# Appendix — D. C. Transit System, Inc. v. Washington Metropolitan Area Transit Commission > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385002_0578%3A2 ## Record - **Collection:** Supreme Court brief - **Document type:** Appendix - **Published:** January 1, 1989 - **Citation:** 488 U.S. 1043 ## Text 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 Al 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 A2 Hearing Officer Decision 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 A3 Hearing Officer Decision 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 Hearing Officer Decision 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 AS Hearing Officer Decision 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). A6 Hearing Officer Decision 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. A7 Hearing Officer Decision 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 A8 Hearing Officer Decision 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). A9 Hearing Officer Decision 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. A10 Hearing Officer Decision 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 All Hearing Officer Decision 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. | | — Al2 Hearing Officer Decision 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. 7 ee ee a ee Al3 Hearing Officer Decision 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. Al4 Hearing Officer Decision 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. EE — Al5 Hearing Officer Decision 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. Al6 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. Al8 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. Al19 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. | A31 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 [THIS PAGE INTENTIONALLY LEFT BLANK] 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. AS1 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 a [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385002_0578%3A2. Public record. Not legal advice.