tal investment and $112,846 bonus. In this manner, the fare-paying bus riders paid off the investing stockholder in full by the end of 1958.

The payment of the $450,000 in dividends in the year ending December 1959 is thus inexplicable. If we assume that the previous payments to stockholders were not to return the investment but were entirely dividends, the rates would be 58 percent, 80 percent and now 90 percent in 1959. Commencing in 1960, the socalled dividends rose to $500,000 or 100 percent-a complete return of the investment each year. This is far in excess of the Congressional provision for "an attractive investment."

The WMATC has continued its approval of the 100 percent dividend rate, plus the accumulation of $3,385,405 in retained earnings or undistributed profits, despite the clear provisions in the compact for setting rates "at the lowest cost consistent with the furnishing of such service" and the "need of revenues sufficient to enable such carriers, under honest, economical and efficient management, to provide such service." [Compact § 6(a) (3)] Dividends of 100 percent seem to us to be a clear and flagrant violation of such provisions.

Extravagant dividends explained

The payment of large cash dividends in the face of claimed operating losses points to the highly theoretical character of such claims.

a. How much of the alleged "loss," for example, is made up for by an excessive depreciation allowance. The Citizen's report points out:

We are aware of the flexibility of depreciation setasides. High depreciation transfers add to operating costs and thus reduce the apparent amount and ratio of the operating profits. Yet the depreciation is cash and used by the company for debt retirement, interest, genuine reserves or distribution to stockholders, as it wishes.

29-234 069- -11

The Commission reduced the depreciable life of Transit's buses from 17 to 14 years in Order No. 245 and from 14 years to 12 years in Order No. 362. The stated reason for the shorter depreciation period was to encourage Transit to acquire new buses. If so, how much of the increased depreciation allowance represents a return on investment? How much of the deduction for depreciation is in fact profit on operations? There is no such analytic breakdown in this record. The failure to make such a distinction poisons all rate of return and other calculations which include any reference to depreciation.

b. The same type of inquiry is required with respect to all other reserve accounts, for, to the extent that such deductions are overstated they result in a hidden profit to the company. Conversely, the underapplication of the Acquisition Adjustment Account results in increased hidden profits as well. Yet there has been no meaningful inquiry into these distinctions. The record is thus misleading, and calculations which depend on such figures are necessarily tainted.

Other aspects of this matter are presently under consideration by this court in Williams and Trask v. WMATC, No. 20,200 and Democratic Central Committee v. WMATC, No. 20,201, and while raised again in these proceedings, will not be discussed here.2

Land operations

There had been no meaningful inquiry into land operations. Profits, past and future, for such operations are critical to a realistic evaluation of rate of return. Yet the record provides little enlightment. Where, for example, are the answers to these charges in the Citizen's report:

The disappearance of real estate no longer used for operations into subsidiary corporations looks like a

2 Exhibit R-13 shows the 1963 Commission Forecast was a net operating income of $1,401,056. Actual net operating income was $2,495,732.

leak of assets to us. These properties were part of the package bought by Capital Transit. They were paid for by the bus riders. They belonged to D.C. Transit and, in terms of social ethics, to the Washington Community. Yet we see them being transferred at book value, i.e. original cost less depreciation to wholly controlled subsidiaries whose profits are not regulated by WMATC and, apparently, are not available for the operation of buses. Considering the tremendous rise in real estate values, these properties constitute gold mines. But the gold is not shown on the books and is not available to the public or the bus riders. It is thus profit to the shareholder over and above the 100 percent dividends paid out of operating revenue.

The property in the 3200 block of M Street, N. W. may be an example. It apparently was transferred to the subsidiary in exchange for $99,605 in stock. Yet it has been able to borow $2,407,975 on a long-term note and to run up current liabilities of $672,164. These operations thus provided $3,079,000 in working capital. Some of this was probably loaned to D.C. Transit's affiliated companies investing in profitable real estate transactions. But the interest on the loans and the profits on the real estate do not get back to the bus riders, as far as we can determine.

"...whether the carrier is being operated economically and efficiently" [Compact, § 6(a)(1)] at the lowest cost consistent with the

"

furnishing of such services" [Compact, § 6(a)(3)] under honest, economical, and efficient

...

management" [Compact, § 6(a)(3)]

No rationale has been placed on the record indicating the reasonableness of expense allowances. For example, Exhibit S-7 shows:.

D.C. Transit has the highest operating cost per mile of the four largest bus companies shown (87¢; the next highest being 73¢ and the others 65¢ and 59¢).

It also leads the pack in having the highest cost per mile for maintenance; the highest cost per mile for transportation and station expense; the highest cost per mile for traffic solicitation; and the highest cost per mile for administration and general expense.

Other indications of faltering efficiency appear in the high amount of labor overtime pay.

Why is this? The record offers no answer.

Yet an answer is clearly required. The whole reason for operation of D.C. Transit is the supposed increased efficiency of free enterprise. Is this theory working out in practice? The public has the right to know.

The law recognizes that inherent in regulated business activities is the constant tendency to disregard efficiency since it frequently assumes a "de facto cost plus" operation wherein there is more "plus" as there is more "cost." When the Commission states that the "staff. . . has not called into questions its [Transit's] overall efficiency" the Commission admits that efficiency has never been studied. For the staff to suggest that efficiency is to be assumed without the public hearing evidence, and to suggest that raising the question can be dismissed as "sheer speculation," is for the Commission to ignore their responsibility to the public.

Diminishing returns

Underlying this application is the dangerous assumption that the company's need for a higher profit can be realized by higher fares. Yet past history clearly indicates that fare increases inevitably result in decreased ridership, especially in the more densely populated city areas where operations are most profitable. Calculation of resistance factors does not include any realistic evaluation of past and threatened bus boycotts. The only treatment in this record of the possible effect of organized resistance to fare increases is merely polemical. If Transit fares have not already reached the point of diminishing returns, they are fast approaching it. Why then is not the classic business answer to this problem-internal economy-explored more fully in this record?

Exhibit S-11 shows some glaring need for economy:

Operation of the Limousine Service resulted in an operating loss (before depreciation & capital charges) of over $109,000

Operation of the charter and contract service resulted in an operating loss (before depreciation & capital charges) of over $108,000

The Maryland Interstate operation resulted in a loss (before depreciation & capital charges) of over $774,000

Yet there is no breakdown of these losses. Counsel for Transit concedes (Tr. 1842) that the company has not even attempted to ascertain its costs on anything but a systemwide basis. The absence of such inquiry in these days of modern cost accounting is highly significant of a general lack of concern for internal economy.

2. RATE STRUCTURE

"... unduly preferential or unduly discriminatory either between riders or sections of the Metropolitan District" [Compact, § 6(a)(2)]

The lack of cost information is most acutely felt when the Commission starts to set a fare structure. Petitioner's questions about discrimination against the more densely populated urban areas were brushed aside by the Commission as being based on "a little learning." But that is all this record provides unless petitioner's request for a more scientific inquiry is granted. (Tr. 1741-42, 1746-48, 1750-54, 1781, 1784-85)

Congress requires a determination of "net operating income from mass transportation operations in the District of Columbia of any common carrier required to furnish transportation to school children at a reduced fare . . .." § 44-214(a), D.C. Code, 1961 Ed. Act of August 9, 1955, 69 Stat. 616.