Democratic Cent. Com. of DC v. Washington MAT Com'n

• Decision Date: 28 June 1973
• Docket Number: No. 21865.,21865.
• 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.
• Court: U.S. Court of Appeals — District of Columbia Circuit

485 F.2d 786 (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.

No. 21865.

United States Court of Appeals, District of Columbia Circuit.

Argued June 23, 1970.

Decided June 28, 1973.

Rehearing Denied September 25, 1973.

COPYRIGHT MATERIAL OMITTED

Landon G. Dowdey, Washington, D. C., with whom S. David Levy, Neil J. Cohen and William A. Grant, Washington, D. C., were on the brief, for petitioners.

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

Harvey M. Spear, New York City, for intervenor.

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

SPOTTSWOOD W. ROBINSON, III, Circuit Judge:

This petition subjects to review Order No. 773 of the Washington Metropolitan Area Transit Commission¹ in an aspect untouched by today's Powell decision.² Petitioners assert, as their major contention, that the Commission should have taken into account, in the fare-setting process leading to that order, the amount by which properties which Transit had transferred from operating to nonoperating status had appreciated in value while in service. We conclude, in the circumstances peculiar to Transit as a public utility, that the Commission erred in refusing to treat the excess of market value over book value of the properties when transferred as an offset to higher fares.³ To that extent we hold Order No. 773 invalid and direct the remedial steps to be taken. In the other respect in which the order is complained of, we affirm the Commission.⁴

I BACKGROUND

The evolution of Order No. 773 is summarized in our Powell opinion.⁵ We need add only the events of record which bear particularly on the transferred assets.⁶ All are parcels of real estate which in times past were employed by Transit in mass transportation operations, but which, after later losing their usefulness for that purpose, were withdrawn from service. These withdrawals are reflected by entries on Transit's books recording the removals — in utility jargon, from "above the line" to "below the line" — and denoting Transit's continuing interest in the properties as investments. In some instances, Transit retains direct ownership; in others, Transit has conveyed to a wholly-owned subsidiary, and in still others it has made an outright sale. It appears without controversy that the market value of the unsold properties at the time of transfer below the line has invariably exceeded their value as tabulated on Transit's books.⁷

During the course of the proceeding before the Commission, petitioners endeavored to probe into Transit's below-the-line real estate, Transit's interrelationships with its subsidiaries, and the market value of withdrawn realty held by either. Transit resisted those efforts, maintaining that the properties belonged exclusively to its investors,⁸ and that information concerning them was irrelevant to the fare investigation in which the Commission was engaged.⁹ The Commission, subscribing to Transit's basic premise, ruled that petitioners' inquiries had but limited pertinence to the proceeding.¹⁰ It directed that some of the sought-after information be made available to petitioners, but refused to require disclosure of any market-value data on the properties.¹¹

Not surprisingly, then, Order No. 773 reflects no consideration whatever by the Commission of rises in the value of the transferred assets during the course of structuring the increased fares which that order awarded. Petitioners filed a timely petition for reconsideration¹² containing, inter alia, what may fairly be characterized as a request that the Commission devise ways and means of giving Transit's farepayers appropriate credit for the appreciation in value of the properties while in service. By Order No. 781, the Commission denied the petition,¹³ and by Order No. 781a stated its reasons for doing so.¹⁴ The Commission's statement, like Order No. 773 itself, is devoid of anything which we can identify as a response to petitioners' entreaty. And so it is that the theory underlying their plea is presented here,¹⁵ now to support the charge that the Commission was grievously in error.¹⁶

We have painstakingly examined this serious charge in all of its many ramifications, and in this opinion we set forth the results of our investigation. We begin in Part II with an exploration into the adjudicative history, administrative and judicial, of allocations of capital gains on operating utility assets. After that, in Part III, we scrutinize the interest of investors in value-appreciations on such assets, with reference to treatments of that interest in rate- and depreciation-base formulations and, more particularly, in Transit's ratemaking litigation. Next, in Part IV, we identify the doctrinal considerations guiding allocations of capital gains on in-service utility property and apply them to this case. Then concluding that Order No. 773 is invalid and must be set aside, we specify in Part V the basis for and mechanics of remediation.

II ADJUDICATIVE HISTORY OF ALLOCATION OF CAPITAL GAINS ON OPERATING UTILITY ASSETS

Seldom have regulatory agencies or courts been called upon to allocate, as between investors and consumers, gains on utility assets while in operating status.¹⁷ Nonetheless, for the assistance and indispensable background they may afford to resolution of the controversy at hand, we must pause to examine this group of cases. In the realization that problems of allocation may well differ according to whether the asset is depreciable¹⁸ or nondepreciable, we look first to the decisions treating allocation issues in relation to depreciable properties.

A. Depreciable Assets Out-of-District Cases

Outside the District of Columbia, we find relatively little authority precisely in point. In 1959, the question was presented to the Appellate Division of the New Jersey Superior Court¹⁹ after a utility providing water service made a profitable sale of a portion of its distribution system, consisting of cast-iron mains and fire hydrants.²⁰ In subsequent rate proceedings, the New Jersey Board of Public Utility Commissioners deducted the profit from the utility's earned surplus and credited it to its depreciation reserve, in conformity with the board-adopted uniform system of accounts for water companies. From 1931, when the sale was made, to 1958, when the rate case was instituted, the utility had not complained of this treatment. Ascribing controlling weight to the commissioners' long standing construction of their own regulation — the accounting system prescribed — the court found no error in the challenged adjustment.²¹

In the same year, a similar question arose in a rate proceeding before the Minnesota Railroad and Warehouse Commission.²² During its historical test period, a transit company sold obsolete buses and treated the proceeds as nonoperating income. This was held to be improper.²³ "The Uniform System of Accounts prescribed by this Commission," said the agency, "requires that such salvage²⁴ `shall be credited to the depreciation reserve account.'"²⁵ In its words, the agency accordingly "added this income from sale of obsolete buses to operating income in determining actual operating results. . . ."²⁶ "Any further income from sale of obsolete buses or equipment," the agency added, "will be treated . . . as a reduction in depreciation expense and thus, as an increase in operating income."²⁷

A few years later, the Wyoming Public Service Commission faced essentially the same problem in a variant context.²⁸ A utility engaged in selling natural gas purchased mineral interests in lands, including a gas-producing well. The utility thus became entitled to a depletion allowance on the purchased assets.²⁹ After taking some gas from the purchased properties for its southern division customers, the utility sold them at a profit. Regulatory approval of the sale had been accompanied by a direction to treat the profit as utility income. In a later rate proceeding, the Commission reiterated its position that the profit "must be treated as nonoperating utility income."³⁰ The theory underlying the order approving the sale, the Commission said, was that "the profit to be made by the company upon the sale thereof should be used to reduce its . . . natural gas rates, rather than increase them."³¹ "As we view the transaction," the Commission explained, "the company will simply make the substantial profit from the sale of utility properties dedicated to its southern division operations, which, in our opinion, should inure to the benefit of the ratepayers in that division."³²

Such are the decisions outside this jurisdiction. In each, the entire gain from disposition of depreciable assets was passed on to the utility's consumers, to the exclusion of its investors. While it is true that two of the decisions were influenced by agency-adopted accounting practices, it must be remembered that such practices are but reflections in accounting technique of what is generally considered wholesome in substantive principle. And the principle to be gleaned, both from the practices and the decisions themselves, is that consumers have the superior claim on capital gains achieved when depreciable utility properties are removed from service. We do not suggest that so small a number of cases establish a rule of general and controlling applicability in the ratemaking field. But it can hardly be denied that these decisions are precedents of value in similar litigation.

— District Cases

Within, much as without, the District of Columbia the problems of allocating value-appreciation of depreciable in-service utility property have but infrequently arisen before either regulatory agencies or courts. And the litigation locally, such as it has been, has invariably...