Appendix — D. C. Transit System, Inc. v. Washington Metropolitan Area Transit Commission
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Supreme Court, U.S.
88-979 FILED
No. 88- DEC 13 1988
IN THE L —
Supreme Court of the United States
OCTOBER TERM, 1988
D.C. TRANSIT SYSTEM, INC.
Petitioner,
V.
WASHINGTON METROPOLITAN AREA
TRANSIT COMMISSION, et al.,
Respondents.
APPENDIX TO PETITION FOR A WRIT OF CERTIORARI
HARVEY M. SPEAR
1333 New Hampshire Avenue, N.W.
Washington, D.C. 20036
(202) 862-2200
Counsel of Record for Petitioner
WILLIAM J. NATBONY
CADWALADER, WICKERSHAM
& TAFT
1333 New Hampshire Avenue, N.W.
Washington, D.C. 20036
(202) 862-2200
Counsel for Petitioner
D.C. Transit System, Inc.
December 13, 1988
LADEN, AESORIIE Se ESAT SL ERP MLE EE OSES ARAN IE ALLERGENS ETE SRNL E DL DELLA DALLES ENE LEE LEE EEE LDL LAELIA
_ =
TABLE OF CONTENTS
In re D.C. Transit System, Inc.
Report of the Hearing Officer dated
POE Big Bt iincnttasnetetacsccctscccccees
In re D.C. Transit System, Inc.
Decision of the Washington Metropolitan
Area Transit Commission dated June 30,
Democratic Central Committee of the District
of Columbia v. Washington Metropolitan
Area Transit Commission, 842 F.2d 402
(EPs Es SED Anon succnadessdsadececesesccne
a. Majority Opinion of the Three-Judge
POET AS auadedadedovnsncbabdbectnenhancesses
nn cee sdbe neces hexedes
Washington Metropolitan Area Transit
Commission Order No. 773 ............0++0:-
Washington Metropolitan Area Transit
Commission Order No. 882 ..............02+-
Washington Metropolitan Area Transit
Commission Order No. 900 ..................
Washington Metropolitan Area Transit
Commission Order No. 984 .................-
Washington Metropolitan Area Transit
Commission Order No. 1052.................
Order of the United States Court of Appeals
for the District of Columbia Circuit Denying
PE rtwiccnssksdvsdaseiecansanendntorssss
Order of the United States Court of Appeals
for the District of Columbia Circuit Denying
PO Fe EE se tcneckvenesevaxiscivenses
PAGE
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Hearing Officer Decision
WASHINGTON METROPOLITAN AREA
TRANSIT COMMISSION
_ WASHINGTON, D.C.
~ REPORT OF THE HEARING OFFICER
IN THE MATTER OF: Served February 17, 1978
REMANDS from United States )
Court of Appeals for the )
District of Columbia Circuit of )
D. C. Transit System, Inc.,
proceedings:
Application of D. C. Transit
System, Inc., for Authority to
Application No. 226
Increase Fares Docket No. 32
Application of D. C. Transit _and
System, Inc., for Authority to > Application No. 344
Increase Fares Docket No. 101
System, Inc., for Authority to ) Application No. 453
Increase Fares Docket No. 156
Application of D. C. Transit _and
System, Inc., for Authority to ) Application No. 436
Increase Its Fleet in Lieu of Docket No. 145
Purchasing Buses
Application of D. C. Transit
System, Inc., for Authority to
Increase Fares
HEARING OFFICER:
W. R. STRATTON, Chairman, Washington Metropolitan Area
Transit Commission
APPEARANCES:
DONALD J. BALSLEY, JR., for staff, Washington Metropoli-
tan Area Transit Commission
LEONARD N. BEBCHICK for Leonard N. Bebchick, et al.
STANLEY J. FINEMAN and MICHAEL J. MCGOVERN for
D. C. Transit System, Inc.
GILBERT HAHN, JR., and MAYNARD DIXON for Black
United Front
HARVEY M. SPEAR for D. C. Transit hveiom, Inc.
)
)
)
)
)
)
)
)
Application of D. C. Transit
)
)
)
)
)
)
)
)
)
Application No. 613
Docket No. 216
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TABLE OF CONTENTS
. PAGE
CONTENTS
I. PROCEDURAL HISTORY............. A8
II. SUBSTANTIVE HISTORY ............ Al10
ig I 5 bbe Wedukdcacacdescoase Al10
B. Democratic Central Committee-I ..... Al3
C. Democratic Central Committee-II..... Al5
ii My: @. * . 4) SIR rere Al6
Pe; BK doa vdecdbadh aca ckanws Al6
B. The Statute of Limitations........... Al18
IV. UNRECOVERED INVESTMENT ...... A20
V. MARKET VALUES AT DATE OF
We ek, owed hance te cess A38
RA IL, oc cincceaaaatacs essence A4l
4th Street Shop and Southern
ee ee oe ee seen ena A43
Sp cine nndenae een see A43
ee cw ag bias A49
Maryland Line Right-of-Way ......... A51
Benning Line Right-of-Way .......... A52
PONE GIN occ accccccccssce A52
Cabin John Line Right-of-Way........ A55
Georgia and Eastern Avenues
PE cick Cheek becaweneas eee es AS56
14th and V Streets, N. W. Substation . A5S6é
13th and D Streets, N. E. Storage
pe Peer ere rt Pe rre A56
Navy Yard Carhouse ................ A56
Re EE ois scdescecccaesedece A58
OR EE I sae daceiccccacecds A60
General Office Building .............. A6él
Parking Lot 36th and M Streets, N. W. . A65
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PAGE
Brookland, Eastern and Trinidad
GE ceed Uissdskscoceesausssds Aé5
EOGNGED GATORS 2. cc ccscccccsess A70
Brookland Garage .........e000s- A72
RRs co cnscccccccsse A74
VI. SALES EXPENSES AND INCOME
py > Be ar yer nr her rT ee A80
A. SRE BB oon ccvedscccancescce A8l
1. District of Columbia Deed Recor-
dation Tax, United States Internal
Revenue Stamp Tak. ........s000- A81
2. Settlement Charges ........2.200. A82
3. Brokerage Commissions .......... A82
4. FEE Ki abil see ndensanes A84
” 5. BR Acekasdesececosesves A84
6. Holding Costs and Points......... A84
Se. TE WE oc SSG d ann cdebennases A90
VII. ISSUES PECULIAR TO BEBCHICK-II .. A106
vill, ISSUES PECULIAR TO DCC-I......... A116
IX. ISSUES PECULIAR TO DCC-II........ A120
X. REALIZATION OF RESTITUTION .... A121
TABLES
I. UNRECOVERED INVESTMENT ...... A34-A37
II. DATE OF TRANSFER MARKET
VALUES AND GROSS GAIN.......... A78-A79
IN]. SALES BPR «ccc ccc ccccccscces A88-A89
LV... Fee aa bededbeceessccseves A98-A101
V. SUMMARY OF FINDINGS............ A102-A105
VI. NET GAINS ON DEPRECIABLE
PROPERTIES AVAILABLE AS OFF-.
SET TO DEPRECIATION
PEGE Sewanee ccukinksakencanes Al114-A115
Ad
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PAGE
ALTERNATIVE FINDINGS
Appendix A—Market Values as of ies 15,
BPE Sad bean cnbedeacansaeencese A124-A125
Appendix B—Unrecovered Investment per the
“‘Compromise”’ Rate Base
BU vaca nacdcccadtesnsensces A126—130
Appendix C—Date-of-Transfer Market Values
per Assessed-Value-Ratio Method .. A131-132
Appendix D—Date-of-Transfer Tax Basis...... A133
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BIBLIOGRAPHY
REPORTED DECISIONS:
Bebchick v. Public Utilities Commission, 115
U.S.App.D.C. 216, 318 F.2d 187, (D.C. en banc
1963) cert. denied 373 U.S. 913, 83 S.Ct. 1304, 10
L.Ed.2d 414 (1963).
Leonard N. Bebchick v. Washington Metropoli-
tan Area Transit Commission, 158 U.S.App.D.C.
79, 485 F.2d 858 (D.C. 1973).
Democratic Central Committee of the District of
Columbia v. Washington Metropolitan Area Tran-
sit Commission, 158 U.S.App.D.C. 7, 485 F.2d
786 (D.C. 1973) cert. denied 415 U.S. 935, 94
S.Ct. 1451, 93 L.Ed.2d 493.
Democratic Central Committee of the District of
Columbia v. Washington Metropolitan Area Tran-
sit Commission, 158 U.S.App. D.C. 68, 485 F.2d
847 (D.C. 1973).
Democratic Central Committee of the District of
Columbia v. Washington Metropolitan Area Tran-
sit Commission, 158 U.S.App.D.C. 107, 485 F.2d
886 (D.C. 1973) cert. denied 415 U.S. 935, 94
S.Ct. 1451, 93 L.Ed.2d 493.
D. C. Transit System, Inc. v. P.U.C., 110
U.,S.App.D.C. 241, 292 F.2d 734 (D.C. 1961).
D. C. Transit System, Inc. v. Washington Metro-
politan Area Transit Comm’n., 121 U.S.App.D.C.
375, 350 F.2d 753 (D.C. en banc 1965).
D.C. Transit System, Inc. v. Washington Metro-
politan Area Transit Commission, 158 U.S.App.
D.C. 102, 485 F.2d 881 (D.C. 1973).
Diana K. Powell v. Washington Metropolitan
Area Transit Commission, 158 U.S.App.D.C. 301,
485 F.2d 1080 (D.C. 1973).
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Williams v. WMATC, 134 U.S.App.D.C. 342, 415
F.2d 922 (D.C. en banc 1968) cert. denied 393
U.S.1081, 89 S.Ct. 860, 21 L.Ed.2d 773 (1969).
REPORTED ORDERS:
D. C. Transit System, Inc., 25 P.U.R.3d 371
(D.C. P.U.C. 1958).
D. C. Transit System, Inc., 30 P.U.R.3d 405
(D.C.P.U.C. 1959).
D. C. Transit System, Inc., 33 P.U.R.3d 137
(D.C.P.U.C. 1960).
D. C. Transit System, Inc., 38 P.U.R.3d 19
(D.C.P.U.C. 1961).
D. C. Transit System, Inc., 48 P.U.R.3d 385
(WMATC 1963).
D. C. Transit System, Inc., 64 P.U.R.3d 45
(WMATC 1966).
D. C. Transit System, Inc., 68 P.U.R.3d 32
(WMATC 1966).
D. C. Transit System, Inc., 72 P.U.R.3d 113
(WMATC 1968).
D. C. Transit System, Inc., 81 P.U.R.3d 113
(WMATC 1969).
D. C. Transit System, Inc., 85 P.U.R.3d 1
(WMATC 1970).
UNREPORTED ORDERS:
Order No. 289 (WMATC, unreported) July 29,
1963.
Order No. 381 (WMATC, unreported) September
11, 1965.
Order No. 634 (WMATC, unreported) August 19,
1966.
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Order No. 684 (WMATC, unreported) March 13,
1967.
Order No. 718 (WMATC, unreported) July 3,
1967.
Order No. 773 (WMATC, unreported) January
26, 1968.
Order No. 882 (WMATC, unreported) October
29, 1968.
Order No. 984 (WMATC, unreported) October
24, 1969.
Order No. 1052 (WMATC, unreported) June 26,
1970.
Order No. 1317 (WMATC, unreported) April 4,
1974.
Order No. 1354 (WMATC, unreported) October
10, 1974.
Order No. 1355 (WMATC, unreported) October
10, 1974.
Order No. 1356 (WMATC, unreported) October
10, 1974.
Order No. 1358 (WMATC, unreported) October
10, 1974.
Order No. 3592 (D.C.P.U.C., unreported)
November 27, 1957.
STATUTES:
District of Columbia Code, Title 12, Section
301(8) (1973 Ed.).
Transit Franchise Act, P.L. 70-757, T. I, part 1,
Sec. 7, 70 Stat. 598, 599 (1956).
Public Law 91-106, October 31, 1969, 83 Stat.
176.
easeeinaicieaiiamaneaaaill
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I. Procedural History
In June 1973, the United States Court of Appeals for
the District of Columbia Circuit (Court) handed down
six opinions in appeals of orders of this Commission
relating to D. C. Transit System, Inc. (Transit or
company).' Four of these cases remanded orders of this
' They are:
(a) Democratic Central Committee of the District of Colum-
bia v. Washington Metropolitan Area Transit Commission,
(No. 21865) 158 U.S.App.D.C. 7, 485 F.2d 786 (D.C. 1973),
cert. denied 415 U.S. 935, 94 S.Ct. 1451, 93 L.Ed.2d 493. For
convenience, this case is sometimes referred to in this report
as ‘‘DCC-I’’.
(b) Democratic Central Committee of the District of Colum-
bia v. Washington Metropolitan Area Transit Commission,
(No. 22450) 158 U.S.App.D.C. 68, 485 F.2d 847 (D.C.
1973).
(c) Leonard N. Bebchick v. Washington Metropolitan Area
Transit Commission, (Nos. 23720, 23747) 158 U.S. App.D.C.
79, 485 F.2d 858 (D.C. 1973). For convenience, and to distin-
guish it from another seminal case involving D. C. Transit Sys-
tem, Inc. (Bebchick v. P.U.C., -115 U.S.App.D.C. 216, 318
F.2d 187 (D.C. 1963), cert. denied 373 U.S. 913) heretofore
known as the Bebchick case, this case is sometimes referred to
in this report as ‘“‘Bebchick-II”’.
(d) D.C. Transit System, Inc. v. Washington Metropolitan
Area Transit Commission, (No. 23958) 158 U.S.App.D.C. 102,
458 F.2d 881 (D.C. 1973).
(e) Democratic Central Committee of the District of Colum-
bia v. Washington Metropolitan Area Transit Commission,
(Nos. 24398, 24415 and 24428) 158 U.S.App.D.C. 107, 485 F.2d
886 (D.C. 1973), cert. denied 415 U.S. 935, 94 S.Ct. 1451, 93
L.Ed.2d 493. For convenience this case sometimes is referred
to in this report as ‘“‘DCC-II””.
(f) Diana K. Powell v. Washington Metropolitan Area Tran-
sit Commission, (No. 21750) 158 U.S.App.D.C. 301, 485 F.2d
1080 (DC. 1973).
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Commission for further proceedings,” and three of those
were petitioned to certiorari.’ Certiorai was denied in
every instance,* and in February 1974, the Commission
took up the remanded orders. Management of the
proccedings on remand was the first order of business.
Pursuant to notice’ a prehearing conference was con-
vened in May 1974 to define issues and establish proce-
dures. We concluded that the common issues in DCC-I,
DCC-H, and Bebchick-IT° relating to the increase in
value of Transit’s real property should be litigated’ in
one proceeding.® Thus grouped, these remanded dock-
ets have come to be known as ‘“‘the properties case’’.?
Hearings were conducted on 27 days between February
1 and November 3, 1977, yielding 2550 pages of tran-
script, 115 exhibits and various supplemental filings. A
subsequent hearing was held on February 8, 1978, to
accept two stipulations by the staff and Transit. In addi-
tion, two staff exhibits were marked and received in the
record.
* DCC-I, Bebchick-II, DCC-II and D. C. Transit v. WMATC,
supra, n.1(a) (c) (d) and (e).
* DCC-I, Bebchick-II, and DCC-II, supra, n.1(a) (c) and (e).
* Ibid.
* Order No. 1317 (WMATC, unreported) April 4, 1974.
° DCC-II and Bebchick-II also involved unique issues which were
dealt with separately; see our Order Nos. 1354, 1356, and 1358
(WMATC, unreported) October 10, 1974.
” In DCC-I, supra, n.1(a) at 829 the Court had said, “‘fojur dis-
position, too, leaves interested parties free to litigate to a complete
and final conclusion the rights and obligations we have identified.”’
This freedom to litigate has been availed of unstintingly by the par-
ties, and these proceedings have been every bit as extensive as
Transit’s major fare cases in past years.
® Order No. 1354, supra, n.6.
” Referring to the caption, Dockets 32 and 101 gave rise to
Bebchick-II, Docket 156 to DCC-1, and Docket 216 to DCC-II.
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II. Substantive History
To aid those whose knowledge is limited by lack of
previous acquaintanceship or the attrition of memory,
some Stage-setting may be in order lest this document
and the issues it discusses by unintelligible.
A. Bebchick-II me
Bebchick-II is a very old friend. Its origins go back to
our Order No. 245 of April 12, 1963.'° As is pertinent to
this particular proceeding, Bebchick-IJ involves an
issue treated in our Order No. 381,!! No. 564!* and No.
981'° and the related appeals and remands.’* These
Commission orders and Court opinions are the saga of
the “‘depreciation deficiency”’ found to exist as of Au-
gust 15, 1963, by the Commission in Order No. 381.°
For the full story the reader is referred to those orders
and opinions. It is sufficient here to record that August
15, 1963, was a red-letter day in the history of mass
transit in Washington, for it was the day that the last
10D. C. Transit System, Inc., 48 P.U.R.3d 385 (WMATC 1963).
This is the order that resulted from Application No. 226 in Docket
No. 32. Docket No. 32 is not involved in this particular set of hear-
ings; Docket No. 32 appears in the caption only because it has been
consolidated with Docket No. 101. The et No. 32 issue in-
volved in the remanded cases was the subject of our Order No.
1356, supra, n.6.
‘1 (WMATC, unreported) September 11, 1965.
12 D. C. Transit System, Inc., 64 P.U.R.3d 45 (WMATC 1966).
'3 D. C. Transit System, Inc., 81 P.U.R.3d 113 (WMATC 1969).
'* Williams v. WMATC, 134 U.S.App.D.C. 342, 415 F.2d 922
(D.C. en banc, 1968) cert. denied 393 U.S. 1081, 89 S.Ct. 860, 21
L.E.d.2d 773 (1969), was the result of the appeal of Order No. 564,
supra, n.12. On remand after the Williams case, supra, the Com-
mission issued Order No. 981, supra, n.13, which was, in its turn,
appealed in Bebchick-I] and again returned to us by the Court.
'S Supra, n.11.
ne
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trolly car would run.’© This epoch-ending event had
more than a nostalgic effect on the Commission: it
moved us to examine Transit’s books’’ to determine
whether the depreciation accruals over the years had
been sufficient in amount to retire the booked invest-
ment in the properties that would be retired in fact as a
consequence of Transit’s conversion to all-bus
operations. !®
We determined in Order No. 381!° that there had been
an insufficiency of about $1,223,000 in depreciation ac-
cruals against these properties. In Order No. 564” it
was determined that the farepayers should make up most
of this deficiency through a charge of $806,168 against
the Riders’ Fund created as a result of the first Bebchick
case.*1 Order No. 564 was appealed both by Transit,
_ who wanted the entire depreciation deficiency charged
against the farepayers, and by representatives of the
farepayers, who wanted none of it charged against the
riders. The decision in Williams** resolved these issues,
holding that, indeed, the farepayers were ultimately ob-
16 This was required by the ast conferring the local mass
transit franchise on Transit. P.L./0-757, T.1, part 1, Sec. 7, 70 Stat.
598, 599 (1956).
7 Order No. 289 (WMATC, unreported) July 29, 1963.
'8 When the properties were retired the related remaining invest-
ment was moved ‘““below the line’’ on the books. The consequence
is that depreciation can no longer be charged as a utility expense to
be paid by the farepayers, and the investors do not recover the
investment through depreciation charges.
'9 Supra, n.11.
20 Supra, n.12.
2! Bebchick v. Public Utilities Commission, 115 U.S.App.D.C.
216, 232-33, 318F.2d 187, 203-04 (D.C. en banc 1963) cert. denied
373 U.S. 913, 83 S.Ct. 1304, 10 L.Ed.2d 414 (1963). this fe) =
reversed a P.U.C. fare increase order and set up on ‘ransit’s
a reserve for the benefit of the farepayers. At the time of Order NS
564 there was more than $806,000 standing to the me i ers’ credit
in the Riders’ Fund —actually about $2,167,000 — but $1,350,000 was
used to cover the revenue requirement found in Order No. 564.
22 Supra, n.14.
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ligated for the entire depreciation deficiency of
$1,058,856~ and not just $806,168 as the Commission
had found. The Court found it acceptable to make up
the entire depreciation deficiency from the Riders’
Fund. But, the Court held, the Riders’ Fund should be
surcharged only to the extent that Tramsit’s ‘excess
earnings’’ were insufficient to offset the deficiency in
the depreciation reserve.~ On the resulting remand,
protestant Bebchick urged the Commission to look not
only to “‘excess earnings’’ as an alternative to the Rid-
ers’ Fund as a source of offset to the depreciation defi-
ciency as the Court had ordered in Williams, but also to
the appreciation in value of six of Transit’s real proper-
ties that had been retired from utility service during
Transit’s operation of the mass transit franchise.*° The
Commission declined”’ (erroneously, as it was to turn
out) and determined that Transit had not enjoyed any
excess earnings which could be applied against the de-
preciation deficiency.”
Order No. 981 was, in its turn, appealed, leading to
the decision in Bebchick-II that the Commission must
consider the appreciation in value of the depreciable
portion’ of the six properties as a source of compensa-
tion to Transit for the under-accrual of depreciation. The
2 It has been reduced from the original amount of $1,223,000
adjustments and payments which do not bear on the issues in this
proceeding.
24 Williams, supra, n.14 at 956, 957.
25 Ibid. at 958, 977.
26 Of these properties, five had been transferred to subsidiaries:
Central Garage (Georgia Avenue Estates), Northeastern Garage
(4th Street Estates), M Street Shop (M Street Estates), Navy Yard
Carhouse (L Street Estates), and the General Office Building (3600,
Inc.); and one continued to be held by Transit, but appeared “‘below
the line’’ on Transit’s books: Grace Street Shop.
27 Order No. 981, supra, n.13 at 128.
28 Ibid.
2° Te., the buildings, but not the land.
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depreciation deficiency issue thus is again before the
Commission, ‘‘. . . to determine the fair market value of
the properties*° at the time of the transfer and compute
the net gain to Transit, taking into account taxes and
costs which might have reduced the gain if the proper-
ties had been sold.’’*?
This “‘net gain’’, if any, is to be regarded as compen-
sation to Transit for the depreciation reserve
deficiency.** Thus did Bebchick-II give rise to the fact-
finding task undertaken in-this proceeding, a task
undertaken, as the Court suggested,** in conjunction
with similar fact-finding determinations required by the
decisions in the two Democratic Central Committee
cases, which will now be discussed.
B. Democratic Central Committee —-—I
DCC-I* also requires the Commission to make deter-
minations of the increase in value of certain of Transit’s
real estate holdings while they were in utility service,
-but for an entirely different purpose than does
Bebchick-II. In this case. the Court found flawed the
Commission’s failure to look to in-service appreciation
in value of properties as an offset to the increased reve-
nue requirement found on January 26, 1968, in our fare
Order No. 773°, an order otherwise upheld.*°
*° Supra, n.26.
3! Bebchick-II, supra, n.1(c) at 876. The full treatment of the matter
is found at supra, n.1(c) at 868-76, 880.
32 Bebchick-Il, supra, n.1(c) at 875-6. There is a dispute whether the
entire $1,058,856 in depreciation reserve deficiency may be offset
these “‘gains’”’ or only $252,688. This issue is discussed and a finding is
entered, infra, at Part VII of this report.
3 See Bebchick-II, supra, n.1(c) at 876, n.139.
*4 Supra, n.1(a).
35 D.C. Transit System, Inc., 72 P.U.R.3d 113 (WMATC 1968). This
was the final order in Docket No. 156.
36 Powell v. WMATC, supra, n.1(f). Also see DCC-I, supra, n.1(a)
at 788, 790 n.16, and 827 n.388.
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In DCC-I the Court held “‘... that the farepayers
were entitled to all appreciations in the value of the as-
sets in issue, depreciable and nondepreciable, accruing
during their tenure as operating properties’’,*’ and de-
creed that restitution be made to the farepayers of the
amount of appreciation.*® As in Bebchick-II the Court
held that the right to in-service value appreciation ma-
tured and is to be measured as of “‘... the time the
assets are removed from operating status .. . .’”* and
the appreciation or gain to be awarded to the farepayers
is “‘...anet figure. . .”"“°
The Court was explicit in suggesting the techniques to
be used by the Commission in determining the amount
of restitution:
This determination will require identification of
all properties which Transit shifted from above to
below the line prior to issuance of Order No.
773.*! Once identified the market value of the
properties at the time of their transfer to nonoper-
ating status will have to be established. The dol-
lar amount of restitution can then be arrived at
by subtracting the book value of the properties
>” Supra, n.1(a) at 822.
38 bid. at 824-26. Delivery to the farepayers of the benefit of
their entitlement to appreciation could not be made by reduced fares
or in fare proceedings because Transit ceased operations in January
1973, when its utility assets (but not its liabilities) were taken over
by Washington Metropolitan Area Transit Authority (WMATA).
39 See supra, n.1(a) at 822, n.343.
“© Ibid. ‘‘The amount which should be credited to the farepayers
is not the entire difference between book value and market value of
the assets at the time of transfer, but rather that sum minus the
taxes and sale expenses which would have been deducted from
Transit’s profits if the assets had been sold outright instead of sim-
ply being moved into nonoperating status.”
“! Order No. 773’s finality was suspended by the filing of peti-
tions for reconsideration which were denied on February 26, 1968,
by Order No. 781. No property transfer occurred during this pe-
riod.
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from the market value at the time of transfer. This
figure will represent the appreciation in value of
the assets, which should have been credited to
the riders when the fares prescribed by Order No.
773 were set.*?
C. Democratic Central Committee —II
DCC-II* was the appeal of our fare Order No. 1052“
the Commission’s final order in Docket No. 216. In
DCC-II the Court determined the entitlement as between
Transit and its farepayers to the appreciation in the value
of landholdings while in utility service, again concluding
that the farepayers were entitled to have the amount of
appreciation offset against the revenue requirement es-
tablished in Docket No. 216. This case involves only
appreciation in the value of land, and not buildings.“
Again, the restitutional remedy is directed, the mea-
sure of restitution to the farepayers being ‘‘... the
amount by which the company’s lands increased in value
up to the time they were removed from operating
status.’’“°
“2 Supra, n.1(a) at 827. This statement is presumably qualified by
n.343, supra, n.39.
*? Supra, n.1(e).
“ D.C. Transit System, Inc., 85 P.U.R.3d 1 (WMATC 1970).
“5 The property appreciation issue is dealt with generally in Part
II of the Court’s opinion. Supra, n.1(e) at 895-903 and 913-15. The
land-limitation point is made specifically at supra, n.1(¢) at 895 n.74.
In DCC-I appreciation in value of both land and buildings is in-
volved. In Bebchick-I] only the appreciation in value of buildings
(depreciable property) is involved.
“© Supra, n.1(e) at 913. The size of the award in this proceeding
may be limited by exhaustion of part of the gain in satisfying the
requirement of DCC-/ (see supra, n.1(e) at 897, text following n.84)
and the gain is Percy, to be measurable net of taxes and sales
expenses as in Bebchick-II and DCC-I, although this requirement is
not explicitly imposed by the Court’s opinion.
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Hearing Officer Decision
III. The Properties
A. Identification
The first task was to identify the properties. I find that
there are eighteen separate properties to consider.*’
The parties for their own purposes have grouped the
properties into categories, each with common character-
istics relating to the issues as seen by the parties. I do
not subscribe to any of these systematic groupings.
There are different ways to look at each of the remanded
cases individually and at the three cases as they have
been consolidated for these hearings. I found that aggre-
gation of the properties tended to impose a unitary view
of the matter that obscured the importance of other per-
ceptions. In this report, issues that apply to all proper-
ties are treated as a Single issue (e.g., book value); two
Or more properties are grouped for discussion when an
issue applies equally to them (e.g., de facto transfer);
certain issues (e.g., fair market value) can be addressed
only on a property-by-property basis.
It is useful to keep in mind that Bebchick-II] involves
only the depreciable portion (buildings) of six proper-
ties: Central Garage, Northeast Garage, Navy Yard
Carhouse, M Street Shop, Grace Street Shop, and Gen-
eral Office Building. DCC-/J, under one theory of that
case, could embrace both the depreciable and nondepre-
ciable portions of all eighteen properties, including the
six properties involved in Bebchick-II]. DCC-II relates
only to nondepreciable property (i.e., land), but, like
DCC-I, could also involve every property, including the
Bebchick-II properties.“
*” A generally reliable data sheet on each property is at Tr. 58-83
where the Appendix ‘‘Property Histories’’ to staff witness Lo-
conto’s testimony has been printed.
“8 The properties in the Democratic Central Committee cases
are identified and the order of application of the gain is established,
infra, at Part VIII of this report.
Al7
Hearing Officer Decision
Six properties as to which restitution may apply were
identified in this proceeding for. the first time.**® Their
transfer out of operating status during the relevant time
period was ascertained by the staff's witness, Mr.
Loconto, of Touche, Ross & Company. These proper-
ties are in addition to the twelve properties mentioned
in the appendix to DCC-I.*°
In Bebchick-II, the Court seems to have accepted the
protestants’ contentions as to which properties may be
looked to as sources for value appreciation to be used to
offset the depreciation deficiency.*! As to DCC-I it is
Transit’s contention that we may not look beyond the
twelve properties identified in the appendix to the
Court’s decision in calculating the restitution due the
farepayers. I find to the contrary. In DCC-J the Court
has directed that the farepayers shall receive restitution
measured by the net gain on all properties transferred
out of operating status prior to the effective date of Or-
der No. 773, January 26, 1968.°*In DCC-JI restitution is
available from the net gain on the land portion (not the
buildings) of all properties transferred out of operating
Status prior to the effective date of Order No. 1052, June
26, 1970, subject to its exhaustion in satisfying the res-
titution requirement of DCC-J.**
There is no dispute, however, that these six ‘‘newly
discovered’’ properties were all removed from operating
status and booked below-the-line during the relevant pe-
riod between August 15, 1956, when Transit’s franchise
“° Maryland Line Right-of-Way ; Benning Line Right-of-Way;
Cabin John Line Right-of-Way; Substation 14th and V Streets, N.
W.; Storage Yard, 13th and D Streets, N. E.; Parking lot, 36th and
M Streets, N. W.
°° Supra, n.1(a) at 829-31.
>! Supra, n.1(c) at 869, n.85, 86 and 875-76.
52 Supra, n.1(a) at 827.
3 Supra, n.1(e) at 914.
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Hearing Officer Decision
commenced, and January 26, 1968, the effective date of
Order No. 773.
In addition to the six properties first identified in this
proceeding, Transit disputes the propriety of affording
restitution to the farepayers from four of the twelve
properties identified in the appendix to DCC-/.™ In the
interest of a complete record, I have entered findings as
to all eighteen properties.*°
B. The Statue of Limitations
Transit contends that a statute of limitations®® limits
our consideration to properties transferred out of ser-
vice within the three years preceding the issuance of the
order appealed from in each remanded case. In other
words, since Order No. 773 was issued on January 26,
1968, only properties transferred out of service between
January 26, 1965, and January 26, 1968, are involved in
DCC-I; likewise, only properties transferred between
June 26, 1967, and June 26, 1970 (the date of Order No.
1052) would be involved in DCC-II. As to Bebchick-II,
it is Transit’s contention that the three-year limitation
runs either from August 15, 1963 (the date as of which
the depreciation deficiency was determined) or the three
years prior to January 26, 1966 when Order No. 564 was
issued.
This point was discussed and decided adversely to
Transit by the Commission in Order Nos. 1355°’ and
** 4th Street Shop, Southern Carhouse, Brookland Garage, and
Eastern Garage.
°° | have found all eighteen properties to be available as sources
of restitution, see specifically Part V p. 33 as to 4th Street Shop and
Southern Carhouse, and p. 54 as to the Brookland and Eastern
Garages.
© Presumable the three year, general statute at 12-301(8) D.C.
Code, 1973 Ed.
57 (WMATC, unreported) October 10, 1974.
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Hearing Officer Decision
1356.°* If that determination is reversed, I find that the
following properties are involved in the several cases:
Bebchick-II. A. If a three-year limitation from August
15, 1963, is found to exist:
M Street Shop
Navy Yard Carhouse
B. If a three-year limitation from January
26, 1966, is found to exist:
M Street Shop
Navy Yard Carhouse
Grace Street Shop
General Office Building
DCC-I. If a three-year limitation from January 26,
1968, is found to exist:
Brookland Garage
Eastern Garage
Trinidad Garage
provided that a date of transfer of September
11, 1966, is found for these properties. If the
Brookland and Eastern garages are found not
to have been transferred, and a date of trans-
fer of July 3, 1967,°° is found for the Trinidad
Garage, then only the Trinidad Garage is in-
volved in DCC-J. If a date of transfer of May
8, 1970,© is found for the Trinidad Garage,
then there are no transferred properties from
8 Supra, n.6.
°° See discussion of Trinidad Garage at Part V, infra.
| © Ibid. n.59.
A20
Hearing Officer Decision
which the farepayers are entitled to in-service
appreciation in value in DCC-I.
DCC-II. If a three-year limitation from June 26, 1970, is
found:
Trinidad Garage
provided that a date of transfer of May 8, 1970,
is found for the Trinidad Garage.*
IV. Unrecovered Investment
The Court has toid us to measure the gain to be cred-
ited the farepayers “‘. . . by subtracting the book value
of the properties from the market value at the time of
transfer’’,°* and from this gross gain to deduct the taxes
and sales expenses that would have been incurred if the
properties had actually been sold. The Court’s opin-
ions have established once and for all the entitlement to
the appreciation in value of these properties, concluding
that this gain shall flow to the farepayers. While the ap-
preciation in the value of the investment in these prop-
erties can be (and has been) awarded to the farepayers,
the Court’s opinion does not purport to grant them any
portion of the unrecovered investment in these proper-
ties. This, the investors are entitled to retain.
The Court’s language, quoted above, suggests the
conclusion that the measure of the unrecovered invest-
ment is book value. But this point was not conceded,
and the issue of the proper measure of unrecovered in-
vestment became the most hotly contested in these pro-
ceedings.
The parties generally agreed that the approach to der-
ivation of unrecovered investment should be the same
for every property. This is not to say that the parties
®! [bid.
62 Supra, n.1(a) at 827.
® Ibid. at 822, n.343.
A21
Hearing Officer Decision
agree on the method of calculation—far from it—only
that whatever method is adopted must be uniformly ap-
plied to all properties. Therefore, I shall identify and
discuss the contending theories in this section of the re-
port and reach a decision as to which is applicable.
Unrecovered investment for each property will then be
determined in accordance with that decision. The issues
to be disposed of in this effort are:
1. Is the starting point for the computation of original
investment the market value as of August 15, 1956, when
Transit acquired the properties?
2. If market value, how is market value to be ascer-
tained?
3. If not market value, should original investment be
measured by the “‘compromise’’ rate base?
4. If not market value, or a value calculated from the
‘“‘compromise’”’ rate base, should original investment be
measured by book value on August 15, 1956?
5. What treatment is to be accorded to in-service: Ac-
quisition Adjustment amortization accruals and unamor-
tized Acquisition Adjustment balances relating to
individual properties?
In general I have accepted the theories of the staff
and the intervenors on these issues and rejected Tran-
sit’s.
1. I find unrecovered investment to be rooted in book
value and not market value. Transit would have the gain
on each property calculated by subtracting the market
value as of August 15, 1956 (adjusted for subsequent
depreciation and amortization of the Acquisition
Adjustment™) from the market value as of the date of
transfer. This is the so-called ‘‘benefit of the bargain’”’
theory.© D.C. Transit’s purchase of the stock of Capital
* The Acquisition Adjustment is discussed later.
65 Elucidated by counsel for Transit at Tr. 1003.
A22
Hearing Officer Decision
Transit in 1956 was a bargain purchase, i.e., the price
paid was below the market value of the underlying as-
sets, particularly the real property. The Court makes
reference to this fact in its discussion of entitlement to
the value appreciation of the properties®’ and cites it as
a factor in its decision to award the value appreciation
to the farepayers.™
Transit’s argument is couched in equitable terms and
in the final analysis is addressed to the conscience of the
tribunal. At its core is the plea that it is ultimately unfair
to use the bargain purchase as a principal prop for the
conclusion that the farepayers should enjoy the increase
in value of these properties and then to measure this
increase in a way which strips away the bargain, as
measuring it from a value that is not derived from date-
of-purchase market value undeniably does.
The Commission does not have equitable powers,
however, and so we cannot respond to Transit’s plea—
especially in view of the Court’s explicit instructions to
us on how to compute value appreciation. In order that
the point may be preserved for the Court, I have en-
tered findings on market value as of August 15, 1956.”
In any case, this jurisdiction has long since adopted
an Original-cost approach to regulation in which investor
* Supra, n.1(a) at 814—15.
®” [bid. at 815 n.264.
®§ Jbid. at 822 and n.340.
*° The argument has a semantic a ~ as well. For example, at
places in its opinions such as, in DCC-/, supra, n.1(a) at 822 (text at
n.334) the Court speaks of the farepayers’ entitlement to ‘‘appreci-
ation in market value’’, which many would construe to mean the
increase computed by subtracting the market value at one time from
market value at another time. Bui ore of the interpretation
that linguistic analysis may permit of a random phrase, there is
little ambiguity in the opinions taken as a whole or in the Court’s
instructions to us on how to measure ‘“‘gain’’, see DCC-I ibid. at
827.
~® See Appendix A.
A23
Hearing Officer Decision
costs are equated with book value and not market value.
In every instance during the years that Transit was reg-
ulated by the Public Utilities Commission and by this
Commission, the original investment in each property
has been equated to a pro rata share of the purchase
price, the proration being on the basis of historical
booked costs as of August 15, 1956.”’ To vary that ap-
proach now would only introduce further complexities
in this proceeding and produce distortions that would
have to be resolved—heaven forbid, by the Court of
Appeals!
If Transit’s benefit-of-the-bargain theory were to be
accepted, it would reduce almost to nil the gain to be
awarded to the farepayers.’” Transit’s first-filed exhibits
in this case were based on the theory that the point of
beginning was market value on the date of acquisition.”
I conclude that computation of appreciation on date of
transfer is to be calculated from a date-of-transfer
unrecovered investment derived from the August 15,
1956, book value, not the August 15, 1956, market value.
2. It should be noted that Transit’s Exhibits 15 to 28
calculated August 15, 1956, market values on an
‘assessed-value-ratio”’ basis.” If the decision is finally
7! This is not to say that some other allocation of purchase price
to assets might not have been made as, for example, o proration in
accordance with relative market values as of the ‘ta of acquisi-
tion, or in accordance with net book values on that date.
72 To illustrate: date-of-transfer market values aggregate
$9,835,055 per my findings, infra. Subtracting the August 1 1 556,
aggregate appraised mar et values of $7,741,355 per Appendix A
leaves a gross gain of $2,093,700 according to my own findings in
which unrecovered investment is equated with net book value.
” This theory was rejected, and the —e. calculating gain on
that basis were not admitted into evidence. Tr. 937— 1036 espe-
cially 986 — 1029.
”* That is, market values were calculated as a percentage of as-
sessed value. Transit assumed that assessed values represent
65 percent of market value.
5
These values are set out in Appendix A of this report.
A24
Hearing Officer Decision
made that August 15, 1956, market values are the proper
basis from which to determine original investment, I find
that the market values on that date are the appraised
values that appear in Staff Exhibits 2-20, which were
admitted as rebuttal to Transit’s evidence of market
value.”
3. After the ruling that date-of-acquisition market val-
ues would not be considered as evidence of original in-
vestment, Transit presented an alternative theory,
namely, equating original investment with valuations
based on the ‘‘compromise”’ rate base. Transit filed ad-
ditional testimony (Tr. 1262 et seq.) and exhibits (Transit
Exhibits 35 to 44) allocating the ““compromise”’ rate base
to the several properties.”°
The “‘compromise”’ rate base was a creature of the
D.C. Public Utilities Commission, who regulated Tran-
sit until this Commission assumed jurisdiction in 1961.
The “‘compromise’’ rate base first saw light in 1957 in
P.U.C. No. 3592”’certifying Transit’s eligibility for gas-
oline tax exemption. ”®
The valuation of this rate base, $13,020,500, was half-
way between the value of Transit’s assets per its books,
$17,910,000, and the cost to investors of its assets,
$8,131,000, as found by the P.U.C. Of course, the higher
the valuation of the rate base the greater the revenue
requirement under the rate-base/rate-of-return method
of regulation, and the more dollars are needed to achieve
7° These exhibits were admitted into evidence because the
““compromise”’ rate base may be characterized as a ‘‘book value’”’
and, hence, arguably within the meaning of the language of DCC-/,
supra, n.1(a) at 827, directing that book value at date of transfer be
determined.
7? (D.C.P.U.C., unreported) November 27, 1957.
’8 The Transit Franchise Act, supra, n.16 at Section 4 provided
for exemption of the company from certain District of Columbia
taxes if it did not earn its authorized rate of return.
79 Ibid. Section 6.
1S EDR RTT NOTE
A25
Hearing Officer Decision
authorized earnings. P.U.C., by adopting the ‘“‘com-
promise’”’ rate base, was, in effect, liberalizing the regu-
latory treatment of the company as contemplated by the
franchise act,’”? by measuring earnings against a more
generous standard than conventional rate base regula-
tion would have accorded. In Order No. 4480° the
““compromise’’ rate base was used in a fare case for the
first time.®' The applicability of the ‘“compromise”’ rate
base as a regulatory instrument is discussed exhaus-
tively in D.C. Transit v. WMATC.®
The question posed is whether the unrecovered in-
vestment as measured by “‘net book costs’’® must or
may be calculated using the “‘compromise”’ rate base,
as it would have been on August 15, 1956, as the start-
ing point. I conclude that we are neither required, nor
even authorized, by anything in the Court’s opinions to
do so. An “‘investment’’ that bears no relationship to
actual cost will not do. The ‘‘compromise’’ rate base is
not representative of cost any more than market value.
As the next section demonstrates, net book value at
date of transfer is the best measure of unrecovered in-
Ps D.C. Transit System, Inc., 25 P.U.R.3d 371 (D.C. P.U.C.
1958).
5! This was the only time it was the exclusive regulatory tool.
Later, P.U.C. moved to the operating ratio method of regulation
[see D.C. Transit System, Inc., 33 P.U.R.3d 137 (D.C. P.U.C. 961)
and D.C. Transit } sow Inc., 38 P.U.R.3¢ 19 (D.C. P.U.C. 1961)
with the return on the “‘compromise’’ rate base used as a check
after the decision in Bebchick v. P.U.C., supra. n.21.
82 D.C. Transit System, Inc., v. Washington Metropolitan Area
56s Commission, 121 U.S.App.D.C. 375, 350 F.2d 753 (en banc
1965).
” pect supra, n.1(a) at 827.
8 It bears mention that no regulatory agency has ever allocated
Transit’s rate base —be it original cost, ““compromise’’, or purchase
price —to individual properties, or, for that matter, even to classes
of property except for depreciation purposes. Thus the use of a
book-value rate base, of whatever kind, requires an allocation of a
gross book figure to the properties involved in the case, an exercise
that is judgmental or ‘“‘arbitrary’’.
A26
Hearing Officer Decision
vestment among the various approaches suggested by
the parties to capture that concept.® While in D.C.
Transit v. WMATC*® the Court accepted the ‘‘com-
promise”’ rate base for ratemaking and tax-certification
purposes, that case cannot be construed as a ratification
of that rate base as representative of investment in a
specific property at any particular time. The Commis-
sion must look to the opinions on remand for the Court’s
views on how to determine unrecovered investment.
Despite the eloquence of Transit’s counsel (Tr.1454-6) I
find no basis in any opinion to conclude that the Court
has found that as of the date of transfer Transit’s inves-
tors had a right to retain any more than their remaining
investment in these properties, as they would surely do
if investment were equated with an allocation of the
“‘compromise”’ rate base. While thoroughly disagreeing
with Transit on this point, I have nevertheless entered
findings (see Appendix B) on unrecovered investment
per the “‘compromise”’ rate base theory.
Appendix B is the best illustration of the folly of the
compromise-rate-base approach to a determination of
unrecovered investment. The problem arises because of
the arbitrary nature of the allocation process used by
Transit to apportion the “‘compromise’’ rate base to the
individual properties. The “‘compromise”’’ rate base, it
will be remembered, is half-way between the August 15,
1956 net book value on the basis of depreciated original
cost and the actual purchase price. Transit’s purchase
price was, in round numbers, $13.5 million for a corpo-
ration with net assets of $23.8 million or about 56% per-
cent of net book value. On that basis—which Transit
may have feared would be adopted in this proceeding —
each property, land and buildings, could have been as-
85 Subject to the infirmity that any method requires an allocation
among properties and property classes.
86 Supra, n.82.
A27
Hearing Officer Decision
cribed an original investment value of 56% percent of
net book value. This would have produced an aggregate
original investment value for all the properties of
$1,666,436 (56% percent of the net book value of
$2,938,005 on the date of acquisition).
Transit chose to calculate the ‘‘compromise’’ rate
base investment in another way, one which allocated
the excess of the “‘compromise’’ rate base over actual
purchase price entirely to depreciable property in pro-
portion to its original cost and not its net book value as
of the date of acquisition. This technique inflates the
presumed original investment in the properties involved
in this proceeding by $148,389 to $1,814,825.
4. The only other “‘cost’’ offered in evidence was re-
lated to book value, and to that I now turn. I have con-
cluded that the proper measure of the investor’s
remaining unrecovered investment in any property at its
date of transfer is the net value on the company’s regu-
latory books of account on that date. This is not to say
that I am totally enthusiastic about this, as it, no less
than any other method that requires an allocation, is
oracular. It is, however, constitutionally defensible and
less unacceptable than the other indices recommended
by Transit®’ or which have occured to me.®
While parties do not all agree that net book value on
the date of transfer is the proper measure of unrecovered
investment, there is agreement on how to calculate it.
There is agreement on the net book value of each prop-
erty on the date of acquisition. Similarly, there is no
57 Market value based on assessed value ratios, or the ‘‘com-
romise’’ rate base. The case would have been more interesting if
ransit could have shown that, in fact, the value of the company
was in its real property and their motive in purchasing the company
was to exploit those assets, with a resultant subjective allocation of
the purchase price to real properties in some closer relationship to
market value.
88 Tax basis, for example.
A28
Hearing Officer Decision
dispute that improvements between the date of acquisi-
tion and the date of transfer constitute additional invest-
ments. There is agreement, except in one instance,®® on
the investment in improvements. There is agreement
that depreciation accruals between the date of acquisi-
tion and the date of transfer represent a recovery of in-
vestment and should be deducted from net book value
at date of acquistion to ascertain the remaining unrecov-
ered investment at date of transfer. There is agreement
on the amount of these depreciation accruals. There is
agreement on the dates of transfer except for Brookland,
Eastern and Trinidad garages, to which Transit
excepts.” These essentially undisputed concepts and
data simply reflect the truism that at any given time the
remaining dollar investment in an item of utility prop-
erty is the net book value, that is, original cost less ac-
crued depreciation to date. And so, I find, it is for
Transit.
There would be no room to dispute this finding if there
had been continuity of ownership in these assets
throughout their lives as utility property. But Transit ac-
quired an operating utility system at a price that bore no
relationship to the then unrecovered investment residual
in its assets, thereby opening the issue of how to allo-
cate the purchase price among the assets. The market-
value approach and the compromise-rate-base
alternative are no more than attempts by Transit to
achieve a favorable allocation in this proceeding. As
compared with an allocation based on net book value at
date of acquisition I have found Transit’s alternatives
wanting. In any event I conclude that the Court decided
the allocation issue, requiring that it be based on net
book value.
8° The General Office Building. This is discussed and decided,
infra, Part V p.49.
%° This is discussed infra, Part V p.54.
A29
Hearing Officer Decision
On the basis of the foregoing, I have made findings as
to the unrecovered investment in each property as of its
date of transfer. Those findings are set out in Table I
which appears at the end of this section of the report.
5. One final matter requires discussion: the Acquisi-
tion Adjustment. The Acquisition Adjustment is a famil-
lar creature to the coterie of Transit regulation
cognoscenti. The net book value of the company’s as-
sets (original cost less accrued depreciation) when ac-
quired by Transit in August 1956 was $26,631,874. The
purchase price was $16,292,833 consisting of cash con-
sideration of $13,478,000 and assumption of $2,814,833
in liabilities. The difference was $10,339,041. Following
conventional regulatory accounting practices the P.U.C.
set up an ‘‘Acquisition Adjustment Account’’ of
$10,339,041 as a noncurrent liability to be amortized
over 10 years by offsets against depreciation expense
(which was based on original cost) in order, as the
P.U.C. stated, ‘*. . . that the allowance for depreciation
should be based on the purchase price... .’’! The
schedule for amortization of the Acquistion Adjustment
was later modified by this Commission (Order No.
563),°* with the approval of the Court in Williams v.
WMATC.”* P.U.C. never allocated the Acquisition Ad-
justment to Transit’s assets, and it continued to be am-
ortized as a single charge, offsetting depreciation
expense. By the time of Transit’s acquistion by WMATA
in 1973 it had been entirely amortized except for $168,000
(see Schedule 6 to Mr. Loconto’s testimony Tr. 35 —39,
and 50).
When the several properties involved in these cases
were transferred out of service there was an unamortized
balance in the Acquistion Adjustment account. Arguably
°” Supra, n.77 at 9.
% D.C. Transit System, Inc., 63 P.U.R.3d 32 (WMATC, 1966).
°3 Supra, n.14.
A30
Hearing Officer Decision
some portion of this balance was allocable to each of
those properties. After a property was taken out of ser-
vice, no further charges to farepayers for depreciation
on that property were made. But the offset for the am-
ortization of the Acquisition Adjustment account in toto
did continue, because the Acquisition Adjustment was
never allocated to individual properties. Thus, the
farepayers continued to receive the benefit of the total
offset to depreciation charges even though depreciation
expense was less because the depreciable base in real
estate to which the offset was in part related (i.e., the
properties acquired in 1956) was declining. As noted by
Mr. Loconto (Tr. 96) the farepayers received, for all
practical purposes, the entire benefit of the Acquisition
Adjustment.
This bears directly on the actuality of the recovery by
the investors of their investment as was illustrated by
Mr. Bebchick at the hearing on June 2, 1977.™ In a per-
fect world when a property went out of service, not only
would its original booked cost and accrued depreciation
be moved ‘“‘below the line’’, but so would an allocable
portion of the Acquisiton Adjustment account. Other-
wise the allocable portion of the Acquisition Adjustment
would continue to be credited as an offset to deprecia-
tion expense, to the benefit of the farepayers, as in fact
happened. This is what Transit’s witness Hatfield meant
by insisting that the related Acquistion Adjustment must
‘“follow the property below the line’’ (Tr. 1259). I agree
with Mr. Hatfield that this is so. But I cannot agree with
his apportionment of the Acquisition Adjustment among
the properties nor the increments to unrecovered cost
that would result from his method of compensation for
the failure to reduce the Acquisition Adjustment when a
property was transferred below the line.
* Tr. 1484—1506, especially 1487 line 2, to 1493 line 11, and
1494 line 22, to 1495 line 20.
|
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Hearing Officer Decision
Mr. Hatfield allocated the Acquisition Adjustment pro
rata on the basis of original cost of the depreciable
property. This produced anomalies such as an allocation
of $52,128 to the Trinidad Garage which was fully de-
preciated on the date of acquisition and therefore gener-
ated no depreciation expense against which to amortize
the Acquisition Adjustment. To allocate a portion of the
Acquisition Adjustment to this property is not only il-
logical, but is at variance with the practice of the Com-
mission in amortizing the Acquisition Adjustment against
depreciation expense. It has the anomalous result that
in a fully depreciated property like Trinidad there can
be no amortization of the allocable Acquisition Adjust-
ment because there is no depreciation on that property
against which to offset it.”
In any event, in Williams,®° the only time the Court
has spoken to the allocation of the Acquisition Adjust-
ment, it was determined that it must be related to depre-
ciation dollars. That decision, even if not binding, is
eminently logical. If I were to allocate the Acquisition
Adjustment I would do it on that basis, and allocate the
unamortized balance property-by-property as of the date
of transfer against the then net book cost of the depre-
ciable property. However, I also accept Mr. Loconto’s
view that the inequities that flow from the failure to re-
duce the balance in the Acquisition Adjustment account
whenever a property went out of service do not work a
substantial injustice.”’ Therefore, in arriving at the figure
°5 Moreover, in Mr. Hatfield’s schedules Acquisition
Adjustment-related increments to investment are bound up inextn-
cably with the increments to net book value brought about by his
use of the “‘compromise”’ rate base as a surrogate for investment.
It was not necessary for me to extricate the increments from Mr.
Hatfield’s schedules (Transit Exhibits 40, 41). I have not attempted
it, nor asked Transit to do so, for the reasons in the text.
% Supra, n.14.
” Tr. 1494—95, and 1501.
A32
Hearing Officer Decision
establishing the unrecovered investment in each prop-
erty at date of transfer I have ignored the Acquisiton
Adjustment and calculated it on the basis of original cost
less accrued depreciation at date of transfer. As Mr.
Bebchick demonstrated” this approach produces virtu-
ally the same result as would flow from a properly
conducted” allocation of the Amortization Adjustment
to the properties, combined with recognition of the
unamortized balance of the Acquisition Adjustment ac-
count allocable to a given property at its date of transfer
as an element that would diminish the investor’s recov-
ery of their investment.
In short, both Mr. Loconto and Mr. Hatfield recog-
nized the dynamics of the situation and tried to deal with
it. Mr. Hatfield’s method required vast recalculation ef-
forts and rested on an unacceptable allocation formula.
Mr. Loconto’s method reconciles history with the award
of “‘gain’’ to the farepayers in these proceedings—a
“‘real world”’ solution. If, in fact, these ‘“‘gains’’ had
been awarded to the farepayers at the time the proper-
ties went out of service, or in 1968 or 1970 in connection
with the orders under remand, it would have been ap-
propriate to make an allocation of the Acquisition Ad-
justment account and move the unamortized balance
related to the property below the line, or otherwise take
account of its effect to reduce the recovery of invest-
ment.
98 Ibid.
” J.e, in proportion to undepreciated original cost of deprecia-
ble property at date of acquisition.
A33
Hearing Officer Decision
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A34
Hearing Officer Decision
Table I
UNRECOVERED INVESTMENT
(2) (3) (4)
Original Cost Net Book Vaiue
(1) Per Books oo 06/15/56
Property 08/15/56 08/15/S6 Col(2) minus Col(3)
Central Garage
SS eee eee $ 19,315 - $ 19,315
DE itetdeheewee tal anes 427,778 $192,881 234,897
WE aseceua euaensanes 447,093 192,881 254,212
Fourth Street Shops
BM ean sbadsceead aan 48,912 = 48,912
DRG bAeRaeAde ated awed 795,399 395,279 400,120
et REP rae 844,311 395,279 449,032
Southern Carhouse
5b 84-600 6040 d0ke ne 40,177 - 40,177
Pe sANeMiwsctheaenwes 243,347 120,933 122,414
ME Miikka ke keane 283,524 120,933 162,591
Maryland Line Right-of-Way . . . 4,301 ~ 4,301
Benning Line Right-of-Way .... 974 - 974
Northeast Carhouse
PP eer ee eT ee 36,151 - 36,151
_ POPP ee eee eee 124,438 49,281 75,157
Pane ae are bee 160,589 49,281 111,308
Cabin John Right-of-Way. ..... 96,237 = 96,237
Georgia and Eastern Terminal
DO: cdva cas ch cen kak 31,199 ~ 31,199
rrr t 20,399 6,134 14,265
WEG eausecaceds e446 51,598 6,134 45,464
14th and V Streets Substation
SO EPO? Peres 9,038 = 9,038
De Kekhnsbdaddeaeednea 16,835 13,643 3,192
Ws th adanevanedae at 25,873 13,643 12,230
13th and D Streets Storage Yard 976 - 976
Navy Yard Carhouse |
Dveteesadbeaeion des 106,562 ~ 106,562
PS erry ee ere 245,776 198,088 47,688
Mt i Cact dss eaamees 352,338 198,088 154,250
M Street Shop
Dskribssseunenedeuxe 65,793 - 65,793
Diwhuseersanencncuke 281,035 222,651 58,384
per errr rrr re rire 346,828 222,651 124,177
A35
Hearing Officer Decision
(S) (7) (8) (9)
Improvements (6) Original Cost —— *“*Unrecovered Cost”
(Retirements) Depreciation Per Books: Net Book Value
08/15/56 to 08/15/56 to Date of Transfer Date of Transfer Date of Transfer
Date of Transfer Date of Transfer Col(2) plus Col(S) Col(3) plus Col(6) Col(7) minus Coil(8)
- - $ 19,315 - $ 19,315
- $ 22,725 427,778 $ 215,606 212,172
- 22,725 447,093 215,606 231,487
$ 1,590 47,321 796,989 442,600 354,389
1,590 47,321 845,901 442,600 403,301
2 a 40,177 - 40,177
752 12,204 244,099 133,137 110,962
752 12,204 284,276 133,137 151,139
= i. 4,301 - 4,301
- ~- 974 = 974
- - 36,151 - 36,151
- 8,685 124,438 __57,966 ___ 66,472
= 8,685 160,589 __57,966 __102,623
- - 96,237 - 96,237
- - 31,199 - 31,199
~ 8,279 20,399 14,413 5,986
- 8,279 51,598 14,413 37,185
- - 9,038 - 9,038
- 2,718 16,835 __16,361 __474
~ 2,718 25,873 __16,361 __ 9512
- ~ 976 - 976
- ~ 106,562 - 106,562
~ 42,243 245,776 __ 240,331 __5,445
= 42,243 352,338 __ 240,331 __112,007
- ~ 65,793 - 65,793
~ 48,303 281,035 __270,954 ___ 10,081
- 48,303 346,828 270,954 75,874
A36
Hearing Officer Decision
Table I
UNRECOVERED INVESTMENT — (Continued)
(1)
Grace Street Shop
RUNG Soares ke GG oe ae
BMC aNers Saw kod es ae
ee og ens aoa ah iG
| Ea aA aie eee
RRS Sores oa ee wale 2
(2) (3) (4)
Original Cost Net Book Value
Per Books — 08/15/56
06/15/56 08/15/56 Col(2) minus Coi(3)
$ 11,294 - $ 11,294
152,703 $ 104,596 48,107
163,997 104,596 59,401
44,127 ~ 44,127
839,071 504,463 334,608
883,198 504,463 378,735
579 _ 579
103,659 _ 103,659
393,007 289,147 103,860
496,666 289,147 207,519
74,867 -_ 74,867
334,387 246,588 87,799
409 254 246,588 162,666
40,733 - 40,733
234,557 234.557 a
275,290 234,557 40,733
$4,843,626 $2,578,241 $2,265,385
A37
Hearing Officer Decision
(5) (7) (8) (9)
Improvements (6) Original Cost Depreciation “Unrecovered Cost”
(Retirements) Depreciation Per Books: Reserve Net Book Value
08/15/56 to 08/15/56 to Date of Transfer Date of Transfer Date of Transfer
Date of Transfer Date of Transfer Col(2) plus Col(5) Col(3) plus Col(6) Col(7) minus Coi(8)
- = $ 11,294 _ $ 11,294
~ $ 27,201 152,703 $ 131,797 20,906
- 27,201 163,997 131,797 32,200
~ - 44,127 = 44,127
$673,024 212,357 1,512,095 716,820 795,275
673,024 212,357 1,556,222 716,820 839,402
- _ $79 ~ 579
= = 103,659 - 103,659
4;967 108,827 397,974 397,974 -—0-
4,967 108,827 $01,633 397,974 103,659
a we re 74,867
(7,747) 80,052 326,640 326,640 —0-
(7,747) 80,052 401,507 326,640 74,867
~ _ 40,733 - 40,733
- P ~ 234,557 234,557 —0-
_ - 275,290 234,557 40,733
$672,586 $ 620,915 $5,516,212 $3,199,156 $2,317,056
A38
Hearing Officer Decision
V. Market Values at Date of Transfer
The gross gain in value to be recognized for any prop-
erty is the difference between the market value of the
property and the unrecovered investment on the day the
property was taken out of utility service.”
In determining unrecovered investment the issue was
allocation of the purchase price. The choice was be-
tween several methods of allocation. The choice having
been made, the method was applied uniformly to every
property. In determining market values of eighteen
unique properties, the choice was not among methods
of valuation in an effort to find the one applicable to all
the properties. Rather, it was to select the most appro-
priate method for each property. This is not to say that
a common method could not be used for determining
date-of-transfer market value. Indeed, Transit has sug-
gested that the assessed-value-ratio’™ method is, if not
required,'™ at least an option.
If assessed values were the only market value evi-
dence in this record, they would be accepted and a uni-
form approach to valuation would be the result.
However, the staff presented copious appraisal testi-
mony by Mr. William S. Harps, a real estate appraiser
100 DCC-I, supra, n.1(a) at 827; Bebchick-II, supra, n.1(c) at 875;
DCC-II, supra, n.1(e) at 914.
101 Under the assessed-value-ratio method, market value is ob-
tained by dividing the assessed value (for purposes of real estate
taxation) of the property at a given time by the stated ratio of as-
sessed value to market value. For example, if assessed value of a
property is $65,000 and assessed values are said to be calculated at
65 percent of market value then market value of $100,000 would be
assumed ($65,000 +.65).
102 The assertion that this approach to market valuation is re-
quired is eo in Part IV, supra. See Bebchick-II, supra, n.1(c)
at n. 137. In the event that it is determined that assessed-value
ratios must be used to determine date-of-transfer market values, I
have made supplemental findings as to those values. They appear in
Appendix C.
A39
Hearing Officer Decision
of recognized stature’? who is familiar with Transit’s
real estate holdings.’™ I find his testimony and support-
ing exhibits to be more credible evidence of date-of-
transfer market values than extrapolated assessed
values.
An inherent weakness in Mr. Harps’ appraisals lies in
the fact that they were necessarily made years after the
dates as of which they speak.’ It is possible that ap-
praisals made at the actual dates of transfer by Mr.
Harps would have produced different estimates of
value.’ This defect is by no means as severe, how-
ever, aS the weaknesses of calculating market values
from real estate tax assessments, which are nce. made
with close attention to every property, which are not
revised regularly or often, where the ratio of assessment
to value must be assumed and may differ between land
and buildings, and so on. Mr. Harps pointed out some
of the deficiencies in the assessed-value method (Tr.
356). Moreover, there was a suggestion that utility prop-
erty especially was treated casually by the assessor’s
office (Tr. 576) a fact that further undermines the reli-
ability assessed values as evidence of market values.
One general point must be made about Mr. Harps’
testimony, which is found in some 20-odd exhibits. Most
were appraisals, reappraisals, or revisions in appraisals
of specific properties. Staff Exhibit 1, however, was a
narrative volume describing Mr. Harps’ approach to ap-
praisal of the several parcels involved. In some cases
103 See qualifications, Staff Exhibit 1, pp. iii, iv.
Te as,
105 Appraisals were not made in connection with the transfers of
properties out of utility service.
'°6 Two more contemporaneous appraisals were used to test Mr.
Harps on cross-examination. Their conclusions were different from
his, but there is no consistent pattern of difference suggesting that
contemporaneity rather than judgment is the source of difference.
A40
Hearing Officer Decision
(Grace Street Shop, Navy Yard Carhouse) he relied in
his specific appraisal report on an approach to valuation
different from the one indicated in his narrative
report. !°’
Generally speaking there are three principal ap-
proaches to valuation used by real estate appraisers: the
cost approach, the market data approach, and the in-
come approach. When possible, an estimate of value us-
ing each approach is developed by the appraiser and the
valuations reached are reconciled judgmentally in reach-
ing the appraiser’s final estimate of value. This reconcil-
iation requires consideration of the reliability and
completeness of data, and the applicability of the ap-
proach used to the type property involved.
The cost approach involves an estimation of the value
of land as if vacant, and an estimate of the cost to re-
place the improvements, from which is deducted the
physical, functional and economic depreciation or obso-
lescence of the property at the appraisal date.
The market data approach relies upon a comparison
of sales data for similar properties, with adjustments to
reflect differences in order to make the data useful as a
basis for valuing the property being appraised.
The income approach capitalizes the net income to be
expected from a property.
One or another approach to valuation might produce
a better indication of value at a given time depending on
the nature of the property. For example, to determine
the value in use of special purpose property such as util-
ity property it is typical to rely most heavily on the cost
approach, because of the paucity of similar properties
for which market data are available, and the limited in-
sight into value to be gained by capitalizing income flows
for another use. For that reason Mr. Harps’ appraisals
107 Where this issue arose specifically it is discussed in connec-
tion with the findings on the particular property, infra.
A4l1
Hearing Officer Decision
as of August 1956 rely on the cost approach. The prop-
erties at that time were all devoted to utility purposes
and appraised in that use, where their value is most
properly equated with replacement cost.
When estimating market values under no restriction
as to use, i.e., after transfer from utility service, Mr.
Harps’ value estimates usually derived from an income
approach or from a market data approach if comparable
data were reasonably reliable.
In some instances Mr. Harps changed the approach to
valuation between the time he wrote his original narra-
tive report and the time he prepared the specific ap-
praisal. He readily acknowledged this and willingly
explained the reasons, which in every case I have found
to be plausible.
Date-of-transfer market values and gross gain (market
value less unrecovered investment at date of transfer)
are summarized in Table II, following this section.
Central Garage (Georgia Avenue Estates)
2112 Georgia Avenue, N.W.
The parties agree that this property left utility service
on September 30, 1958. Shortly thereafter it was rented
to the U. S. Post Office as a garage. Two appraisals of
this property were admitted into evidence.
Mr. Harps’ appraisal (Staff Exhibit 8) was made in
the Spring of 1975. He estimated the value of the land to
be $322,000 and the value of the building to be $610,200
for a total of $932,200. Mr. Harps followed the income
approach to valuation of this property.
Also admitted into evidence (Protestant Exhibit 2) was
an appraisal dated December 1, 1958, by Mr. Thornton
W. Owen. This appraisal concluded that the land was
worth $293,035, which was rounded to $300,000, and
that the building, based upon a cost approach to valua-
tion, was worth $700,359, although on an income ap-
A42
Hearing Officer Decision
proach it would be worth $721,931. The building
valuation was rounded to $700,000, to produce a total
valuation of the property of $1,000,000.
Intervenor Bebchick used the Owen appraisal on
cross-examination to challenge Mr. Harps’ valuation.
Mr. Harps, while conceding Mr. Owen’s qualifications
and the recognition to be accorded a more contempora-
neous appraisal than his own, nevertheless declined to
modify his valuation on the basis that the difference be-
tween the two appraisals, about 7 percent overall
($68,000/$1,000,000) and 13 percent on the building
($90,000/$700,000), was within the range that one might
normally expect (Tr. 430-33, 440). He did indicate that
he would have “‘no problem”’ if the Commission were to
find this property to have a value of $1,000,000 (Tr. 442),
but this concession seems to relate to his acceptance of
a $1,000,000 valuation based upon a cost approach to
value (Tr. 438-39).
I believe that the income approach to valuation should
be preferred for this property, which was commercially
desirable real estate when transferred out of service in
September 1958 as is evidenced by its prompt lease to
the Post Office department.
Of course, Mr. Owen’s income-approach valuation
was also $1,000,000. This was based upon his capitaliza-
tion of the net income of $82,000 from the Post Office
lease, which had already been entered into when Mr.
Owen did his appraisal. Mr. Harps, on the other hand,
reached his income-approach valuation by capitalization
of net income of only $66,500. Mr. Harps’ rental esti-
mate was derived from comparable leases to commer-
cial tenants, and in discussing the income approach to
valuation of this property, he concluded that the rent
paid by the Post Office and capitalized by Mr. Owen
was “‘too much”’ (Tr. 438-39). I agree, and accept Mr.
Harps’ rental estimate and related building value. The :
_——
A43 .
Hearing Officer Decision
likelihood is too great that the rent capitalized by Mr.
Owen, includes something for the auto repair equipment
in this property and, hence, inflated Mr. Owen’s valua-
tion. Mr. Harps’ valuation will be accepted as represen-
tative of the judgment of value that would have been
given by an appraiser on September 30, 1958, if an ap-
praisal had actually been made on that date.
On cross-examination by counsel for Transit, Mr.
Harps agreed that market value would be reduced from
$932,000 to $877,000, if a capitalization rate of 8% per-
cent, as used by Mr. Owen were applied rather than 8
percent, as Mr. Harps had used. I find it difficult to ac-
cept a Capitalization rate of 8% percent, which derives
from Mr. Owen’s use of a mortgage rate in the high
range of a zone rather than the midpoint that Mr. Harps
selected. To accept one element of the Owen report to
vary Mr. Harps’ conclusion, and not accept others
which Mr. Harps also agreed were reasonable would
lead to inconsistency if not error.
Accordingly, I find the market value of the Central
Garage on the date of transfer, September 30, 1958, to
be $932,200 of which $322,000 is attributable to the land
and $610,200 to the building.
4th Street Shop And Southern Carhouse
These two Southwest Washington properties were
transferred out of service on January 16, 1959, when
they were purchased by the District of Columbia Rede-
velopment Land Agency.
1. Res Judicata
The first issue to be addressed is whether these prop-
erties should be considered in this proceeding at all.’
108 They are involved only in the Democratic Central cases in
any event.
A44
Hearing Officer Decision
Transit urges that they must be excluded on the grounds
of res judicata and collateral estoppel. Staff and the
other parties differ. This issue arises for the first time in
this proceeding. Heretofore the parties and the Commis-
sion have concentrated on the issue of entitlement to
value appreciation generally, without focus on specific
properties.
Transit’s res judicata argument is bottomed on the
premise that entitlement to the appreciation in value of
these properties has been adjudicated to finality, both
administratively’” and judicially.'’° Moreover, runs the
company’s argument, the estoppel doctrine bars the
parties from raising in this proceeding any issue that
could have been raised in the prior administrative and
judicial proceedings but was not.
In its Order No. 4577'"! the Public Utilities Commis-
sion considered the allocation of the gain realized on the
sale of these two properties. The P.U.C.’s order did not
treat the properties individually and they will not’ be
treated individually in this discussion since the res
judicata/collateral estoppel point applies to both, and the
matter can be better understood if continuity of arith-
metic is maintained back to the original P.U.C. order.
As to these two properties, P.U.C. Order No. 4577
found the combined original cost of land to be $89,089
and of buildings to be $1,077,824.'!* Some $613,661 had
been accrued to the depreciation reserve on account of
depreciation allowed on these buildings over the years,
leaving $464,163 in unrecovered investment on the de-
109 See D.C. Transit System, Inc. (Order No. 4577) 30 P.U.R.3d
405 (D. C. P.U.C., 1959).
10 D. C. Transit System, Inc. v. P.U.C. 110 U.S.App.D.C. 241,
292 F.2d 734 (D. C., 1961).
"! Supra, n.109. :
‘2 These figures are confirmed by my findings. —
A45
Hearing Officer Decision
preciable buildings.'’* Proceeds of sale of $2,954,6931!*
were allocated $1,039,658 to land and $1,915,035 to
buildings, resulting in a gross gain as follows:
LAND
Proceeds $1,039,658
Cost 89,089
Gain $ 950,569
_ BUILDINGS
Proceeds $1,915,035
Cost $1,077,824
Less accrued depreciation 613,661
Unrecovered cost 464,163
Gain $1,450,872
The $950,569 gain realized on the land was credited to
earned surplus, where, of course, it benefited investors.
This treatment was not contested at the agency level
nor appealed.
As to the $1,450,872 gain over depreciated cost of the
buildings, Transit sought a P.U.C. ruling that the entire
amount be credited to earned surplus, where it too
would benefit investors. A ruling was necessary because
the treatment sought by Transit varied from that pre-
scribed by P.U.C.’s system of accounts. Under P.U.C.’s
accounting system the entire $1,450,872 would have
been credited to the depreciation reserve, thereby ‘“‘re-
paying’ the farepayers not only the $613,661 in depre-
ciation charges that they had borne, but further
benefiting them to the extent of the $837,211 by which
the allocable proceeds of sale exceeded the original cost
of the depreciable property. The P.U.C.’s system of ac-
13 Thes These fi — are a computation from other data. In fact, as
Order No. 4577 points out, depreciation accruals had not been seg-
regated by units or classes of property.
14 The total sale price to RLA was $3,320,000, but $265,307 was
allocated to machinery, sales expense, and severance damages.
A46
Hearing Officer Decision
counts, in Common with most such accounting systems,
contemplated a depreciation reserve such that the pro-
ceeds of a sale of property at retirement would be suffi-
cient to offset any remaining undepreciated cost. Of
course no such system works perfectly, but errors are
generally fairly small in relation to the whole and tend to
offset one another as some sales come in high ase oth-
ers low.
This sale was very unusual, producing revenues that
were not only far in excess of undepreciated cost but
substantially in excess of original cost. Accordingly, it
merited special consideration. Transit took the conven-
tional view that the proceeds should be allocated to the
depreciation reserve only in an amount sufficient to off-
set the unrecovered $464,163.
P.U.C.’s decision split the $1,450,872 gain, allocating
$613,661 of the proceeds to the depreciation reserve (in
effect to the farepayers) and the $837,211 “‘profit”’ over
Original cost to earned surplus (the investors). In the
final analysis this must be seen as an attempt to do eq-
uity between the farepayers and Transit’s investors. As
the P.U.C. pointed out, the streetcar-to-bus conversion
program was sure to result in some extraordinary retire-
ment losses, which the farepayers would bear. This
sale — of streetcar-related properties — was viewed as part
and parcel of the conversion program, notwithstanding
that its timing was dictated by RLA’s requirements and
not Transit. As P.U.C. said in Order No. 4577,'%°
“‘(hjowever, if the customers are to be required to bear
the burden of extraordinary retirement losses incident
to the whole conversion program, it appears equitable
that they should share, at least to some extent, in ex-
traordinary retirement gains of the nature here under
consideration.’’ P.U.C. accomplished this sharing by re-
"5 Supra, n.109 at 412. i
A47
Hearing Officer Decision
turning to the farepayers the $613,661 that they had con-
tributed over the years through depreciation, to retire
the investment in the property. This decision was af-
firmed by the Court upon Transit’s appeal.’*®
On this history, Transit claims its bar of res judicata
and collateral estoppel to reconsideration of the disposi-
tion of the proceeds of sale of these two properties.
Clearly, Transit’s argument must fail as to the gain on
the land, a question that was not litigated before the
P.U.C. or the Court.
Proof that Transit does not really regard the
appreciation-in-land issue as foreclosed by prior deci-
sions is its failure to nominate the Georgia and Eastern
Avenue Terminal as a property from which the farepay-
ers can claim no restitution on the grounds of res
judicata and collateral estoppel. No less than the 4th
Street Shop and Southern Carhouse, this property and
the proceeds of its sale have been the subject of prior
litigation, both administrative and judicial. It was in-
volved in Order No. 245,!!’ D. C. Transit v. WMATC"®
and Order No. 563,''® where, on remand, this Commis-
sion found that there was no gain on the depreciable
portion of this property, and determined that the
farepayers were not entitled to share in gain on the land.
In Order No. 563 after finding that the retirement of the
terminal was not related to the bus conversion program
the Commission concluded:
"6 D.C. Transit System, Inc. v. P.U.C. supra n.110. Only the
decision to credit the $613,661 to the depreciation reserve was ap-
aled; the decisions to credit the $950,000 gain on land and the
837,000 gain over original cost on buildings to earned surplus were
not appealed.
"7 Supra, n.10.
18 Supra, n.82.
19 Supra, n.92.
A48
Hearing Officer Decision
Therefore, the ratepayer is not entitled to share
in any portion of the proceeds of that sale, unless
there was a profit on the depreciable portion of
the asset sold. There was none in this case.!”°
This language suggests that the Commission has adju-
dicated the issue of entitlement to the gain realized on
the Georgia and Eastern Terminal. This particular deter-
mination was not a subject of appeal in Williams’ al-
though it could have been. The issue of entitlement to
the gain on the Georgia and Eastern Terminal was tied
to its relationship to the streetcar-to-bus conversion
program no less than the Fourth Street Shop and South-
ern Carhouse, as to which Transit has raised its pleas in
bar. If the appreciation in land value of the Georgia and
Eastern Terminal is available to the farepayers as resti-
tution in the Democratic Central cases, as Transit ap-
parently concedes, then so is the appreciation in land
value of the shop and carhouse, which has been ‘“‘adju-
dicated’’ under the same considerations.
Even as to the gain on buildings which was allocated
to the investors by P.U.C. in Order No. 4577, Transit’s
thesis is not irrefutable. In the decision on the appeal of
Order No. 245’ the Court intimated a power in the
Commission to reopen the 4th Street Shop/Southern
Carhouse accounting to make further offsets, at least
against streetcar-to-bus conversion costs, from any gains
realized on that sale.'~ Moreover, the earlier decisions
dealing with the proceeds of the sale of these properties
all related to the availability of gains to offset charges
arising out of the streetcar-to-bus conversion
120 Thid., at 33-34.
121 Supra, n.14.
122 Supra, n.82.
123 Tbid. at 774-75, where the Commission’s action in declining to
offset the profits of the sale against other expenses is characterized
as discretionary, implying the power to do the opposite.
Ba tes
|
A4d9
Hearing Officer Decision
program.'** This proceeding deals with the availability
of these gains to defray costs upon which fare increases
were predicated.'* It is by no means established that
the question of use of the gains on the depreciable por-
tion of these properties to offset a fare increase has been
foreclosed by prior decisions, which is a necessary un-
derpinning to a res judicata plea.
Therefore, I conclude that--if the appreciation in
market value is measured by the proceeds received in
excess of unrecovered investment — the entire $1,787,780
allocated to earned surplus’ ($950,569 related to land,
and $837,211 related to buildings) is available for resti-
tution to the farepayers in DCC-/J, and the $950,569 re-
lated to land is available for restitution to the farepayers
in DCC-II.
2. Valuation
This brings me to the next question: should the
market-value appreciation of these properties be mea-
sured by the difference between the sales price and the
unrecovered investment?
These are the only properties that were sold simulta-
neously with retirement from service.'*’ Most of the
out-of-service properties have not been sold. Those sold
were disposed of after the date they were transferred
124 P.U.C. Order No. 4577 and our Order No. 245 and the re-
lated appeals. Our Order No. 245 was entered in a fare increase
case but, there, gains from this sale were not sought to be applied
against anything but the recovery of streetcar-to-bus conversion
costs. Ibid. at 773-75.
125 These properties are involved only in the Democratic Central
cases, which are remands of fare orders.
'26 A portion of the gross gain on the buildings ($613,661) has
—_ 4 ae allocated to the farepayers by the P.U.C. in Order
0. 4577.
‘27 Indeed it was the sale that caused the retirement of these
properties on the books. Transit still used these properties in its
O ee sg leased the 4th Street Shop from RLA for two years
er the sale.
AS0
Hearing Officer Decision
below the line on the books. A sale price is normally
considered the best evidence of market value. As to ev-
ery property but these two, an appraisal of market value
as of the date of transfer has been necessary because
there was no sale contemporaneous with transfer out of
service. Here there is such a sale. One would normally
assume that the sale price was better evidence
of market value on that date than an appraisal made
sixteen years later when the buildings had been
demolished. .
On the other hand, prices associated with sales under
condemnation or threat of condemnation are uniformly
rejected as evidence of fair market value.’ The sale of
these properties to the urban renewal arm of the District
Government was indisputably such a sale. In the light of
that fact, and at Transit’s request, I directed Mr. Harps,
the staff's expert on real estate valuation, to conduct an
appraisal of these properties as of January 16, 1959, us-
ing standard techniques. This he did, and his report
(Staff Exhibit 21) developed an estimate of value for the
4th Street Shop of $1,014,000 and for the Southern
Carhouse, $833,500. These valuations assigned no value
whatsoever to improvements,’*° finding all the value to
subsist in the land. Deducting the original cost of land
($89,089) from the combined estimated value of
$1,847,500 leaves a gross gain of $1,758,411, a figure that
is, coincidentally, very close to the $1,787,780 found
available for restitution to the farepayers if the actual
Sales price is used to measure market value.
In view of the Court’s mandate that the Commission
measure ‘‘market value”’ as of the date of transfer,}*° I
128 Tr. 364-66, 370.
129 Indeed the land values were reduced to reflect the cost of the
demolition necessary to make the land available for the alternative
highest and best use — apartments.
13° DCC-I, supra, n.1(a)at 827.
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Hearing Officer Decision
have selected the value estimates in Mr. Harps’ apprais-
als rather than the actual sales price, as allocated by the
P.U.C., as the better evidence of market value on the
date of transfer.
The remaining question is whether the increase in
value, thus determined, must be offset by the $613,661
already allocated to the farepayers. The visceral reac-
tion is to say yes. On the other hand, that allocation was
related to the conversion program and has had its effect
in that context in relation to other charges for track re-
moval and extraordinary retirement expenses charged
to the farepayers. Basing date-of-transfer market value
_ on Mr. Harps’ appraisal is worth about $30,000 to Tran-
sit. Under Transit’s appraisal approach, all the increase
in value has been found to inhere in the land. That being
the case, it is inappropriate to offset the Order No. 4577
credit to the depreciation reserve against the gain.
I find the market value of the 4th Street Shop and the
Southern Carhouse, taken together, as of January 16,
1959, to be $1,847,500, attributable entirely to the land.
Maryland Line Right-Of-Way
This includes a small parcel of land owned in fee in
the District of Columbia and easements in Maryland.
Mr. Harps, for the staff, appraised the District of Co-
lumbia parcel at Florida Avenue and Eckington Place,
N. W. A title company, for the staff, rendered an opin-
ion that the Maryland easements would revert upon ter-
mination of rail transit operations. Rail service on the
Maryland line ceased on April 30, 1959.
Mr. Harps’ appraisal (Staff Exhibit 18) estimated the
market value of the Florida Avenue and Eckington Place
parcel at $16,500. It was recognized that to achieve the
highest and best use of this property, which is necessary
to support the valuation of $16,500, the streetcar tracks
on the property would have to be removed. A cost esti-
AS52
Hearing Officer Decision
mate for track removal was never supplied for the
record, however. Transit’s limited interest in the Mary-
land right-of-way has no value.
I find the market value of this property on the date of
transfer to be $16,500, attributable entirely to land.
Benning Line Right-Of-Way
This property includes a single parcel of land located
at 62nd and Dix Street, N.E. It was retired from service
on April 30, 1959. Mr. Harps appraised the property at
$4,800 (Staff Exhibit 17), a value estimate that was not
disputed.
I find the market value of this property on the date of
transfer to be $4,800, attributable entirely to land.
Northeast Carhouse (Fourth Street Estates)
4th and T Streets, N.E.
This property was transferred out of service on May
31, 1959. Subsequently, extensive improvements were
made to it at a cost of about $149,000 and it was leased
in the Spring of 1962 to the White Motor Company at a
rental which rose from $30,000 to $45,000 per year over
three years. Later it was leaséd to the U.S. Post Office
at an even higher rental.
Mr. Harps, recognizing the rentability of this prop-
erty, appraised it on the income approach and checked
his conclusion with an assessed-value-ratio analysis. Mr.
Harps did not rely on actual post-1959 figures in reach-
ing his value estimate. It was his judgment that, with
accomplishment of conversions to the building costing
about $21,000, the property could be rented for a gross
rent approximating $36,000 per year. Following the in-
come approach to valuation he reached a date-of-transfer
value of $417,000, of which $268,500 was attributed to
land and $148,500 to buildings.
A53
Hearing Officer Decision
Transit objected to this appraisal on the basis that it
was not an “‘as is’’ appraisal as of the date of transfer,
but, rather, an income approach to valuation of a prop-
erty which had no rental history, wasn’t rented as of the
date of transfer, and required improvements to be made
rentable.'*’ Conceding these facts, I nevertheless find
the objection not well taken in light of Transit’s failure
to sponsor its own appraisal of the property.'**
Mr. Harps underwent rigorous cross-examination. For
one thing, Transit tested Mr. Harps’ conclusion that a
mere $21,000 in conversion expenses would have suf-
ficed to produce gross annual rentals of $36,000 as Mr.
Harps estimated. Transit introduced financial records
showing that more than $149,000 was spent by the com-
pany in improving this property between May 1959 when
it was retired and April 1962 when it was rented. A lease
and related documents revealed that the property rented
at rates of $30,000 to $35,000 per year in 1962-1963, and
$45,000 in 1964.
Mr. Harps, although pressed upon cross-examination
would not agree that achieving a gross rent in the $35,000
range depended on conversion expenditures of almost
$150,000. On the witness stand he made an income anal-
ysis based on an assumed $45,000 annual rental and a
conversion expenditure of $149,000 (Tr. 737-40). This
'3!- Transit made similar objections to Mr. Harps’ use of the in-
come approach on the M Street Shop and the Navy Yard Carhouse,
. Vv.
132. Of course, Transit has offered its calculation of value under
the assessed-value-ratio method, an offer consistent with its posi-
tion that all parties and the Commission are bound to use the as-
sessed value method of valuation because of past practice. As
pointed out above, this method of valuation is notoriously inaccu-
rate, and in the presence of an alternative I have rejected it. Only if
I am bound to use that method would I elect to do so when other
appraisal evidence is offered and the sponsor stands cross-
examination. Transit could have sponsored an expert valuation
based on its theory if it had chosen to do so; alternative positions
are not unknown to Transit in this proceeding.
Ee
a |
A54
Hearing Officer Decision
resulted in a valuation of $356,000, some $61,000 less
than his own value estimate of $417,000, but Mr. Harps
did not accept the lower amount (Tr. 740).
Mr. Harps was also tested by Mr. Thornton W.
Owen’s appraisal of December 1958 (Transit Exhibit 11)
which, based on the income_approach, concluded a
value for this property of only $305,000. Mr. Owen’s
appraisal was an “‘as is’’ appraisal, ie., he estimated
the rent the property would generate in its condition as
of the date it was taken out of utility service without any
improvements or conversions. This led Mr. Owen to
conclude that the warehouse space would rent for 75¢
per square foot, whereas Mr. Harps’ estimate was $1
per square foot. Therefore, Mr. Owen’s annual rental
figure was $6,500 lower than Mr. Harps’. Mr. Harps
found no basis for Mr. Owen’s rental figure, however;
and with the awareness that the rent on this property
did in fact rise over the years he concluded that if his
appraisal was wrong, ““Mr. Owen is even wronger”’ (Tr.
749), a conclusion with which it is hard to disagree.
Thus, on this record, Mr. Harps’ rental estimate must
be preferred over Mr. Owen’s.
On the other hand, Mr. Harps did adopt the 6 percent
interest rate used by Mr. Owen in lieu of the 5% percent
rate he had used (Tr. 750, 752). The effect of this is to
change the capitalization rate and reduce the valuation
of the property by $35,000 from $417,000 to $382,000.
Distributing this $35,000 reduction proportionately to
Mr. Harps’ original values for land and building pro-
duces final date-of-transfer values of $246,000 for the
land and $136,000 for the building.
I find the market value of the Northeast Carhouse on
the date of transfer to be $382,000, of which $246,000 is
attributable to the land and $136,000 to the buildings.
,
—
A55
Hearing Officer Decision vt
Cabin John Line Right-Of-Way
The next property to be retired from utility service
was the Cabin John Line right-of-way which was trans-
ferred on January 31, 1960. The District of Columbia
portion of this property was appraised by Mr. Harps, as
if owned in fee by Transit, at $201,500 (Staff Exhibits 20
and 28). Transit accepted Mr. Harps’ valuation subject
to the customary reservation that the assessed-value-
ratio method is required. A title company, for the staff,
rendered an opinion that the Maryland portion of this
right-of-way traversed easements which reverted to the
original owners when rail service ended. Transit’s lim-
ited interest in the Maryland right-of-way has no value.
The title company also rendered an opinion that three
separate parcels within the District of Columbia portion
of this right-of-way were not owned in fee simple by
Transit. As a result, the staff and Transit entered a stip-
ulation: these parcels contain a total of 88,914 square
feet; Mr. Harps valued these parcels upon the basis of
25 cents per square foot; and the appraisal by Mr. Harps
($201,500) should be reduced by the value of the parcels
not owned in fee simple ($22,228.50) resulting in a net
value for the District of Columbia-Cabin John Line of
$179,271.50.
Although the staff and Transit agreed to reduce the
value, they did not submit any corresponding data to
support a reduction in the unrecovered investment. The
parties are urged to stipulate as to this amount. The stip-
ulation as to value and any stipulation or calculation of
the reduction in unrecovered investment should be sub-
mitted to the Commission.
I find the value of the District of Columbia property at
date of transfer to be $201,500 as appraised by Mr.
Harps.
A56
Hearing Officer Decision
Georgia and Eastern Avenues Terminal
This property was transferred out of service on Octo-
ber 31, 1960.'*3 Mr. Harps’ date-of-transfer valuation of
this property (Staff Exhibit 15) in the amount of $187,800,
entirely attributable to the land, was accepted by all
parties subject to reduction by an amount adequate to
cover the costs of removing trolley tracks and the termi-
nal building. At this writing, these offsets have not been
supplied for the record, and market value as of October
31, 1960, is, therefore, found to be $187,800.
14th and V Streets, N. W. Substation
This property was transferred out of service on Janu-
ary 31, 1962.!* It was appraised as of that date by Mr.
Harps (Staff Exhibit 11) at $23,800. This estimate of
value was undisputed and I find the value of this prop-
erty on that date to be $23,800, of which $16,700 is at-
tributable to the land and $7,100 to the building.
13th and D Streets, N.E. Storage Yard
This unimproved property was transferred out of ser-
vice on January 31, 1962.'*° It was appraised by Mr.
Harps at $4,755 as of that date (Staff Exhibit 16). This
valuation was not questioned, and I adopt it as my
finding of the market value of this land as of January 31,
1962.
Navy Yard Carhouse
(L Street Estates), 770 M. Street, S.E.
This property was taken out of service on June 30,
1963. As of that date there was a lease of the first floor
to the U.S. General Services Administration for a five-
'33- Tt was sold in December 1962 for $225,000.
134. Tt was sold in June 1971 for $25,000.
'35-It was sold in May 1970 for $8,150. ——
A57
Hearing Cfficer Decision
year term starting July 1, 1963. Expenses to improve the
building to meet the government’s requirements were
incurred after the date of transfer in late 1963 and early
1964. It is not clear from the record when the govern-
ment actually occupied this property. '*°
Mr. Harps’ appraisal of this property is Staff Exhibit
19. He used an income approach to valuation. Mr.
Harps’ estimate of value was admitted over Transit’s
objection that it was not an appraisal of the property in
its unrenovated, ‘‘as is’’ condition as of the date of
transfer (Tr. 841, 1660).
The approach used by the appraiser seems reasonable
in the circumstances, particularly considering the fact
that this property was substantially leased within a week
of its retirement. The only alternative approach to date-
of-transfer valuation in the record is Transit’s extrapola-
tion of the assessed value. This is not a preferred method
of appraisal in any case, and appears to be specially in-
applicable here because of the variation of the assessed
value of this property from the normal range of error.
The assessment of this property had not changed since
at least 1956. (Tr. 865-72).
Under cross-examination Mr. Harps revised his value
estimate downward from $725,000 to $666,500. These
changes resulted from: first, an adjustment upward in
the expenses to be capitalized, which reduces income,
and hence value, under the income approach; and, sec-
ond, an upward adjustment in the conversion expendi-
ture required to render the property rentable.
Mr. Harps’ approach to conversion cost, a dollar-fer-
dollar deduction from gross value, gave the benefit of
'36-The original lease was amended to revise the commencement
date to July 8, 1963. Later addenda to the lease suggest that the
= expanded its occupancy to the pee eee square
eet on the first floor in July 1975, and to the 27,600-square-foot
second floor in January 1966 (Staff Exhibit 19, p.8).
A58
Hearing Officer Decision
every doubt to Transit. For example, retirements were
not netted against the gross cost of conversion (Staff
Exhibit 19, p.6). There was generous allowance ($50,000)
for entrepreneurship (Staff Exhibit 1, p.11). A vacancy
rate of 6 percent was posited even though the lease was
to the government. Extrapolation of the original conver-
sion cost of $2.77 per square foot to the entire building
was accepted, even in the absence of evidence of any
expenditures. I accept these adjustments for additional
conversion expense as did Mr. Harps.
I find the value of this property as of June 30, 1963, to
be $666,500 of which $427,500 is attributable to the land
and $239,000 to the building.
M Street Shops (M Street Estates)
3222 M Street, N.W.
This property was transferred out of service on June
30, 1963, and sometime subsequently leased to the U.S.
Government after rather extensive renovation, which
took place after June 30, 1963.
Mr. Harps’ appraisal report is Staff Exhibit 5. His
narrative report (Staff Exhibit 1) suggested that the cost
approach to valuation would be the most appropriate
method to estimate the value of this property. In fact,
when it came time to do the appraisal, Mr. Harps used
an income approach to valuation. His selection of that
method is explained (Tr. 627-38) and seems reasonable.
He estimated date-of-transfer market value to be
$984,000, $660,000 for the land and $324,000 for the
building. !*’
The approach to valuation of this property should be
compared to that of the Navy Yard and Northeast
carhouses. Those properties, like the M Street Shops,
137 The oiding valuation was reduced by $7,200 under cross- j
examination (Tr. 727).
AS9
Hearing Officer Decision
were taken out of service and then renovated before oc-
cupancy by tenants. The lapse in time between retire-
ment and rental was only a week at Navy Yard, 3%
years at Northeast and, apparently, something in be-
tween at M Street. At Navy Yard, due to the contempo-
raneous retirement from service and lease, Mr. Harps
looked at actual costs of renovation and actual rentals. I
accepted his Navy Yard valuation in part because of the
accuracy of these virtually contemporaneous data. At
Northeast he estimated both cost of conversion and the
rent. Transit demonstrated that the actual cost of reno-
vation of the Northeast Carhouse was substantially
higher than Mr. Harps’ estimate; it also developed that
the rent was higher than Mr. Harps’ estimate. Using ac-
tual figures for rent and conversion expense, Mr. Harps
developed a valuation on cross-examination, and it was
lower than his original appraisal. I did not accept the
valuation based on actual data, primarily because the
data on which it depended dated from a period long
after the date of transfer.'**
In the case of the M Street Shops, as in Northeast
Carhouse, Mr. Harps rendered his date-of-transfer value
estimate on the income approach based on estimated
conversion costs and estimated rent. In contrast to the
Northeast Carhouse, there was no evidence presented
of either actual conversion costs or actual rentals. Thus,
the issue was not whether to prefer a set of out-of-time
data or appraiser’s estimates of what those data would
have been at date of transfer. Rather it was whether to
accept the income approach to value or the cost ap-
proach, as Mr. Harps originally indicated he would use.
Transit urges that Mr. Harps’ income approach, in-
volving, as it does, estimates of both rent and renova-
138 This knowledge could not have been available at or about the
date of transfer; and the usage that actually resulted was somewhat
different than Mr. Harps had posited.
A60
Hearing Officer Decision
tion costs, introduces so great a speculative element into
his valuation as to render it of little probative value and
even inadmissible as evidence in a condemnation case.
Whatever the merit of this argument may be, Transit
offered no alternative ‘‘as is’’ appraisal on the record. It
sponsored no witness, offered no other appraisal to
challenge Mr. Harps’ on cross-examination, presented
no evidence of actual rents or conversion costs, and did
not develop—in any manner—a 1963 cost-approach val-
uation of the property. Thus, the only evidence of 1963
valuation other than Mr. Harps’ appraisal is Transit’s
assessed-value-ratio figure. This produces a value esti-
mate of $705,800’? a figure unsupported by expert opin-
ion.
I find the value of this property on June 30, 1963, to
be $976,800 of which $660,000 is attributable to land and
$316,800 to the buildings.
Grace Street Shop (Grace Street Estates)
3211 Grace Street, N.W.
The date of transfer of this property is September 30,
1963.
Inconsistencies between the appraiser’s narrative re-
port (Staff Exhibit 1) and the later appraisal report on
this specific property (Staff Exhibit 6) were reconciled
or explained by Mr. Harps on cross-examination (Tr.
443-57). He also explained his deduction of 24 percent
of the value of the building for functional obsolescence
when appraised as a truck garage as of 1956, and his
nonrecognition of any functional obsolescence in his ap-
praisal as of 1963, which contemplates full use of the
cubic capacity of the building (Tr. 468-85, 489).
139 Assessed value in fiscal 1963 was $458,752, of which $301,652
was land and $157,100 was improvements. I have divided both these
figures by .65 to reach the assumed market value of $705,800.
irl
Aél
Hearing Officer Decision
On cross-examination Mr. Harps agreed to reduce the
value estimate of the building in 1963 from $109,153 to
$88,809 to take account of functional obsolescence and
physical depreciation. Although his original appraisal of
1963 value averaged the results obtained from the cost
approach and the assessed-value-ratio approach, on
cross-examination Mr. Harps conceded that the cost ap-
proach to valuation would be preferable for this prop-
erty (Tr. 904-05).
I find the market value of this property on September
30, 1963, was $234,000, of which $145,500 is attributable
to land and $88,500 to the building.
General Office Building
(3600, Inc.) 3600 M Street, N.W.
This property was transferred out of service as of Jan-
uary 1, 1964. It was appraised as of the date of transfer
by Mr. Harps, whose report became Staff Exhibit 10.
Following the income approach to valuation he esti-
mated the date-of-transfer market value to be $2,115,000
($402,000 for the land and $1,713,000 for the building).
At Transit’s request Mr. Harps also valued this prop-
erty on the cost approach, which resulted in a value
estimate of $1,930,500.!“°
This, of course, raised the issue of which approach to
valuation was appropriate in the circumstances. Mr.
Harps persistently and vigorously denied the reliability
of the cost approach method to produce a valid estimate
of the market value of this property, which was, for all
practical purposes, a commercial office building and not
special purpose utility property. As he put it, the market
would value this property on the basis of its income
potential.'*’ I accept Mr. Harps’ judgment on this ques-
© Transit Exhibit 13; Tr. 791-99, $14-17.
'*! Tr. 816-17; Transit Exhibit 13, p. 4.
A62
Hearing Officer Decision
tion, and conclude that the property should be valued
on the income approach, and that alone.’*?
A significant element contributing to both the cost and
market value of this property was the improvements
made to this property while in Transit’s hands. There
was disagreement over the amount expended on these
improvements, specifically, whether certain of them
were contracted for, performed, or paid for before or
after the date of transfer, which makes a difference in
the valuation. The amount of pre-1964 improvements re-
ported ranged between $673,024, as reported by Mr.
Harps, and $512,321, as reported by Mr. Loconto. Be-
tween these was the $566,790 figure reported by Tran-
sit’s witness, Mr. Hatfield. Mr. Harps’ report was the
most thorough and careful work-up of the available data
and his cost estimate of $673,024 will be accepted as the
cost of improvements made between the date of acqui-
sition and the date of transfer.
From the date this property was transferred below the
line on Transit’s books right through the date Transit
ceased utility operations in January 1973, the company
continued to occupy a portion of the rentable space for
use in the general and administrative functions of its
utility business.’** This has presented a problem in val-
uation, which has required a separate inquiry in the lat-.
ter days of this proceeding to ascertain how much of the
property was used by Transit for utility purposes,
'42 Transit is apparently of the belief that Mr. Harps has accepted
the average of the cost-approach and income-approach valuations
as his estimate of value. Rather, he insisted that from his stand-
point a cost-approach appraisal was not applicable (Tr. 817). His
apparent acceptance of an average of the cost- and income-approach
valuations was premised on an assumption that the Commission
might consider the cost approach to be appropriate, in which case
Mr. Harps believed its result be averaged with the result obtained
from the income approach.
3 Tr. 788, 2241.
A63
Hearing Officer Decision
whether this usage was charged to the farepayers, and
what financial adjustments are required to take account
of these facts.
At first it was assumed that Transit occupied about 40
percent of the rentable space throughout the years in
question.'** This gave rise to Transit’s suggestion that
only 60 percent of the property be deemed transferred
and that net gain be computed accordingly. Staff, on the
other hand, has recommended that the gain be computed
on the basis that the entire property was transferred and
that an “‘equitable offset’’ be allowed against net gain in
an amount equal to the fair rental value of the premises
used by Transit for utility purposes.'“* Therefore, calcu-
lation of the rental value of the space occupied by Tran-
sit was required. This was duly made, and a stipulation
entered by staff and Transit on the matter was accepted
for filing.'“© This stipulation would reduce the net gain
by an agreed-upon fair rental value of $918,278. It was
based on the assumption of a constant 40 percent occu-
pancy by Transit.
However, there was a suggestion in the Williams case
that Transit’s occupancy was not 40 percent of the pre-
mises as the stipulation posited, but 20 percent.’*’
Therefore, I directed the staff to investigate the matter
further. This investigation, which went on from October
1977 to January 1978 produced evidence that Transit’s
occupancy declined from 40 percent to 20 percent to 10
percent of the premises over time, and that some of the
'*4 That is, January 1, 1964 through June 30, 1970 (Tr. 2555).
'45 Interestingly, Transit’s and staff’s positions on this poeperty
are Opposite in theory to their views of how to treat the Brookland,
Eastern and Trinidad garages. Here, Transit would have us view
the eeey on the basis of its actual use and not its book status,
and staff would look to its status on the books and not its actual
use.
© Tr. 2241-50.
'47 Williams, supra, n. 14 at 957.
A64
Hearing Officer Decision
expenses of the building were charged to utility opera-
tions thereby reducing the benefit flowing to farepayers
from Transit’s rent-free use of the property in utility op-
erations. Transit’s ‘‘floating’’ occupancy level and the
partial charge of building expenses to utility expense ac-
counts makes Transit’s suggestion for ‘‘partitioning”’ the
property and calculating net gain on only a portion of it
too unwieldy to carry out. Therefore, I have dealt with
the property as an entirety, subject to reduction of the
related restitution to the farepayers for the benefits they
may have derived from its partial use for utility pur-
poses at less than full cost.
The staff’s investigation prompted a revision of the
stipulation between staff and Transit to reduce the equi-
table offset from $918,278 to $282,690. This stipulation
was entered into the record on February 8, 1978!“ along
with supporting memoranda’? and discussed at a hear-
ing on that date. On the basis of the record thus devel-
oped I have accepted the stipulated figure as equivalent
to the benefit conferred on the farepayers by Transit’s
partial occupancy of the premises at a cost below its
value and recommend that the $282,690 be offset against
the restitutional award in this proceeding.
This is not the final issue on this question. B.U.F.
points out that the effect of the offset differs if it is made
against gross gain instead of net gain:'*°
Gross Gain Net Gain
Method Method
a, | EE I dca cadsscusue $2,115,000 $2,115,000
2. Unrecovered Investment .... (840,000) (840,000)
2 ie aac a ean, 1,275,000 1,275,000
4. Equitable Offset............ (280,000) N.A.
Sy GSLs occa Gebueue ess 995,000 1,275,000
148 Tr. 2556-57.
'49 Staff Exhibits 38 and 39.
‘50 Figures are rounded in this illustration.
A65
Hearing Officer Decision
Gross Gain Net Gain
Method Method
6. Sales Expense ..........+.. (80,000) (80,000)
Poe: Ue. fb Se) es (250,000) (320,000)
S. Batenee .......; aia hake earl 665,000 875,000
9. Equitable Offset............ N.A (280,000)
10. Restitution to Farepayers ... $665,000 $595,000
As the illustration shows, the amount of restitution
differs depending on whether the offset is taken against
gross or net gain.’>! I have determined that the offset, if
allowed, should be taken on the net gain after taxes.
The building is deemed to have been transferred in toto
on January 1, 1964. The Court’s directive requires that
net gain be computed as of that date. The benefit to
farepayers from below-cost occupancy occurred after
that; it should therefore be recognized and taken into
account after that event, .e., against the net gain recog-
nized in this proceeding.
Parking Lot 36th and M Streets, N.W.
Date of transfer of this unimproved property was Jan-
uary 1, 1964. Mr Harps’ appraisal placed its market
value on that date at $14,900. There was no dispute with
this figure and it is accepted.
Brookland, Eastern and Trinidad Garages
I find the date of transfer of these properties to be
September 11, 1966. On that date the new Bladensburg
Maintenance Base went into service. The functions for-
merly carried on at these three garages were thereafter
151 This conclusion, of course, assumes that the equitable offset
reduces taxable gain, an assumption that I have accepted for pur-
poses of this discussion.
A66
Hearing Officer Decision
conducted at Bladensburg, and it is undisputed that af-
ter September 11, 1966, these properties were not used
in utility operations. '*?
On March 2, 1966, the company applied to the Com-
mission to consolidate the operations from Brookland,
Eastern and Trinidad at Bladensburg and to divest itself
of the three old garages.'** This application was with-
drawn, at the request of Commission staff according to
a company officer (Tr. 1230). In a subsequent filing’”* in
August the company applied merely to consolidate op-
erations at Bladensburg, but not to abandon or divest
itself of the garages at Brookland, Eastern, and Trinidad.
This application was granted by Commission Order
No. 634,!°° which also directed:
That the units of property now housing the
Brookland, Trinidad and Eastern Divisions be re-
tained as operating property to provide for sup-
plementary service requirements which may arise
in the overall operations of the company.'*°
Credence is lent to the claim that Commission staff
sought withdrawal of the application to remove these
properties from service in the Spring of 1966, by the
correspondence in time between Application No. 361
and the promulgation of Commission Regulation 61,
which was noticed on March 25, 1966, and finally en-
acted in revised form on September 30, 1966, by Gen-
eral Order No. 17. Regulation No. 61, it will be
remembered, is the rule pursuant to which accrued de-
preciation attributable to utility property is recaptured
'S2 Brookland Garage was apparently used to store retired buses,
but I do not consider this to be a utility function.
'S3 Application No. 361.
'S¢ Application No. 386.
‘55 (WMATC, unreported) August 19, 1966.
'56 Ibid. at p. 2.
j
A67
Hearing Officer Decision
for the farepayers when utility property was taken out
of service.'°’ It would certainly have been an embar-
rassment if these three properties, upon which a total of
$959,171 in accrued depreciation was subject to recap-
ture under Regulation No. 61, had been removed from
service just before Regulation No. 61 took effect.
As a result of Order No. 634 these three properties
remained on Transit’s books as operating properties:
Brookland and Eastern garages until 1973 when the
company ceased utility operations,’** and Trinidad until
May 8, 1970, when it was sold to the Redevelopment
Land Agency.'*?
Order No. 634 suggests that the Commission or its
staff, or both, were skeptical about the wisdom and ef-
ficiency of shifting so much of the company’s mainte-
nance and operating facilities to Bladensburg and desired
the superseded properties to be kept in technical oper-
ating status so that operations could be re-established
there if Bladensburg did not work as planned. The
Bladensburg alternative apparently proved acceptable to
the company and the Commission because operations
were never re-established at the three garages. How-
ever, Order No. 634 was never rescinded as to Brookland
and Eastern.’
'S? Actually, under Regulation No. 61 as originally noticed, even
values in excess of accrued depreciation might have been credited
to farepayers.
'88 WMATA did not acquire these properties.
‘59 Trinidad’s retirement had actually been authorized on July 3,
1967, by Commission Order No. 718 (unreported).
1 Ibid.
A68
Hearing Officer Decision
Transit’s position is that the Court’s mandate does not
extend to the two properties (Eastern and Brookland)
that never were removed from operating status, an event
which Transit deems to be a prerequisite before their
increase in value may be credited to the farepayers.'”
The staff is adamant that the farepayers are entitled to
the increase in value of these properties and that their
“‘date of transfer’? was September 11, 1966, when they
ceased to function as operating utility properties, not-
withstanding their status on the books. The staff pre-
sented evidence in support of this proposition through
witness Loconto who listed several reasons for deeming
them nonoperating and out-of-service as of September
11, 1966: no improvements were made on them after
1966 (in fact improvements ceased several years prior to
that); the company’s 10-K reports to the SEC showed
them as “‘investment”’ property rather than operating
property; the company formed subsidiaries with an ap-
parent purpose of taking title to these properties as it
had with several other properties removed from utility
Status; the Commission authorized the sale of the
Trinidad Garage shortly after Order No. 634'® indicat-
ing that this property was not needed in transportation
operations; the company’s apparent belief that the three
garages had no further use for utility purposes as evi-
denced by application to have them transferred to
nonoperating status;'®* and WMATA’s determination in
1973 that Brookland and Eastern garages had no useful-
ness as elements of a mass transit system (Tr. 30-33).
Staff, consistently with its view, offered appraisals by
‘6! The company does not 4 the farepayers entitlement to
the increase in value of Trinidad Garage. As to Trinidad the dispute
is over the date of transfer, which staff insists is September 11,
1966, and Transit says is either the date of sale (May 8, 1970) or the
date sale was authorized (July 3, 1967).
162 See n.159.
163 See n.153.
A69
Hearing Officer Decision
Mr. Harps of the market value of these properties as of
September 11, 1966.’ These appraisals presented value
estimates based on the income approach. In determining
the highest and best use, Mr Harps assumed no limita-
tion on the usage to which the properties could be put.
Transit argued the properties were hardly salable, en-
cumbered as they were by the stricture of Order
No. 634 that they be available to meet transit needs that
might arise. My suggestion that Order No. 634 would
have been lifted in the event of a prospective sale was
characterized as ‘‘speculative’”’,’® notwithstanding the
rapid change in the Commission’s position in the case of
Trinidad Garage, where sale was authorized only
10 months after Order No. 634 had been entered. Tran-
sit claims that the Trinidad precedent is not indicative
because it was sold to the urban renewal agency (RLA)
“‘under threat of condemnation.”’ In fact the RLA pur-
chase did not take place until May 1970, almost three
years after sale had been authorized by Order
No. 718.'% There is a sense of urgency about Order
No. 718, as if the authorization to sell was hurriedly
entered’®’ in order to gain the advantage of a prospec-
tive private sale. This is only supposition, however;
there is no evidence that this was the case either in the
record of this proceeding or in the Commission files I
have consulted.
Having this background in mind, I acceded to Tran-
sit’s request that Mr. Harps make a second appraisal of
these properties, as of September 11, 1966, taking into
account their “‘encumbered’’ status resulting from the
directive of Order No. 634. These appraisals were re-
164 Staff Exhibits 7 (Trinidad), 9 (Eastern), and 13 (Brookland).
165 Tr. 498.
166 See n.15.
‘67 In fact it was rushed out in four days, the application having
been filed on June 29.
A70
Hearing Officer Decision
ceived into evidence'® with revisions.’® The staff,
while adhering to its position that valuation should be
made as of September 11, 1966, the date of de facto
removal from service, did agree that valuation as of that
date should not ignore the effect of Order No. 634 on
the value of the properties. Accordingly, the staff spon-
sored Mr. Harps’ second appraisals with revisions and
did not offer the original appraisals into evidence.
I have agreed with this approach. My findings as to
the market value of these individual properties follow.
Eastern Garage
Mr. Harps made two appraisals of this property as of
September 11, 1966. The first, Staff Exhibit 9, reached a
value of $1,033,000, entirely in the land, on the basis of
a highest and best use as of that date as a shopping cen-
ter, and assumed that the property was available for that
use on that date. The second, Staff Exhibit 22, was made
at the direction of the chair and subject to an instruction
that the appraiser take into account the terms of Order
No. 634 in determining the highest and best use. Mr.
Harps concluded that Order No. 634 was in effect, an
encumbrance on the site, denying it the highest and best
use so long as the order was in effect. Accordingly, Mr.
Harps appraised the property as an element of a transit
system. This led him to abandon the income approach
to valuation in favor of the cost approach. His cost-
approach appraisal was an update of the cost-approach
appraisal he had used to estimate value as of August 15,
1956. Land value in September 1966 was estimated at
$584,000, an increase from the 1956 value commensu-
rate with the decline in purchasing power of the dollar,
albeit substantially lower than the Exhibit 9 land value
168 Staff Exhibits 22 (Eastern), 23 (Brookland), and 24 (Trinidad). j
169 Staff Exhibits 22-A, 23-A, and 24-A. J
=
A71
Hearing Officer Decision
estimate for the property in its highest and best use. The
estimate of value of the building was $362,000, a de-
crease from the 1956 value estimate attributable to
greater physical depreciation and functional obsoles-
cence. The 1966 valuation, taking Order No. 634 into
consideration, was $946,000, $584,000 attributable to
land and $362,000 to the building.
This estimate of value was futher reduced, to take ac-
count of ‘“‘economic obsolescence”’ attributable entirely
to Order No. 634.'7? Economic obsolescence is a term
appraisers use to describe a diminution of value attrib-
utable to an externality—such as the limitation of Order
No. 634. To calculate it in this case, Mr. Harps made
the assumption that the restriction would be lifted in
September 1978, twelve years after it was imposed, and
that the property could then be rezoned and sold for
town house development for $1,215.000 the present
worth of which he calculated at $396,333 as of Septem-
ber 1966. He also assumed that even under the Order
No. 634 restriction the property could be leased on a
short-term basis for truck parking at $26,000 per year
for the twelve years that Order No. 634 would be in
effect, which gave an economic value of $186,181'”' to
the rental income stream. Summing capitalized income
of $186,181 and discounted reversion of $396,333, he
rounded the value to be $582,500 in the property as of
September 1966. He felt compelled to accept this value
and not the $946,000 calculated on the cost basis. The
difference of $363,500 he described as economic obso-
lescence due to Order No. 634 ‘“‘which was not
needed.””!”
As events have demonstrated, the Order No. 634 re-
Striction was not needed for Eastern Garage. It was
1 See Staff Exhibit 22-A.
'71 Erroneously reported as $181,178 in staff Exhibit 22-A.
| 172 His words, Exhibit 22-A pp. 1, 3.
A
.
g
m
A72
Hearing Officer Decision
never called back into service to meet “‘supplementary
service requirements”’ because they never arose. While
we can now say that Order No. 634 was not needed,
that could not have been said in 1966. To the contrary,
the Commission determined that the restriction was
needed. The cost of meeting that need was the economic
loss that it occasioned, namely a reduction in the mar-
ket value equal to the “‘economic obsolescence”’ brought
about by withholding the property from the marketplace
at its highest and best use.
Frankly, I missed the significance of this point in my
July 24, 1977, finding that its date-of-transfer market
value was $946,000. I recommend that the Commission
review this finding carefully, as I now believe that an
offset for economic obsolescence is appropriate. I do
not agree with Mr. Harps’ assumption that Order No.
634 would have remained in effect through September
1978. Rather, it seems to me that August 15, 1976, when
Transit’s franchise term would end, is the appropriate
date. Our power to restrict the usage of that property
would have ended there. A valuation as of August 15,
1976, would probably increase the value of the rever-
sion slightly and decrease the value of the income
stream. The parties are invited to supply their calcula-
tion of August 15, 1976, value for the record.’”
Brookland Garage
Much of the discussion related to Eastern Garage ap-
plies to this property.
73 Staff Exhibit 9 was admitted into evidence. If this ruling is
deemed erroneous and it is held that the property should be valued
on the basis of that appraisal, I adopt Mr. Harps’ value estimate
(land, buildings, and total) as my finding of market value on date of
transfer.
A73
Hearing Officer Decision
It was appraised twice by Mr. Harps. His first ap-
praisal (Staff Exhibit 13) valued the property in a high-
est and best use as a service garage at $958,000,'”* based
on the average cost approach and income approach
value estimates. His second appraisal of the property
(Staff Exhibit 23) gave effect to Order No. 634 which
Mr. Harps interpreted as restricting use to utility func-
tions. This appraisal made on the cost approach, the
customary method for special purpose property, re-
sulted in a value estimate of $816,500.'”> Then, as with
Eastern Garage, he considered the destruction of eco-
nomic value caused by Order No. 634 which in effect
postponed the day when this property could be put to its
highest and best use. Mr. Harps assumed that this re-
striction would be lifted in September 1978, calculated
its value, unencumbered, as of that date, and discounted
that value to September 1966. To this value he added
the capitalized value of the net rental income that he
assumed the property would produce in the meantime.
The sum of these: income capitalized plus reversion dis-
counted, represented Mr. Harps’ estimate of a value as
of September 1966 which took economic obsolesence
into account. This value, $672,000, was less than either
the cost-approach valuation of Exhibit 23, or the highest
and best use valuation of Exhibit 13. The difference rep- _
resented the economic obsolescence or value diminu-
tion caused by Order No. 634.
My original market value findings in July 1977 did not
take economic obsolescence into account, but only the
reduction in value attributable to the restriction on use
'7* Land $547,000; building $411,000.
'75 Land $377,000; building $439,500.
ssieaaneienieciniaeeeele
A74
Hearing Officer Decision
imposed by Order No. 634. I recommend that the Com-
mission review this matter on the same basis as I have
recommended for Eastern Garage.'”®
Trinidad Garage
This property, along with the Brookland and Eastern
garages, was subjected on September 11, 1966, to the
Order No. 634 constraint that it be retained as operating
property “‘. . . to provide for supplementary service re-
quirements which may arise in the overall operations of
the company.”’ However, some ten months later, in July
1967, Transit was given permission to sell this property
by Commission Order No. 718. Order No. 718 spoke of
an “‘immediate sale’’; the prospective purchaser was not
identified. The immediate sale did not occur, and the
property was not sold until May 8, 1970, when the Dis-
trict of Columbia Redevelopment Land Agency pur-
chased it for $500,000. The $500,000 proceeds of sale
were attributed entirely to the land: $40,730.28 was ap-
plied to retire the land at its original cost and the bal-
ance of $459,269.72 was credited to earned surplus (i.e.,
to the investors) pursuant to our Regulation 61-04.'”
No appraisal of the property was made in 1967 or 1970,
even though one was called for under our Regulation
61-03. This property was not used in utility service at
any time between September 11, 1966, and its sale in
May 1970.
Transit’s position is that, unlike Eastern and Brook-
land garages, Trinidad Garage may properly be consid-
ered in this proceeding and that its date of transfer is
176 Staff Exhibit 13 was admitted into evidence. If this ruling is
deemed erroneous and it is held that the ig should be valued
on the basis of the appraisal, I adopt Mr. Harps’ value estimate
(land, buildings, and total) as my finding of market value on date of
transfer.
177 There is thus no claim of equitable offset as in 4th Street
Shop/Southern Carhouse. ,
A75
Hearing Officer Decision
either July 3, 1967, when it was authorized to be sold or
May 8, 1970, when it actually was sold.'” The staff,
relying on the fact that the property was not used in
utility operations after September 11, 1966, thus claims
that as the date of transfer. Several appraisals of this
property, all by Mr. Harps, were offered. Staff Exhibit
7 as revised by Staff Exhibit 7-A is Mr. Harps’ value
estimate for this property in its highest and best use as
of September 11, 1966. Staff Exhibit 24, revised by Staff
Exhibit 24-A, is Mr. Harps’ value estimate of this prop-
erty as of that date, but encumbered by the restriction
of Order No. 634. No appraisal of value is in evidence
for either July 1967 or May 1970, although the actual
sale price in 1970 ($500,000) is known.
I find, consistently with the finding for Eastern and
Brookland garages, that the date of transfer of this prop-
erty is September 11, 1966. In common with the Eastern
and Brookland situations, I concluded that it would be
inappropriate to value this property as if Order No. 634
did not exist. Accordingly, amenable to Transit’s re-
quest, I directed Mr. Harps to re-appraise this property
giving consideration to the effect of Order No. 634 on
market value. Staff Exhibits 7 and 7-A were not admit-
ted into evidence.” Staff Exhibit 24 was a cost-approach
value estimate as is customary for special purpose prop-
erty. To calculate the economic obsolescence occa-
178 Transit is indifferent as between these dates because the as-
sessed value was the same on both dates and Transit’s position is
oe value must be calculated on the assessed-value-ratio
met ‘
'79 If this ruling is deemed erroneous and it is held that the pr
erty should be valued on the basis of that appraisal, I a A
Harps’ valuation estimate (land, building, and total) as my finding
of market value on date of transfer. These values need not be re-
duced further for additional demolition costs as su ted at Tr.
574-78. There is no evidence that the buildings to be demolished
~ ge soy more than the 41,350 square feet onginally estimated by
S.
A76
Hearing Officer Decision
sioned by Order No. 634, an income approach valuation
was also made (Staff Exhibit 24-A) which resulted in a
final value estimate of $436,500, inhering entirely in the
land.
As in the case of Brookland and Eastern garages, my
original finding of date-of-transfer value failed to take
account of economic obsolescence. i believe the Com-
mission should reconsider this aspect of the matter. If
the September 1966 date of transfer is adhered to, then I
believe the property should be deemed available to ful-
fill its highest and best use as of August 15, 1976, when
Transit’s franchise expired rather than September 1978
as Mr. Harps suggested.
If, on the other hand, the Commission accepts Tran-
sit’s view that situation de jure rather than de facto is
determinative of the date of transfer, it will reject Sep-
tember 11, 1966, as the date of transfer for the Trinidad
Garage. In that event, I find July 3, 1967, when the
property was authorized to be sold, is the date of trans-
fer rather than May 8, 1970. This finding would be con-
sistent with the Court’s view that transfer out of service
and not sale and realization of gain is the touchstone of
farepayer entitlement to value appreciation. Moreover,
it wil! permit a market value determination to be entered
on the record that is developed in this proceeding. The
record supports my alternative finding that market value
in July 1967 is $525,000. I base this finding upon Mr.
Harps’ estimate of market value in highest and best use
as of September 1966, which I have increased by
aproximately 3 percent, his estimate of the annual incre-
ment in land value.
To extrapolate Mr. Harps’ 1966 appraisal to 1970 is a
somewhat shakier proposition. To accept the $500,000
sale price in 1970 is also questionable—this sale was
made under threat of condemnation, and Transit was in
a very weak bargaining position in 1970 as is evidenced
A77
Hearing Officer Decision
by the application of the proceeds of sale to meet cur-
rent liabilities. Even on an assessed-value-ratio basis of
computation a 1967 value of $500-525 thousand is
suggested. '®°
180 The $325,647 FY 1966 assessment divided by .65 = $500,995
— a increment of 3 percent for passage of one year’s time =
16, 2.
EEE EO |
Pr MG Pat WES
AZ78
Hearing Officer Decision
Table I
DATE OF TRANSFER MARKET VALUES AND GROSS GAIN
(1)
a.
Central Garage........
Oe er
Benning Line:
Right-of-Way........
Northeast Carhouse.....
OS Re err re ae
Cabin John Right-of-Way
Georgia and Eastern
ree
14th and V Streets
SUDSIOUON. . 00 ese
13th and D Streets
Storage Yard........
Navy Yard Carhouse ...
oS MSP er err ee
(3) (4)
(2) Date of Unrecovered (5)
Date of Transfer Investment Gross Gain
Transfer Markét Veiue (Per Table I) Col(3) minus Col(4)
09-30-58
$ 322,000 $ 19,315 $302,685
610,200 212,172 398,028
932,200 231,487 700,713
01-16-59
1,014,000 48,912 965,088
=— 354,389 (354,389)
1,014,000 403,301 610,699
01-16-59
833,500 40,177 793,323
—0— 110,962 (110,962)
833,500 151,139 682,361
04-30-59 16,500 4,301 12,199
04-30-59 4,800 974 3,826
05-31-59
246,000 36,151 209,849
136,000 66,472 69,528
382,000 102,623 279,377
01-31-60 201,500 96,237 105,263
10-31-60
187,800 31,199 156,601
-0—- 5,986 (5,986)
187,800 37,185 150,615
01-31-62
16,700 9,038 7,662
7,100 474 6,626
23,800 9,512 14,288
01-31-62 4,755 976 3,779
06-30-63
427,500 106,562 320,938
239,000 5,445 233,555
666,500 112,007 $54,493
A79
Hearing Officer Decision
Table II
DATE OF TRANSFER MARKET VALUES AND GROSS GAIN
(Continued)
(3) (4)
(2) Date of Unrecovered (5)
(1) Date of Transfer Investment Gross Gain
Transfer Market Valee (Per Table I) Col(3) minus Col(4)
M Street Shop ........ 06-30-63
sac de dcks iene $ 660,000 $ 65,793 $ 594,207
ee 316,800 10,081 306,719
, eee reer 976,800 75,874 __ 900,926
Grace Street Shop ..... 09-30-63
Se re ee 145,500 11,294 134,206
eee er er ere ey 88,500 20,906 67,594
PE hon pa esbadas 234,000 32,200 __ 201,800
General Office Building .. 01-01-64
FO RST Tere 402,000 44,127 357,873
POPP r Tee eT eee 1,713,000 795,275 917,725
PPP Prey ree 2,115,000 839,402 1,275,598
| 01-01-64 14,900 $79 __14,321
Brookland Garage ..... 09-11-66
SS SECT P ETT Tere 377,000 103,659 273,341
Frere rr ee 439,500 —0- __ 439,500
er 816,500 103,659 __712,841
Eastern Garage ....... 09-11-66
Rade hcn ed cinvan 584,000 74,867 509,133
rere re 362,000 —-0- 362,000
Cr 946,000 74,867 871,133
Trinidad Garage ....... 09-11-66
DO Caacandcaees os 270,500 40,733 229,767
ee eee 194,000 —0- 194,000
eee ere ree 464,500 40,733 423,767
Tete Lame. ....... 5,728,955 734,894 4,994,061
Total Bidgs........ 4,106,100 1,582,162 2,523,938
GRAND TOTAL ... $9,835,055 $2,317,056 $7,517,999
es
A80
Hearing Officer Decision
VI. Sales Expenses and Income Taxes
In DCC-J the Court held, ‘‘... that the farepayers
were entitled to all appreciations in the value of the as-
sets in issue, depreciable and nondepreciable, accruing
during their tenure as operating properties.’’!*! This
finding was qualified as follows:
In referring to the amount of appreciation or
gain on the assets while in service, we are speak-
ing of a net figure. The amount which should be
credited to the farepayers is not the entire differ-
ence between book value and market value of the
assets at the time of transfer, but rather that sum
minus the taxes and sales expenses which would
have been deducted from Transit’s profit if the
assets had been sold outright instead of simply
being moved into nonoperating status. '**
The opinion in DCC-I] is not so explicit on this
point.'8? In Bebchick-II, the Court was precise; the
Commission was directed to compute the net gain “‘. . .
taking into account taxes and costs which might have
reduced the gain if the properties had been sold.’’?™
I have understood the Court’s decisions to require that
Transit’s investors be kept whole. Therefore, I have off-
set sales expenses and taxes against gain on a consistent
basis for all the properties in every remanded docket.
18} Supra, n.1(a) at 822.
182 Thid. at n. 343.
183 In DCC-II the Court directs that the failure to benefit the
riders by the increased market values should ‘‘. . . be handled as
we have suggested . . . in Democratic Central Committee.”’ {citing
DCC-I], supra n.1(e) at 915. There is no specific direction to offset
sales expenses and taxes against the gain.
184 Supra, n.1(c) at 876. Also see n.122 at 873 and n.137 at 875.
A81
Hearing Officer Decision
A. Sales Expenses
Sales expenses fall into several categories. There is a
question whether all the categories proposed should be
recognized. I have entered findings on the issue of rec-
ognition vel non and I have also made findings of the
amount of expense in every category in order that there
shall be an offset amount available even in the disputed
expense categories. My findings are set out in Table III
which appears at the end of this subsection.
Testimony on this subject was received from Mr.
Hatfield for the company, Mr. Harps for Black United
Front (B.U.F.),!® and Mr. Peterman for Mr. Bebchick.
1. District of Columbia Deed Recordation Tax,
United States Internal Revenue Stamp Tax.
These taxes, which present no special theoretical
problems are treated in the sales expense category.
There was no disagreement with Mr. Harps’ testi-
mony that these excise taxes should be recognized as
expenses to the seller in a real estate conveyance. Mr.
Harps calculated taxes at the applicable rates on the date
of transfer in accordance with the market valuations set
forth in my preliminary findings of July 1977. As such,
there was no dispute with Mr. Harps’ calculations and
they are accepted. Recalculation would be necessary in
some cases if a different date of transfer is determined
because tax rates changed from time to time. The Dis-
trict of Columbia and federal taxes are ad valorem exer-
cises, and so recomputation is required in every instance
in which a different market value is found.
'85 B.U.F.’s sponsorship of Mr. Harps was objected to by Tran-
sit. His testimony was received over objection.
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Hearing Officer Decision
2. Settlement Charges.
The settlement charges advanced by Mr. Harps are
also accepted although they are probably a little bit low.
The record presents no basis upon which to increase
them in an informed way, and, in any case, the amount
involved is de minimis.
3. Brokerage Commissions.
This is a major expense in selling real property. The
B.U.F., by sponsoring Mr. Harps, and the staff, by not
contesting Mr. Harps’ views on the matter, accepted the
proposition that every sale would carry a brokerage
commission paid by Transit in the amount determined
by Mr. Harps. Brokerage commissions are, as is well
known, related to sales prices, and commission rates
have varied from time to time. Mr. Harps’ estimates of
the amount of commission are associated with the dates
of transfer and valuations established in my preliminary
findings. A different date-of-transfer finding might re-
quire a new estimate of the brokerage commission.)® A
different finding on market value (i.e., imputed sale
price) would very probably require a redetermination of
the brokerage commission.'®’ Mr. Hatfield testified that
the brokerage commission would be 6 percent in every
case. Mr. Harps, whose expertise in the field was admit-
ted, whereas Mr. Hatfield’s was not, applied varying
rates and testified at some length on practices in the real
estate business. Under cross-examination he agreed to
186 The Commission could reach a finding on the amount of com-
mission based on the record without the need for further evidentiary
hearings.
187 This determination which requires a finding that is within a
range of reasonableness could also be made on the basis of the
record.
3
2
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Hearing Officer Decision
raise his estimate of the reasonable commission rate for
three properties (Brookland, Eastern and Central ga-
rages).
Mr. Bebchick vigorously contested the allowance of
any brokerage fees on the basis that in actual practice
Transit did not use brokers in the real estate sales it did
make or the leases it entered into as lessor. He provided
a witness —the former comptroller of Transit — testify to
the company’s practices in managing, leasing and selling
real estate and cross-examined Mr. Hatfield on the sub-
ject, as did counsel for the staff. From the record thus
developed one must conclude that with the exception of
a listing of its General Office Building with a broker in
late 1972, Transit was not in the practice of using real
estate brokers, or bearing the cost of brokerage com-
missions when property was sold.'®8
Notwithstanding this evidence, brokerage commis-
sions per Mr. Harps’ calculations as revised on cross-
examination will be allowed. The reason is that the
evidence as to the company’s practices, when its policy
was not to sell property (Tr. 1979), is not controlling on
the question of what its policy would have been other-
wise, nor reflective of normal commercial practices. I
believe that brokers would most certainly have been en-
gaged to assist in the major sales program that would
have been necessary to sell these properties on the dates
they were transferred out of service. The use of a bro-
ker’s services is the norm when large or complex sales
are transacted (Tr. 1753).
'88 Grace Street Shop and the terminal at Georgia and Eastern
Avenues were sold without a commission being paid; the four prop-
erties sold to the Redevelopment Land Agency were sold, as one
would expect, without the involvement of a broker or payment of a
commission.
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Hearing Officer Decision
4. Appraisal Fees.
Appraisal fees, as estimated by Mr. Harps on cross-
examination (Tr. 1754-70) will also be allowed. An ap-
praisal is customary in connection with the sale of utility
property. An appraisal is required for sales or account-
ing transfers subject to our Regulation 61. This Commis-
sion would undoubtedly have required an independent
appraiser’s value estimate to confirm the adequacy of
the sale price in the case of a sale or to establish value
in the case of a transfer below the line. The cost of such
an appraisal would have been chargeable to the
farepayers.
5. Attorney Fees.
Transit contends that attorney fees are a normal and
usual expense of the parties to a major real estate trans-
action and claims an allowance in this case. B.U.F. and
Mr. Bebchick disagree, in reliance on the availability of
house counsel at no additional cost, and on Mr. Harps’
view that the seller’s interest in a transaction is typically
so simple as not to require an attorney (Tr. 1734). On
the other hand, there is evidence in the record that on
the occasions when property was sold Transit did avail
itself of the services of retained counsel expert in real
estate matters (Tr. 2398-99). In my view, attorney fees
would have been incurred if these transfers had been
actual sales, and accordingly I accept the stipulation of ~
the parties that attorney fees, if allowed, be calculated
at 3/8ths of 1 percent of the sales price.
6. Holding Costs and Points.
Mr. Hatfield, the company’s witness, estimated total
sales expense at 10 percent of market value for every
property by extrapolation from expense computations
Sd Sale PC RC Ses SORRY ESOS Shan AEA
tn BEE Sts ana Ral ets | tomy
RRR Mei
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Hearing Officer Decision
he performed for three properties.'®’ The 10 percent
sales expense included, in addition to the five categories
of sales expense referenced above, “‘holding costs’’ and
‘“‘points’’, which together were estimated at 3 to 4 per-
cent of market value.
‘“‘Holding costs’’ were described as the expenses in-
curred between the time a property is listed for sale and
when it is sold, and include items such as insurance and
maintenance.!*° Undoubtedly there would have been a
lapse of time between a decision to sell these properties
and their actual sale (Tr. 1780-87). -It is true that, to
paraphrase Mr. Hatfield, costs don’t stop just because
you decide to sell; they stop when you do sell. The
question is whether such costs are allowable as a sales
expense in this proceeding. I have determined that they
are not for two reasons: first, as Mr. Harps put it, hold-
ing costs are an expense of ownership not an expense of
sale, and would be incurred in any case;*! second, this
proceeding assumes a Sale on the date of transfer below
the line. Expenses before that date would have been
charged to the farepayers,'** and expenses after that
date are not allowable. If I am overruled on this point, I
find, on the basis of Mr. Hatfield’s testimony, that hold-
ing costs are, on average, equal to 1% percent of market
value.
‘*Points’’, i.e., a retention of part of the principal of a
loan by a lender, are not allowed as a sales expense.
Except for Mr. Hatfield’s arbitrary claim of an expense
equal to 2 percent of market value for points, there is no
basis in the record to determine the rate at which points
were being charged by lenders on the dates in question.
189 See Transit Exhibits 47, 48, Tr. 240, and Protestant Exhibit 1.
7 Ty, 301.
Te 17M.
'"2 Transit’s counsel conceded as much (Tr. 1792).
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Hearing Officer Decision
In any Case, points are generally paid by the purchaser
not the seller (Tr. 1734).
Sales expense findings are summarized in Table III
following.
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Hearing Officer Decision
oo seen?
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Hearing Officer Decision
| :
7
Table III }
SALES EXPENSE
($) ‘
(2) (3) (4) D.C.
(1) Date Of Market LR. Transfer
Eee. Li —— Sumpe =. =
Central Garage........... 09-30-58 $ 932,200 $ 1,025.42
4th Street Shop .......... 01-16-59 1,014,000 1,115.40
Southern Carhousc........ 01-16-59 833,500 916.85
Maryland Linc........... 04-30-59 16,500 18.15
eee 04-30-59 4,800 5.28
Northeast Carhousc ....... 05-31-59 382,000 458.70
Capen 30me Lime.......... 01-31-60 201,500 221.65
Georgia & Eastcrn Terminal . 10-31-60 187,800 206.58
14th & V Strects, N.W. .... 01-31-62 23,800 26.18
13th & D Streets, N.W. .... 01-31-62 4,755 $.23
Navy Yard Carhouse ...... 06-30-63 666,500 733.15 $ 1,666.25
NM Sereet Shap .... 0. cae 06-30-63 976,800 1,074.58 2,442.00
Grace Street Shop ........ 09-30-63 234,000 257.40 585.00
Gencral Office Building. .... 01-01-64 2,115,000 2,326.50 5,287.50
a | SPR rere rT 01-01-64 14,900 11.44 26.00
Brookland Garage......... 09-11-66 816,500 898.15 2,041.25
Eastern Garage .......... 09-11-66 946,000 1,040.60 2,365.00
Trinidad Garage.......... 09-11-66 464,500 510.95 1,161.25
WEEE hac esccsces $9,835,055 $10,852.11 $15,574.25
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Hearing Officer Decision
(9 10
(6) (7) (8) aamameape Total Seles
Settlement Brokerage Appraisal Fee Expense
Charge Commission Fee 3% of (3) Sum of (4) thru (9)
%
$ 25 4 $ 37,288.00 $ 1,000 $ 3,496 $ 42,834.42
25 3 30,420.00 1,250 3,803 36,613.40
25 4 33,340.00 1,250 3,126 38,657.85
25 10 1,650.00 50 62 1,805.15
25 10 480.00 50 18 $78.28
25 5 19,100.00 750 1,433 21,766.70
25 6 12,090.00 2,000 756 15,092.65
25 5 9,390.00 250 704 10,575.58
25 6 1,428.00 300 89 1,868.18
25 10 475.50 50 18 573.73
25 5 33,325.00 1,000 2,499 39,248.40
25 4 39,072.00 1,250 3,663 47,526.48
25 5 11,700.00 750 878 14,195.40
25 3 63,450.00 2,500 7,931 81,520.00
25 10 1,490.00 100 56 1,708.44
25 4% 36,742.50 1,500 3,062 44,268.90
25 4A 42,570.00 1,750 3,548 $1,298.60
23 5 23,225.00 1,250 _1,742 27,914.20
$450
$397,236.00 $17,050 $36,884 $478,046.36
A90
Hearing Officer Decision
B. Income Taxes
No issue in this proceeding was productive of more
complex, and may I say, confusing testimony. If there is
a reader who seeks to be disabused of the notion that
one can understand a regulatory proceeding by review-
ing the record he is referred to pages 1995-2378 of the
transcript.
The income tax is the largest offset to gain and so, as
one would expect, the subject was explored extensively.'”°
The company’s position was simplicity itself. Transit
sought an income tax deduction of 28.75 percent of the
net gain after sales expenses. This was represented to
be the combined effect of the federal and District of Co-
lumbia capital gains taxes. Transit’s witness conceded
on the witness stand that there was no D.C. capital gains
tax on any of the dates of transfer found by the hearing
officer,’** and that if the properties had been sold on the
dates of transfer only the federal capital gains tax would
have applied. Thus, a tax liability of 25 percent of the
net gain would have been the maximum incurrable had
the properties been sold on the dates of transfer.
The staffs theory of the case purported to be a more
precise reflection of the tax consequences of sales at the
market values and on the dates of transfer found by the
hearing officer. Developed and presented by a tax part-
ner of the accounting firm which served as expert advi-
sor to and witness for the staff throughout these
193 No one addressed the question whether the gain would have
been recognized for tax purposes if Transit had been required con-
temporaneously with the transfer to credit it to the farepayers.
% The District of Columbia capital pin tax was enacted by
Public Law 91-106, October 31, 1969, 83 Stat. 176, and applied to
taxable years from 1969 onward. Thus, if a D.C. capital gains tax
applies to any property being considered in this case it is only to
the Trinidad Garage and then only if its date of transfer is deemed
to be its date of sale, May 8, 1970. Of course, when these proper-
ties are actually sold, they will be subject to the D.C. capital gains
tax.
Won angie iene ea
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Hearing Officer Decision
proceedings, it posited an actual sale of each property
as of the date of transfer and deducted the tax basis!* in
the property and the sales expense to arrive at a hypo-
thetical taxable gain.
In calculating Transit’s assumed tax liability the staff
witness first adjusted the reported taxable income to
exlude the gains from actual sales, since none of these
sales occurred in the same year as the date of transfer'”®
or at a price equal to market value as found by the hear-
ing officer. Then the hypothetical gain on all the assumed
sales of transferred properties was added back as of the
year of transfer.'?’ Then these hypothetical gains were
taken into Transit’s income for the years in question —
i.e., hypothetical capital gains were combined with the
actual operating earnings or losses. Transit’s taxable in-
come was recalculated on this basis and tax rates appli-
'95 It is very important to be aware that the gain for tax purposes
is not equal to the appreciation in value as determined in accor-
dance with the Court’s directives. Both equate market value on the
date of transfer with a sale price. Value appreciation for the pur-
pose of this proceeding has been calculated by subtracting the
unrecovered investment (net book value per regulatory books) from
market value, whereas gain for tax purposes is calculated by sub-
tracting the tax basis from market value. Tax basis does not equal
unrecovered investment because a different method was used to
allocate Transit’s purchase price to assets for regulatory purposes
than was used for tax purposes, and because different rates of de-
tena ss were used for tax purposes than for regulatory purposes.
ax basis became an issue and so I have made findings as to tax
basis, see Table IV at the end of this section.
196 The differences are as follows:
Property Year of Sale Year of Transfer
Cabin John 1961 1960
Georgia & Eastern 1962 1960
Trinidad Garage 1970 1966
Substation (14th and V Streets) 1971 1962
as a of the gain realized on the sale of the 4th Street
Shop and Southern Carhouse to RLA in 1959 was deferred for tax
purposes by Transit, but recognized as of 1959 for purposes of cal-
culating tax expense in this proceeding.
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Hearing Officer Decision
cable to the assumed property transactions were
developed accordingly.
The staff’s elaborate reconstruction also took account
of the fact that Transit incurred operating losses in ev-
ery year from 1966 onward. To illustrate an effect of
income recalculation by the staff method, assume a gain
of $250,000 from a property disposition in a year in
which operating losses exceeded $250,000. In this case
the gain would be offset against the loss and no tax
would be due. Arguably, therefore, the entire gain should
be credited to the farepayers without an offset for taxes.
The accounting gets more complex when tax loss carry-
backs and carry-forwards are taken into consideration.!”*
In 1964 Transit had taxable income. Thus, a property
disposition in that year would have been taxable at the
marginal capital gains rate in the 1964 tax filing. Because
of operating losses in 1966, the 1964 tax return could
later be reopened and the 1966 loss carried back to off-
set 1964 income. Such carry-back losses may be used to
offset not only operating income, but also capital gains
on property dispositions. Assuming a large enough loss
carry-back to offset the gain entirely, the capital gain
would not have been taxable. Therefore, the argument
flows, the farepayers should receive the benefit of the
entire 1964 capital gain without a tax expense offset.!%°
The complexity of the matter deepens when the hypo-
thetical capttal gains in 1966 are used first to offset op-
erating losses in that year, thereby reducing the amount
available for carry-back to 1963, ’64 and ’65, thereby
further distorting the assumed income, and income taxes,
in those years. The intricacy of the problem and the
198 Transit’s 1966 operatin losses were carried-back to offset all
or part of income in 1963, 1964, and 1965 in the staff’s calculations.
1 The irony of a result that losses in operations generate higher
benefits to the farepayers is too juicy to go unremarked.
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? Hearing Officer Decision
arcanity of its solution is further increased when the ef-
fect of the investment tax credit is incorporated, to say
nothing of depreciation recapture and the effect of rental
income.
The staff's approach demonstrates that with the ben-
efit of hindsight and the assumption of certain dates of
transfer and market values for those dates it is possible,
while taking account of all the inter-relationships de-
scribed above, to approximate the actual taxes that “‘. . .
would have been deducted from Transit’s profit if the
assets had been sold outright instead of being moved
into nonoperating status.’’*° And this the staff’s wit-
ness did. The resultant tax was computed at $1,649,946
(Staff Exhibit 29, Schedule 10; Tr. 2042), later increased
to $1,662,413 to take account of differences in selling
expenses from those originally estimated by the witness
(Staff Exhibit 30, and Staff Exhibit 31, Schedule 10).?”
The staff witness did not carry this elaborate year-by-
year reconstruction of the company’s tax liability on-
ward to a calculation of the tax expense to be associated
with each property, nor, a fortiori, as between the land
and depreciable portions of each property. Only a gross
increment in taxes over those actually paid by Transit in
the years in question was calculated. This incremental
tax expense of $1,662,413 was offered as the appropri-
200 DCC-I, supra, n.1(a) at 822 n.343.
20! The staff also offered (as Staff Exhibit 32) an alternative com-
putation in which the 4th Street Shop and Southern Carhouse were
excluded. Neither the gain on those sales nor an imputed tax was
recognized. The resulting tax offset was $1,260,345 (Staff Exhibit
32, Schedule 10) but this offset was to be taken against a total net
gain that did not include the gain imputed to those properties. I
have understood the staff’s position to be that if gain on those prop-
erties is recognized in these proceedings, a tax offset should be
allowed, even though no tax on that gain has been paid as yet. The
recognition of gain has been deferred under provisions of the Inter-
nal Revenue e allowing deferral when a property disposition
r
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