DC Transit Sys., Inc. v. Washington Met. A. Transit Com'n

• Decision Date: 28 July 1972
• Docket Number: No. 72-1555.,72-1555.
• Citation: 466 F.2d 394
• Parties: D. C. TRANSIT SYSTEM, INC., Petitioner, v. WASHINGTON METROPOLITAN AREA TRANSIT COMMISSION, Respondent, and District of Columbia Council et al., Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

466 F.2d 394 (1972)

D. C. TRANSIT SYSTEM, INC., Petitioner, v. WASHINGTON METROPOLITAN AREA TRANSIT COMMISSION, Respondent, and District of Columbia Council et al., Intervenors.

No. 72-1555.

United States Court of Appeals, District of Columbia Circuit.

Argued June 22, 1972.

Decided July 28, 1972.

Certiorari Denied December 18, 1972.

COPYRIGHT MATERIAL OMITTED

Mr. Harvey M. Spear, New York City, for petitioner.

Mr. Frank F. Flegal, Sp. Counsel, Washington Metropolitan Area Transit Comm., with whom Messrs. Bernard Dobranski, Gen. Counsel, and Stephen L. Sharfman, Counsel, Washington Metropolitan Area Transit Comm., Washington, D.C., were on the brief, for respondent.

Mr. Edward B. Webb, Jr., Sp. Counsel, District of Columbia Council, Washington, D.C., for intervenor District of Columbia Council.

Mr. Michael J. Valder, Washington, D.C., with whom Mrs. Elizabeth B. Kleeman, Xenia, Ohio, was on the brief, for intervenor Black United Front.

Miss Diana K. Powell, pro se, intervenor.

Before FAHY, Senior Circuit Judge, and ROBINSON and MacKINNON, Circuit Judges.

Certiorari Denied December 18, 1972. See 93 S.Ct. 688.

SPOTTSWOOD W. ROBINSON, III, Circuit Judge:

The question for decision is whether the Washington Metropolitan Area Transit Commission erred in conditioning further consideration of a fare increase for a financially ailing carrier upon satisfaction of requirements designed to improve its service. We hold that, in the circumstances presented, the Commission's action is legally unobjectionable. We accordingly affirm the orders under review.

I. BACKGROUND OF THE LITIGATION The Administrative Proceeding

On December 28, 1971, D.C. Transit System, Inc. (Transit), filed two tariffs¹ with the Commission which alternatively designated changes in its fares for regular-route transportation of passengers in the District of Columbia and its Maryland and Virginia suburbs. The filings were accompanied by data indicating a net operating loss during an historical twelve-month period ending September 30, 1971, and forecasting another loss during a corresponding period ending April 30, 1973. To enable a suitable return in the future annual period, Transit proposed a variety of fare increases, notably for its intra-District cash and token patrons.² Transit designated January 27, 1972, as the date on which the new fares would take effect.

Transit submitted with the tariffs a motion for fare raise pending determination by the Commission of the general increment it sought. The Commission denied the motion, holding that an interim advance would not serve the public interest, and set hearings to begin at an early date. On January 26, 1972, the Commission suspended Transit's newly-filed tariffs through April 26, and on April 25 further suspended them until May 26. The hearings commenced in mid-February and, with numerous parties participating extended well into May.³ On May 19, the Commission, with one member dissenting,⁴ promulgated its primary order, No. 1216,⁵ denying a fare increase, and by Order No. 1219,⁶ issued on June 16, denied reconsideration of that ruling. These are the principal orders now under review.⁷

Since we later examine the Commission's orders closely, we confine our recitation at this stage to their highlights. The Commission, on preliminary examination of the financial data submitted by Transit, discerned a probable need for additional revenues.⁸ The Commission found, however, that management decisions over the years had left Transit with an unstable financial structure which in turn had contributed substantially to an operation presently uneconomical and inefficient and a service seriously deteriorated.⁹ In the Commission's view, the Washington Metropolitan Area Transit Regulation Compact¹⁰ required it to insure not only the reasonableness of rates permitted regulated carriers but also the economy, efficiency and adequacy of their service to the public.¹¹ The Commission concluded that it could not discharge its responsibilities by granting Transit a fare raise without prior demonstration of Transit's willingness to ameliorate its financial situation by capital funding from sources other than its fareboxes.¹² Attributing Transit's financial plight more largely to management than to insufficient revenues,¹³ and recounting a nine-year history of recalcitrance despite exhortation to remedy its ills,¹⁴ the Commission found a lack of assurance that corrective measures would be adopted even if it established funding requirements concurrently with an award of higher fares.¹⁵ The sole alternative, the Commission decided, was the company's acquisition of new capital as a precondition to any such addition.¹⁶

On these grounds, the Commission, in Order No. 1216, found that the fare increases set forth in Transit's tariff filings were unjust and unreasonable.¹⁷ It ruled that, as a condition precedent to any elevation of fares, Transit must generate $6.4 million in new capital and allocate it to debt retirement and bus purchases in designated amounts.¹⁸ It directed that, pending compliance, Transit continue to charge the regular-route fares then in effect.¹⁹ As already mentioned, Transit subsequently²⁰ applied for reconsideration,²¹ which by Order No. 1219 the Commission denied,²² and the proceeding before us is for review of those orders.²³ We denied a motion by Transit for extraordinary relief pending review²⁴ and, with excellent cooperation from counsel, have expedited our consideration on the merits.

The Loconto Reports

In reaching its conclusions, the Commission drew heavily upon the results of an in-depth study of Transit's financial condition. The Commission had ordered the study made with a view to assessing the full implications and isolating the underlying causes of Transit's condition.²⁵ The study was made by Pasquale A. Loconto, a partner in a consulting firm employed by the Commission for the purpose. Loconto probed into Transit's financial history, analyzed its capital and debt structures, reached conclusions as to the need for improvements and formulated recommendations as to the steps by which financial stability might be achieved.²⁶ Loconto prepared a report, which was placed in the administrative record, and he also appeared as an expert witness in the proceeding and stood cross-examination on the conclusions and recommendations of his report.²⁷ What we now summarize are the Commission's discussions of the report, and the findings it based thereon.

Loconto called attention to substantial increases in Transit's current and long-term liabilities and accompanying declines in reserves and retained earnings.²⁸ He also identified, as concomitants of steadily growing operating revenues, heightening operating revenue deductions, fluctuating operating income, and constantly rising interest expense²⁹ —the latter, by the Commission's appraisal, "a major contributing factor in Transit's poor profit picture."³⁰ A drop in Transit's current ratio—the relationship of current assets to current liabilities—"indicates an extreme lack of liquidity," said Loconto, and "little provision for unevenness in the flow of funds available to meet current liabilities."³¹ "If," Loconto continued, "that flow should decline even temporarily, a condition of insolvency could conceivably result."³² The ratio of Transit's debt to stockholder's equity, the relationship of funds generated by operations to interest coverage and long-term debt, and the percentage of stockholders' equity to total assets, as well as other relationships examined by Loconto, "similarly indicated a worsening financial picture for D. C. Transit."³³ In Loconto's opinion, "the combination of trends presented . . . indicates that the financial condition of the company has been steadily declining during recent years."³⁴

Loconto's analysis of capital structure included a comparison with ten other privately-owned transit companies on a number of financial aspects.³⁵ These comparisons led to Loconto's conclusion "that the structure of the company is quite different from other companies in the industry" and that "by all means, the differences are toward a structure that is more risky and less financially sound."³⁶ Loconto pointed out that a relatively large portion of Transit's assets were fixed and primarily nonoperating, generally yielding comparatively little return to Transit.³⁷ Loconto also noted that debt servicing requirements had increased with increasing debt, and that Transit, lacking sufficient funds from operations to meet those requirements, had been driven to "refinancing debt rather than paying it off."³⁸ "This refinancing practice," said the Commission, "in turn creates what Loconto called a `high risk' situation because there is the chance that the creditors will be unwilling to refinance the debt, will call it instead, and there will not be funds available to pay it."³⁹ There was also a mixture of short and long-term debt disclosing the financing of long-term assets with short-term and intermediate-term financing—by the Commission's characterization, "a poor business practice."⁴⁰

On the basis of his analysis, Loconto identified four problems fundamental to achieving financial stability in Transit's case. These the Commission described thusly:

First, he said some correction must be made in the fact of excessive short-term debt in relation to long-term debt. Also requiring correction was the problem of the excessive debt in relation to stockholders\' equity. Since debt service demands are fixed and must be met, while there is discretion in whether stockholders will receive return when earnings are insufficient, the debt-equity ratio should be reduced. The third area of concern was the fact of the excessive non-earning assets. The consultant noted that the earnings of these assets, largely subsidiary real estate corporations, were very small in relation to their value. He also noted that there are on the books of those subsidiaries

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