIA, et al., Petitioners v. WASHINGTON METROPOLITAN AREA TRANSIT COMMISSION, Respondent, D. C. Transit System, Inc., Intervenor. DISTRICT OF COLUMBIA, Petitioner, v. WASHINGTON METROPOLITAN AREA TRANSIT COMMISSION, Respondent, D. C. Transit System, Inc., Intervenor. BLACK UNITED FRONT, Petitioner, v. WASHINGTON METROPOLITAN AREA TRANSIT COMMISSION, Respondent, D. C. Transit System, Inc., and Washington Construction Area Industry Task Force, Intervenors.
• Court: United States Courts of Appeals. United States Court of Appeals (District of Columbia)

158 US App. DC 107, 485 F.2d 886 (1973)

DEMOCRATIC CENTRAL COMMITTEE OF the DISTRICT OF COLUMBIA, et al., Petitioners v. WASHINGTON METROPOLITAN AREA TRANSIT COMMISSION, Respondent, D. C. Transit System, Inc., Intervenor.

DISTRICT OF COLUMBIA, Petitioner, v. WASHINGTON METROPOLITAN AREA TRANSIT COMMISSION, Respondent, D. C. Transit System, Inc., Intervenor.

BLACK UNITED FRONT, Petitioner, v. WASHINGTON METROPOLITAN AREA TRANSIT COMMISSION, Respondent, D. C. Transit System, Inc., and Washington Construction Area Industry Task Force, Intervenors.

Nos. 24398, 24415 and 24428.

United States Court of Appeals, District of Columbia Circuit.

Argued September 17, 1970.

Decided June 28, 1973.

Rehearing Denied September 25, 1973.

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Landon G. Dowdey, Washington, D. C., with whom S. David Levy and Neil J. Cohen, Washington, D. C., were on the brief, for petitioners in No. 24398.

C. Beldon White, II, Asst. Corp. Counsel, Washington, D. C., for the District of Columbia, with whom Hubert B. Pair, Acting Corp. Counsel, Washington, D. C., at the time the brief was filed, and George F. Donnella, Asst. Corp. Counsel, Washington, D. C., at the time the brief was filed, were on the brief for petitioner in No. 24415.

Jean Camper Cahn, Washington, D. C., for petitioner in No. 24428 and intervenor Washington Construction Area Industry Task Force.

Douglas N. Schneider, Jr., Gen. Counsel, Washington Metropolitan Area Transit Commission, Washington, D. C., for respondent.

Harvey M. Spear, New York City, for intervenor D. C. Transit System, Inc.

Gilbert Hahn, Jr., Washington, D. C., Chairman of the City Council of the District of Columbia at the time the brief was filed, pro se, with whom Louis F. Oberdorfer, Washington, D. C., was on the brief, as amicus curiae.

Before ROBINSON and MacKINNON, Circuit Judges, and DAVIS,^* Judge, United States Court of Claims.

SPOTTSWOOD W. ROBINSON, III, Circuit Judge:

By these three petitions, we are summoned to review aspects of Order No. 1052¹ of the Washington Metropolitan Area Transit Commission authorizing increases in the fares chargeable by D. C. Transit System, Inc. (Transit) for bus transportation in the District of Columbia and adjacent areas in Maryland and Virginia.² Having done so through careful consideration of the parties' contentions and painstaking examination of the administrative record, we find that we must set Order No. 1052 aside and remand the case to the Commission for further proceedings.

In brief summary, our review discloses that in its analysis of Transit's presentation underlying allowance of the increases the Commission mishandled three factors bearing vitally on the propriety of raising the fares. The first of these is the appreciation in market value of certain parcels of unimproved real estate which occurred while they were employed in Transit's operations. The second factor is the efficiency of Transit's service, as to which an investigation is prerequisite to setting higher fares. The final factor is the concept of reasonable rate of return which should have guided the Commission in its fare determinations. We conclude that the Commission did not adequately take into account the first two factors and labored under a misunderstanding of the third.

Our opinion is divided into five parts. Part I recites the history and content of Order No. 1052 and the evolution of this litigation. Part II defines the role which value-appreciation of properties in operating status should have played in the fare-setting process under review. Part III concerns the need, which the Commission should have sufficiently met, to evaluate the efficiency of Transit's service in resolving its claim for increased fares. Part IV discusses the concept of reasonable return on a utility's investment as that concept is elucidated in Market Street Railway Company v. Railroad Commission³ and as the Commission should have applied it when fashioning Order No. 1052. The concluding section, Part V, summarizes our holdings and our directions to the Commission for remedying these defects on remand.

I. BACKGROUND OF THE LITIGATION

On March 13, 1970, Transit filed new tariffs and an application with the Commission seeking authority to raise certain of its fares for transportation of passengers within the District of Columbia and between the District and points in nearby Maryland and Virginia.⁴ In the main, the application requested an increase in the basic District of Columbia and Maryland fares from 32 cents to 40 cents and increments to the Maryland zone fares.⁵ In addition to this application, Transit filed a motion for an interim increase in the basis District of Columbia and Maryland fares to 35 cents and slight interim increases in the Maryland zone fares. Transit urged an interim order as a means of lessening its alleged financial difficulties⁶ at a date earlier than expiration of the 150-day period legislatively specified and traditionally necessary for processing new fare applications.⁷

Because, in its view, the request for interim relief presented issues essentially identical with and as deserving of public comment as those inherent in the regular application, the Commission decided that the better procedure would be to consider the regular application on an expedited basis,⁸ deferring action on the interim motion to such point in the proceedings at which it might become unavoidably required.⁹ Accordingly, and pursuant to the Washington Metropolitan Area Transit Regulation Compact,¹⁰ the Commission suspended Transit's proposed fares¹¹ and ordered public hearings.¹²

After completion of the hearings, the Commission promulgated Order No. 1052. It found that in the historical twelve-month period immediately preceding November 30, 1969,¹³ Transit had a net operating income, after adjustments to operating revenue,¹⁴ of $862,005 which, however, when offset by interest charges of $1,293,651, was transformed into a net loss of $431,646¹⁵ and a reduction of retained earnings to $1,241,203.58.¹⁶ The Commission's conclusion that Transit's fares were too low was reached by a series of estimates. It reasoned that if the basic District of Columbia and Maryland fares were maintained at 32 cents, if loss of ridership continued at the rate anticipated by Transit officials,¹⁷ if the Commission staff's projection of income from charter revenues were accepted,¹⁸ if the sum expected by Transit from school subsidies were likewise accepted,¹⁹ if the company's reserve for injuries and damages were increased from $1.3 million to $1.9 million,²⁰ if maintenance costs were adjusted upward by another half-million,²¹ if profits of $620,000 were channeled to bus purchases,²² if management salaries were reduced by $15,000,²³ and if deduction of $526,177.03 for track removal expenses were made,²⁴ Transit would during the ensuing twelve months lose $2,676,115 which, after inclusion of interest charges, would build up to $3,974,990. "These facts," the Commission declared, "make adjustments in the fares not only necessary, but imperative. . . ."²⁵

The Commission then turned to the question of the fares to be allowed. It found that if the fares proposed by Transit were inaugurated, they would generate net operating income of $2,440,284.²⁶ Interest expenses of $1,198,875 were projected, to which the Commission added new interest charges of $234,263 incidental to bus purchases and $100,000 to meet interest payments on a $1 million loan acquired to settle Transit's debt to its employees' pension fund.²⁷ After payment of the aggregate interest cost of $1,533,138, then, there would be a dollar return of $907,146, or a return on equity of 52.10 percent;²⁸ and with the required purchase of 85 buses, the rate of return on operating revenue would be 7 percent, an operating ratio of 107 percent.²⁹ Since the rate of return had been thoroughly discussed at two recent fare proceedings,³⁰ the Commission considered that new testimony thereon was unnecessary, so instead it stipulated that official notice of all rate-of-return testimony in those proceedings would be taken.³¹

The Commission noted that the projected return would theoretically permit payment of a dividend which would probably attract investors, but admonished that, given the record of operating losses which Transit had incurred in past years, it would be imprudent to distribute any of the return to Transit's investors.³² It was the Commission's expectation, rather, "that the cash flow represented by return on equity would, for the time being, be used in the company's financial recovery, rather than for the payment of dividends."³³ This return, the Commission felt, would provide the internally-generated capital needed to meet down payments on new buses, improve Transit's credit — thereby facilitating other purchases of new equipment — and aid in settling some of Transit's current liabilities of more than $10 million.³⁴ In the opinion of the Commission, the return allowed would thus contribute to the company's recovery without imposing an undue burden on the fare-paying public.³⁵ The increases, the Commission thought, would be sufficient to offset reduction in ridership which the company may not have adequately taken into account,³⁶ and to permit the inauguration of reduced fares in off-peak hours for senior citizens.³⁷

By the Commission's estimate, the new fare structure would produce an abnormally high return on equity of 52.10 percent.³⁸ Adverting to that fact, the Commission observed:

This figure must be carefully assessed. The losses incurred by the company in recent years have reduced retained earnings from $2,890,848 in 1966 to $1,241,204 as of November 30, 1969. Were it not for special adjustments to retained earnings in the net amount of $605,008 during the past three years, the balance in retained earnings account would have stood at $636,196.

We believe that this factor must be heavily weighed in considering

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