Appendix — Giles Lowery Stockyards, Inc. v. Department of Agriculture

Supreme Court, U. & 4

FILED

| MAR 27 1978

MICHAEL RODAK, JR., CLERK

In the Supreme Court of the United States

OCTOBER TERM, 1977

No. ..... @7-1 3 6 6

GILES LOWERY STOCKYARDS, INC. D/B/A LUFKIN

LIVESTOCK EXCHANGE,

Petitioner,

vs.

THE U. S. DEPARTMENT OF AGRICULTURE AND THE

PACKERS AND STOCKYARDS—AMS,

Respondents.

APPENDIX TO

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

RICHARD A. KOEHLER

Attorney of Record for Petitioner

Ropwert M. Cook

For the Petitioner

Suite 306

4900 Oak Street

Kansas City, Missouri 64112

A/C 816 531-2235

E. L. Munpenmatt, Inc., 926 Cherry Street, Kansas City, Mo. 64106, (816) 421-8080

INDEX

Appendix A—Opinion, United States Court of Ap-

peals, Fifth Circuit, No. 76-2462 Al

Appendix B Decision and Order, Administrative Law

. Al5

Appendix C—Decision and Proposed Order, Admin-

istrative Law Judge, August 25, 1975 .A100

Appendix D—Statutes and Regulations ....................... A133

Packers and Stockyards Act, 1921 .A133

he § 0 ge r A137

Administrative Procedure Act

Al

APPENDIX A

565 F.2d 321 (C.A. 5th 1977)

GILES LOWERY STOCKYARDS, INC.

d/b/a Lufkin Livestock

Exchange, Petitioner,

v.

DEPARTMENT OF AGRICULTURE,

Respondent.

No. 76-2462.

United States Court of Appeals,

Fifth Circuit.

Dec. 27, 1977.

Appeal was taken from order of Department of Agri-

culture establishing rates and charges for operator of live-

stock auction market. The Court of Appeals, Thornberry,

Circuit Judge, held that: (1) rate of return of slightly

more than 11 percent on land, equipment, buildings and

working capital was not unreasonably low; (2) the same

method is not required to be used in computing rates for

auction stockyard as is used for terminal stockyards; (3)

rate-making method used was not infirm because it was

not proposed and adopted in a rule-making context; (4)

even if publication was required, the operator had actual

notice of the rate-making method and (5) it was per-

missible to use nationwide allowances or averages of auc-

tion markets in fixing petitioner’s rates.

Affirmed.

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1. Administrative Law and Procedure (Key) 749

Absent a showing to the contrary, agency officials are

assumed capable of judging a controversy fairly and with-

out bias or prejudice.

2. Trade Regulation (Key) 871

No rate is reasonable that is confiscatory. U.S.C.A.

Const. Amend. 5.

3. Trade Regulation (Key) 871

In establishing rates and charges for livestock auction

markets, no single method of ratemaking is required.

Packers and Stockyards Act, 1921, §§ 305, 310, 7 U.S.C.A.

§§ 206, 211.

4. Administrative Law and Procedure (Key) 324

When Congress has directed that rates be regulated

but has not specified a method for doing so, the agency

has discretion in devising a particular scheme. Packers

and Stockyards Act, 1921, § 305, 7 U.S.C.A. § 206.

5. Trade Regulation (Key) 871

If the total effect of a rate order cannot be said to

be unjust and unreasonable, judicial inquiry is at an end,

and it is unimportant that the method employed to reach

such results contained infirmities. Packers and Stock-

yards Act, 1921, § 305, 7 U.S.C.A. § 206.

6. Trade Regulation (Key) 871

In devising a rate-making scheme, the regulatory

agency can take into account the peculiar characteristics

of a particular industry and can choose among various

competing theories. Packers and Stockyards Act, 1921,

§ 305, 7 U.S.C.A. § 206.

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7. Trade Regulation (Key) 871

A regulated industry is not entitled to realize a par-

ticular rate of return; interests of the consuming public

are also to be considered in establishing rates. U.S.C.A.

Const. Amend. 5; Packers and Stockyards Act, 1921, § 305,

7 U.S. C. A. § 206.

8. Trade Regulation (Key) 871

If results reached by Department of Agriculture in

establishing rates and charges for livestock auction market

was reasonable, judicial inquiry would be at an end and

there would be no need to examine the rate-making

scheme itself. Packers and Stockyards Act, 1921, §§ 305,

310, 7 U.S.C.A. §§ 206, 211.

9. Constitutional Law (Key) 298(1)

A party attacking a prescribed rate schedule bears

the heavy burden of showing by clear and convincing proof

that the rates are unreasonably low; absent such proof

the courts will not find a Fifth Amendment violation.

U.S.C.A. Const. Amend. 5.

10. Trade Regulation (Key) 871

In establishing rates and charges for livestock auction

market, it was not unreasonable to fix a rate of return

of slightly more than 11 percent on land, equipment,

buildings and working capital. Packers and Stockyards

Act, 1921, §§ 305, 310, 7 US.C.A. §§ 206, 211; U.S. C. A.

Const. Amend. 5.

11. Trade Regulation (Key) 871

In establishing rates and charges for auction stock-

yards the Department of Agriculture is not required to

utilize the same method as used in computing rates for

terminal stockyards, i. e., the rate base/rate of return

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formula; differences between the two types of operations

can be considered in determining a rate formula. Packers

and Stockyards Act, 1921, §§ 305, 310, 7 U.S.C.A. §§ 206,

211.

12. Administrative Law and Procedure (Key) 324

Choice between rulemaking and an ad hoc proceeding

to determine policy lies within the discretion of the ad-

ministrative agency. 5 U.S.C.A. § 552(a)(1)(D).

13. Administrative Law and Procedure (Key) 389

An agency may announce new principles or policies

in an adjudicatory proceeding and is not required to resort

to rulemaking, although it may do so. 5 U.S. C. A. § 552

(a) () O).

14. Public Service Commissions (Key) 12

A regulated industry is to be sufficiently apprised of

the standards that will be applied to determine a reason-

able rate in order that it may adequately prepare its case.

15. Trade Regulation (Key) 871

Method of computation used in fixing rates for live-

stock auction market was not required to be first pro-

posed and adopted by Department of Agriculture in a rule-

making context; Department could adopt a method of

computation by adjudication as well as by rule-making.

Packers and Stockyards Act, 1921, §§ 305, 310, 7 U.S.C.A.

88 206, 211.

16. Trade Regulation (Key) 871

Operator of livestock auction market was sufficiently

apprised of method of computation intended to be used in

establishing rates and charges where prior to administra-

tive hearing operator was presented with a 15-page doc-

ument outlining method used to handle auction rate as

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well as a financial analysis of the operator for rate pur-

poses; fact that particular rate-making method used was

not formally adopted until judicial officer’s decision was

irrelevant as was fact that operator, relying on cases in-

volving terminal stockyards, chose to build its case on rate

base principle. Packers and Stockyards Act, 1921, §§ 305,

310, 7 U.S. C. A. §§ 206, 211; 5 U.S. C. A. § 552 (a) (1) (D),

(a) (2) (C).

17. Trade Regulation (Key) 871

Since rate- making formula used in establishing charges

for livestock auction market did not achieve status of a

substantive rule of general applicability until administra-

tive decision in instant proceeding was handed down, prior

publication in Federal Register was not required; even if

publication were required, the operator could not be heard

to complain since prior to administrative hearing it had

actual knowledge of the rate-making method proposed to

be used. Packers and Stockyards Act, 1921, §§ 305, 310,

7 USCA. $§ 206, 211; 5 U.S.C.A. § 552(a)(1)(D), (a)

(2) (C).

18. Administrative Law and Procedure (Key) 749

A presumption of validity is accorded administrative

bodies acting within their sphere of expertise.

19. Public Service Commissions (Key) 7.4, 32

An agency has considerable discre non in determining

just and reasonable rates; a court cannot substitute its

judgment for that of the agency.

20. Trade Regulation (Key) 871

Use of nationwide industry studies, rather than actual

figures provided by livestock auctioneer, was within dis-

cretion of the Department of Agriculture in establishing

A6

rates and charges for the auctioneer; tire “just and reason-

able” principle does not require that the cost of each

company be ascertained and its rates fixed with respect

to its own costs. Packers and Stockyards Act, 1921, §§ 305,

310, 7 U.S.C.A. §§ 206, 211.

Petition for Review of an Order of the Department

of Agriculture (Texas Case).

Before THORNBERRY, Circuit Judge, SKELTON,

Senior Judge*, and HILL, Circuit Judge.

THORNBERRY, Circuit Judge:

This is an appeal from an Order of the Department

of Agriculture establishing rates and charges for the peti-

tioner, a corporation that operates the Lufkin Livestock

Exchange at Lufkin, Texas. The Exchange is an “auction

market” at which producers’ livestock is sold on a com-

mission basis.

The case arose when petitioner sought permission to

increase its charges to farmers and ranchers for selling

their livestock. The Packers and Stockyards Act requires

that all rates or charges made by a stockyard owner or

operator be “just, reasonable, and nondiscriminatory.”

7 U.S.C. § 206.“ The Act also provides that whenever,

*Senior Judge of the United States Court of Claims, sitting

by designation.

1. There is no doubt that the Act applies to petitioner’s

operation. In 1958, following extensive hearings, Congress ex-

tended the Act’s tory provisions to auction stockyards,

regardless of size. See Senate Rep. No. 1048, 85th Congress,

Ist Sess. (1958). There are approximately 2,000 such stockyards

operating today, and this is apparently the first case involving

ratemaking for these “auction markets.” As the judicial officer

noted in his this case “will serve as a guide for the

Department’s rate .. . . 35 A.D. at 282.

A7

after full hearing, the Secretary of Agriculture determines

that any rate or charge is or will be unjust, unreasonable,

or discriminatory, the Secretary may determine and pre-

scribe reasonable rates or charges. 7 U.S.C. § 211. Final

administrative authority to decide rate cases under the Act

has been delegated to the Department of Agriculture’s

judicial officer, who in this case denied the requested

rates and instead adopted a rate schedule proposed by

the Department. Giles Lowery Stockyards, 35 A.D. 267

(1976).

[1] This appeal followed, and petitioner and the Live-

stock Marketing Association, amicus curiae, raise three

broad issues before this court: (1) whether the rate-

making scheme employed by the Department is confisca-

tory in violation of the fifth amendment; (2) whether

petitioner had adequate notice of the procedures to be

utilized in the ratemaking process; and (3) whether sub-

stantial evidence on the record as a whole supports the

administrative decision.“ For the reasons stated below,

we affirm.

I. Ratemaking Method

Petitioner contends that the ratemaking scheme used

by the Department does not insure a reasonable rate of

return and complains that the method is deficient because

it does not consider petitioner’s investment in the business.

assumed capable of judging a controversy ly and without bias

v

or Wi q

43 712 (1975). See also Hortonville Joint School Dist. v.

5 Educ. Ass’n, 426 U.S. 482, 96 S.Ct. 2308, 49 L. Ed. 2d 1

Ag

[2, 3] It is elementary that no rate is reasonable

that is confiscatory. See Railroad Commission Cases, 116

U.S. 307, 6 S.Ct. 334, 388, 29 L. Ed. 636 (1886). However,

there exists a zone of reasonableness within which [an

agency] is free to fix a rate varying in amount and higher

than a confiscatory rate. FPC v. Natural Gas Pipe-

line Co., 315 U.S. 575, 585, 62 S.Ct. 736, 743, 86 L.Ed.

1037 (1942). oreover, no single method of ratemaking

is required; rather, “‘it is the result reached, not the method

employed, which is controlling. . . It is not theory but

the impact of the rate order which counts.” FPC v. Hope

Natural Gas Co., 320 U.S. 591, 602, 64 S.Ct. 281, 287, 88

L.Ed. 333 (1944). Accord: Wisconsin v. FPC, 373 U.S. 294,

309, 83 S.Ct. 1266, 10 L.Ed.2d 357 (1963); FPC v. Texaco,

Inc., 417 U.S. 380, 387-88, 94 S.Ct. 2315, 41 L.Ed.2d 141

(1974).

[4-7] When Congress has directed that rates be reg-

ulated but has not specified a method for doing so, the

agency has discretion in devising a particular scheme.

Permian Basin Rate Cases, 390 U.S. 747, 776-77, 88 S.Ct.

1344, 20 L.Ed.2d 312 (1968); Wisconsin v. FPC, supra, 373

U.S. at 309, 83 S.Ct. 1266. If the total effect of a rate

order cannot be said to be unjust and unreasonable, judi-

cial inquiry is at an end, and it is unimportant that the

method employed to reach that result contained infirmities.

FPC v. Hope Natural Gas Co., supra, 320 U.S. at 602, 64

S.Ct. 281; Alabama-Tennessee Natural Gas Co. v. FPC,

359 F.2d 318, 331 (5 Cir.), cert. denied, 385 U.S. 847, 87

S.Ct. 69, 17 L.Ed.2d 78 (1966). In devising a ratemaking

scheme, a reguiatory agency can take into account the

peculiar characteristics of a particular industry and can

choose among various competing theories. Alabama-Ten-

nessee Natural Gas Co. v. FPC, supra, 359 F.2d at 335.

Finally, a regulated industry is not entitled, as a matter

of right, to realize a particular rate of return, and the

A9

interests of the consuming public are also to be considered

in establishing rates. Covington & Lexington Turnpike

Co. v. Sandford, 164 U.S. 578, 596, 17 S.Ct. 198, 41 L. Ed.

560 (1896); FPC v. Natural Gas Pipeline Co., supra, 315

US. at 606-07, 62 S.Ct. 736 (Black, J., concurring).

[8-10] These principles make clear that this court

must first consider whether the result reached by the

Department in the instant case is reasonable. If so, our

inquiry is at an end and there is no need to examine

the ratemaking scheme itself.“ A party attacking a pre-

scribed rate schedule must show with clear and convincing

proof that the rates are unreasonably low. In the absence

of such proof, the courts will not find a fifth amendment

violation. American Toll Bridge Co. v. Railroad Comm'n,

307 U.S. 486, 494-95, 59 S.Ct. 948, 83 L.Ed. 1414 (1939);

FPC v. Hope Natural Gas Co., supra, 320 U.S. at 602, 64

S.Ct. 281. Petitioner has failed to carry this rather heavy

burden.*

1111 Finally, petitioner urges that the same method

must be used for computing rates for auction stockyards

as for terminal stockyards, i. e., a rate base/rate of return

3. Petitioner focuses its attack on the ratemaking formula,

arguing that the Department should have utilized a rate base and

rate of return formula. Petitioner specifically complains of the

Department’s “unit allowance” concept, which takes nationwide

averages regarding and allocates a certain amount to

each animal sold. approach is also referred to as a “per-

head-weight” schedule and is used by approximately 800 of the

nation’s 2,000 auction markets.

4. The rates roved by the Department will produce

nearly $185,000 y, this providing tioner with approx-

tely $48,600 more

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formula. See generally Denver Union Stock Yard Co. v.

United States, 304 U.S. 470, 58 S.Ct. 990, 82 L.Ed. 1469

(1938); St. Joseph Stock Yards Co. v. United States, 298

U.S. 38, 56 S.Ct. 720, 80 L.Ed. 1033 (1936). There is a

great deal of difference between the two types of opera-

tions, and the Department clearly can take into account

these differences in determining a rate formula to apply.

Alabama-Tennessee Natural Gas Co. v. FPC, supra, 359

F.2d at 335.

II. Notice

[12, 13] Petitioner first contends that the method

of computation utilized in the ratemaking proceeding

should have been first proposed and adopted by the De-

partment in a rulemaking context. However, the choice

between rulemaking and an ad hoc proceeding to deter-

mine policy lies within the discretion of the administrative

agency. SEC v. Chenery Corp., 332 U.S. 194, 203, 67 S.Ct.

1575, 91 L.Ed. 1995 (1974); Alabama-Tennessee Natural

Gas Co. v. FPC, supra, 359 F.2d at 343. Moreover, an

agency may announce new principles in an adjudicatory

proceeding and need not resort to rule-making. NLRB v.

Bell Aerospace So., 416 U.S. 267, 294, 94 S.Ct. 1757, 40

5. Terminal stockyards have been traditionally located at

major railroad centers and are the “throat through which the

current [of livestock] flow.” Stafford v. Wallace, 258 U.S. 495,

516, 42 S.Ct. 397, 66 L.Ed. 735 (1922). Owners of a terminal

stockyard provide the facilities where livestock are bought and

sold, while the selling function is performed by independent

market agencies. The owners’ entire income thus depends upon

the return allowed on their investment. Auction markets, on the

other hand, are generally small operations located in cattle-pro-

ducing areas. Most are owner operated with the owner perform-

ing the sales function. In this respect, the owner-operator is in

much the same position as the independent market agency at a

terminal stockyard. Finally, terminal stockyards ordinarily op-

erate in monopolistic settings, while it is not unusual to find

several auction markets within a few miles ~ 4 one another. The

udicial officer compared terminal stockyards to such traditional“

vehile wtilitied es talbeede andl Gunite eum and likened

auction markets to owner-operated taxicabs. 35 at 283.

All

L.Ed.2d 134 (1974). See also Port Terminal R.R. Ass’n

v. United States, 551 F.2d 1336, 1341-42 (5 Cir. 1977).

[14-16] Petitioner, however, urges that it was prej-

udiced because the Department failed to make known,

prior to the hearing, the method of computation it intended

to utilize. Petitioner relies heavily on Hill v. FPC, 335

F.2d 355 (5 Cir. 1964), which requires that a public utility

be sufficiently apprised of the standards that will be ap-

plied to determine a reasonable rate in order that the

utility may adequately prepare its case. See also Port

Terminal R. R. Ass’n v. United States, supra, 551 F.2d at

1342-43.

The Department informed petitioner’s counsel by let-

ter, well in advance of the hearing, of the “method used

by the Packers and Stockyards Administration to analyze

auction rates.” Enclosed with the letter was a 15-page

document outlining that method, as well as a financial

analysis of Lufkin Livestock for rate purposes. See Ex-

hibit 1, Record (vol. 1); Exhibit 10, Record (vol. 4). Peti-

tioner was thus aware of the ratemaking approach, was

aware that the Department planned to apply it in this

case, and was presented with opportunity to build a case

around the method or attack its application. The case is

unlike both Hill and Port Terminal R.R. Ass’n, supra, in

which the aggrieved parties had no such notice or oppor-

tunity.

The fact that this particular ratemaking method was

not formally adopted by the Department until the judicial

officer’s decision in this particular case is irrelevant, since

an agency can adopt such policies via adjudication as well

as by rulemaking. The critical inquiry is whether peti-

tioner had notice of the method so that it could prepare

a case, and there is no doubt that petitioner had such

notice. Nor is it relevant that petitioner, relying on cases

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involving terminal stockyards, chose to build its case on

rate base principles, because petitioner had notice that

another formula was to be utilized.

[17] Petitioner also advances a Freedom of Informa-

tion Act argument to the effect that the Department was

required to publish its ratemaking method. See 5 U.S.C.

§ 552(a)(1)(D).° This publication requirement applies

only to an agency’s “substantive rules of general appli-

cability” and “statements of general policy,” and the rate-

making formula at issue here did not achieve such status

until the administrative decision in this case was handed

down. Prior to that time, the method was merely a posi-

tion or proposal, and, as such, was available upon request

under 5 U.S.C. § 552 (a) (2) (C)“ That portion of the

FOIA, however, does not mandate publication,“ and peti-

6. This subsection provides:

Each agency shall separately state and currently publish in

the Federal Register for the guidance of the public—. . . sub-

stantive rules of general applicability adopted as authorized

by law, and statements of general policy or interpretations

of general applicability formulated and adopted by the

agency.

7. This subsection provides:

Each agency, in accordance with published rules, shall make

available for public inspection 21 copying—. . . administra-

tive staff manuals and instructions to staff that affect a

member of the public...

8. In fact, it is unclear whether the method must now be

published in the Federal Register. Professor Davis has suggested

that some, but not all, adjudicatory opinions must be published.

K. Davis, Administrative Law Treatise § 3A.7 (Supp. 1970). The

Attorney General’s Memorandum on the Public Information Sec-

tion of the Administrative Procedure Act (1967) takes the position

that no statement of policy in an adjudicatory opinion need be

published. Under this view, administrative “case law” is avail-

able under subsection (2)(A), which requires agencies to make

available for public inspection and copying “final orders made in

the adjudica of cases.” See Memorandum. supra, at 10. As

Professor Davis later pointed out, “time goes on without a clarifi-

cation.” K. Davis, Administrative Law of the Seventies § 3A. 7,

at 73 (1976). This case does not u. us with the opportunity

to provide any guidance in this muddled area.

Al3

tioner apparently made no request for the information.

Moreover, we re-emphasize that petitioner had actual

notice of the ratemaking method, and even if publication

were required here, actual knowledge or notice of agency

policy precludes reliance on the agency’s failure to comply

with the FOIJA’s publication requirement. Whelan v.

Brinegar, 538 F.2d 924, 927 (2d Cir. 1976); Kessler v. FCC,

117 U.S.App.D.C. 130, 147, 326 F.2d 673, 690 (1963).

III. Substantial Evidence

118, 19] Petitioner also raises the almost-obligatory

“substantial evidence” challenge: whether substantial evi-

dence on the record as a whole supports the administrative

decision. See Universal Camera Corp. v. NLRB, 340 U.S.

474, 71 S.Ct. 456, 95 L.Ed. 456 (1951). A presumption of

validity is accorded to administrative bodies acting within

their sphere of expertise, ICC v. Jersey City, 322 U.S. 503,

512, 64 S.Ct. 1129, 88 L.Ed. 1420 (1944), and an agency

has considerable discretion in determining just and reason-

able rates. TNT Tariff Agents, Inc. v. ICC, 525 F.2d 1089,

1093 (2d Cir. 1975). We cannot substitute our judgment

for that of the agency, Citizens to Preserve Overton Park

v. Volpe, 401 U.S. 402, 416, 91 S.Ct. 814, 28 L.Ed.2d 136

(1971), and we have in the past noted that our review

of the exercise of agency authority is confined “by the

narrow perimeter of the substantial evidence rule.” Colo-

nial Stores, Inc. v. FTC, 450 F.2d 733, 739 (5 Cir. 1971).

Applying these principles, we find no merit to petitioner’s

argument and conclude that the judicial officer’s exhaus-

tive 54-page opinion finding the Department’s proposed

rates just and reasonable is supported by substantial evi-

dence. The agency has clearly set forth the grounds on

which it acted, Atchison, T. & S. F. R. v. Wichita Bd. of

Trade, 412 U.S. 800, 807, 93 S.Ct. 2367, 37 L.Ed.2d 350

(1973), and has taken a “hard look” at the issues and

Al4

problems. Greater Boston Television Corp. v. FCC, 143

U.S.App.D.C. 383, 393, 444 F.2d 841, 851 (1970).

[20] In the context of this case, a substantial evi-

dence attack is merely another means by which petitioner

can challenge the Department’s ratemaking method. In-

deed, petitioner emphasizes that various “allowances”

based on nationwide industry studies—rather than actual

figures provided by petitioner—were utilized in the rate

calculations.“ Use of such allowances or averages is clearly

within the agency’s discretion. The “just and reasonable”

principle does not require “that the cost of each company

be ascertained and its rates fixed with respect to its own

costs.” FPC v. Texaco, Inc., supra, 417 U.S. at 387, 94

S.Ct. at 2321. It is permissible for an agency to use aver-

age costs rather than the costs of individual utilities.

Permian Basin Area Rate Cases, supra, 390 U.S. at 818-19,

88 S.Ct. 1344. Southern Louisiana Area Rate Cases v.

FPC, 423 F.2d 407, 432 (5 Cir.), cert. denied, 400 U.S. 950,

91 S.Ct. 241, 27 L.Ed.2d 257 (1970). See also Tagg Bros.

& Moorhead v. United States, 280 U.S. 420, 440-42, 50 S.Ct.

220, 74 L.Ed. 524 (1930). To require an agency to rely

only upon figures supplied by a utility would encourage

the company to inflate its actual expenses in order to

would be absorbed by the consumer. See United Gas

Public Service Co. v. Texas, 303 U.S. 123, 150-51, 58 S.Ct.

483, 82 L.Ed. 702 (1938) (Black, J., concurring).

The administrative decision is AFFIRMED.

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APPENDIX B

(No. 16,989)

In re Gites Lowery Stocxyarps, Inc., d/b/a Lurxm

Livestock EXcHANGE. P&S Docket No. 4782.

Decided March 26, 1976.

Rate-making procedure—challenges to—Rate-making

principles—applicability of

Complainant’s rate-making procedure is reasonable and its

rate-making principles employed herein are applicable

to respondent’s auction stockyard. Respondent’s chal-

lenges thereto are found to be without merit.

Buildings and equipment—rate of return on

Complainant’s rate of return as set forth herein is consis-

tent with that allowed in other regulated industries

and is just and reasonable.

Reasonable revenue requirements—increase

An increase in the reasonable revenue requirements does

not result in a change in the proposed tariff.

Rates and charges of respondent—unjust and unrea-

sonable—Complainant’s proposed rates and charges—

just, reasonable and nondiscriminatory—Complainant

—Proposed Tariff IV—adoption of—Order to respon-

dent to assess accordingly

Where the rates and charges of respondent are unjust,

unreasonable and prohibited by law, and the rates and

charges as proposed by complainant in its Proposed

Tariff IV are just, reasonable, and nondiscriminatory,

respondent is ordered to assess those rates and charges

as set forth in the Order herein.

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Thomas C. Heinz, for complainant.

Robert Flournoy, Lufkin, TX, for respondent.

John A. Campbell, Administrative Law Judge.

Decision by Donald A. Campbell, Judicial Officer.

DECISION AND ORDER

PRELIMINARY STATEMENT

This is a proceeding under the Packers and Stockyards

Act, 1921, as amended (7 U.S.C. 181 et seq.), involving

the rates and charges assessed by the respondent corpora-

tion for rendering auction market services at the Lufkin

Livestock Exchange, Lufkin, Texas.

On March 28, 1973, respondent filed with complainant

a new tariff (Tariff No. IV), which was to go into effect

on April 16, 1973, and which would have assessed greater

rates and charges for auction market services than the

tariff (Tariff No. III) then on file and in effect. Tariff

No. III, which had been in effect since September 4, 1972,

was accepted for filing by complainant on the basis of

financial information contained in respondent’s annual re-

port to complainant for the fiscal year ending June 30,

1972. Upon filing Tariff IV, respondent furnished no addi-

tional information in support of the increase in the rates

and charges. Thereafter complainant concluded that a fur-

ther rate increase would be unreasonable, and by Com-

plaint, Order of Suspension and Notice of Hearing, filed

herein on April 13, 1973, complainant suspended the opera-

tion and use of Tariff IV for a period of 30 days. The

Complaint, Notice of Hearing and Order of Suspension was

published in the Federal Register on May 9, 1973 (38 FR.

12143), and among other things stated that “respondent

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and all other interested parties will have a right to ap-

pear” and present relevant evidence. The suspension was

subsequently extended for an additional 30 days, followed

by publication in the Federal Register on May 23, 1973

(38 F.R. 13590). Thereafter, Tariff IV became effective.

An oral hearing was conducted before Chief Adminis-

trative Law Judge John A. Campbell on June 25 and 26,

1974, in Lufkin, Texas. Robert Flournoy, Esquire, of

Lufkin, Texas, represented respondent, and Thomas C.

Heinz, Esquire, Office of the General Counsel, United

States Department of Agriculture, Washington, D.C., rep-

resented the complainant.

The parties filed Stipulation 1 on June 14, 1974; Stip-

ulation 2 became a part of the record during the hearing;

and Stipulation 3 was filed after the hearing on August 9,

1974.

Chief Judge Campbell filed an Initial Decision and

Proposed Order on August 25, 1975, in which he sustained

the complainant’s position as to all of the issues, and con-

cluded that the rates and charges proposed by complainant

in the administrative proceeding, which are lower than

those charged by respondent in its Tariff IV, “are reason-

able and nondiscriminatory, and are the rates and charges

which Respondent should assess for its services and the

use of its facilities” (Initial Decision, pp. 35-36).

On October 10, 1975, the respondent appealed the Ini-

tial Decision and Proposed Order to the Judicial Officer.

Final administrative authority to decide rate cases under

the Packers and Stockyards Act has been delegated to the

Judicial Officer (37 F.R. 28475; 38 F.R. 10795). Oral

1. The office of Judicial Officer is a career position estab-

lished pursuant to the Act of April 4, 1940 (7 U.S.C. 450c-450g),

(Continued on following page)

Als

argument before the Judicial Officer was heard on Novem-

ber 21, 1975. A tentative Decision and Order was filed

February 13, 1976, virtually identical to this Decision and

Order.

RELEVANT STATUTORY PROVISIONS

The Packers and Stockyards Act defines the term

“stockyard” to mean “any place, establishment, or facility

commonly known as stockyards, conducted, operated, or

managed for profit or nonprofit as a public market for

livestock producers, feeders, market agencies, and buyers,

consisting of pens, or other inclosures, and their appur-

tenances, in which live cattle, sheep, swine, horses, mules,

or goats are received, held or kept for sale or shipment in

commerce” (7 U.S.C. 202 (a)).

After the Secretary ascertains that a stockyards comes

within the statutory definition, he is required to “give

notice thereof to the stockyard owners concerned, and give

public notice thereof by posting copies of such notice in

the stockyard, and in such other manner as he may deter-

mine” (7 U.S.C. 202(b)). Such stockyards are referred

to as posted“ stockyards.

Footnote continued—

and Reorganization Plan No. 2 of 1953 (5 U.S.C. 1970 ed., Appen-

dix, p. 550). The Department’s first Judicial Officer held the

office from 1942 to 1972. The present Judicial Officer was ap

2. Following the parlance of the trade, the terms “stockyard”

and “stockyards” are used herein interchangeably to refer to an

individual livestock market.

Alg

operating a stockyard” (7 U.S.C. 201 (a)). The term

“market agency” is defined as “any person engaged in

the business of (1) buying or selling in commerce live-

stock on a commission basis or (2) furnishing stockyard

services” (7 U.S.C. 201(c)).

“Stockyard services” means “services or facilities fur-

nished at a stockyard in connection with the receiving,

buying, or selling on a commission basis or otherwise,

marketing, feeding, watering, holding, delivery, shipment,

weighing, or handling in commerce, of livestock” (7 U.S.C.

201(b)).

Section 304 of the Act states that “[a]ll stockyard

services furnished pursuant to reasonable request made to

a stockyard owner or market agency at such stockyard

shall be reasonable and nondiscriminatory and stockyard

services which are furnished shall not be refused on any

basis that is unreasonable or unjustly discriminatory” (7

U.S.C. 205).

Section 305 of the Act provides that “[a]ll rates or

charges made for any stockyard services furnished at a

stockyard by a stockyard owner or market agency shall

be just, reasonable, and nondiscriminatory, and any unjust,

unreasonable, or discriminatory rate or charge is prohibited

and declared unlawful” (7 U.S.C. 206).

Section 310 of the Act provides that whenever after

full hearing the Secretary is of the opinion that any rate

or charge of a stockyard owner is or will be unjust, un-

reasonable, or discriminatory, the Secretary may determine

and prescribe what will be the just and reasonable rates

or charges to be thereafter in such case observed as both

the maximum and minimum to be charged (7 U.S.C. 211).

Specifically, § 310 of the Act provides (7 U.S.C. 211):

A20

Whenever after full hearing upon a complaint

made as provided in section 210 of this title, or after

full hearing under an order for investigation and hear-

ing made by the Secretary on his own initiative,

either in extension of any pending complaint or with-

out any complaint whatever, the Secretary is of the

opinion that any rate, charge, regulation, or practice

of a stockyard owner or market agency, for or in con-

nection with the furnishing of stockyard services, is

or will be unjust, unreasonable, or discriminatory, the

Secretary—

(a) May determine and prescribe what will be

the just and reasonable rate or charge, or rates or

charges, to be thereafter in such case observed as both

the maximum and minimum to be charged, and what

regulation or practice is or will be just, reasonable,

and nondiscriminatory to be thereafter followed; and

(b) May make an order that such owner or

operator (1) shall cease and desist from such viola-

tion to the extent to which the Secretary finds that

it does or will exist; (2) shall not thereafter publish,

demand, or collect any rate or charge for the fur-

nishing of stockyard services more or less than the

rate or charge so prescribed; and (3) shall conform

to and observe the regulation or practice so prescribed.

Section 313 of the Act provides that orders of the

Secretary prescribing rates and charges “shall take effect

within such reasonable time, not less than five days, as

is prescribed in the order, and shall continue in force

until his further order, or for a specified period of time,

according as is prescribed in the order, unless such order

is suspended or modified or set aside by the Secretary

or is suspended or set aside by a court of competent juris-

diction” (7 U.S.C. 214).

A21

FINDINGS OF FACT

1. Respondent Giles Lowery Stockyards, Inc., d/b/a

Lufkin Livestock Exchange, is a corporation with a place

of business at Lufkin, Texas.

2. Respondent is, and at all times material herein

was:

(a) engaged in the business of conducting the Lufkin

Livestock Exchange, a posted stockyard under the Act;

(b) engaged in the business of selling livestock on

a commission basis at the stockyard; and

(c) registered with the Secretary of Agriculture as

a market agency to sell livestock in commerce.

3. Giles Lowery Stockyards, Inc., owns two stock-

yards, the Lufkin Livestock Exchange and the Bay City

Livestock Commission. Giles Lowery is active in both

stockyards. The Lufkin Livestock Exchange was posted

in March 1959 and was incorporated in February 1960.

Herbert Lowery then owned 98% of the shares of stock

in the corporation and Giles Lowery owned 1%. In No-

vember 1968, Giles Lowery purchased the Lufkin Live-

stock Exchange from Herbert Lowery. In December 1968,

the Giles Lowery Stockyards, Inc., became a separate

corporation. Since then, Giles Lowery has been President

and sole owner of Giles Lowery Stockyards, Inc. (Tr. 7-9).

4. Complainant accepted for filing (without deter-

mining the reasonableness thereof) respondent’s Tariff III

effective September 4, 1972, based upon respondent’s an-

nual report for the fiscal year ending June 30, 1972. Sub-

sequently, on March 28, 1973, respondent filed proposed

Tariff IV to become effective April 16, 1973, which as-

sessed increased rates and charges for its auction market

A22

services and which was based on the earlier June 30, 1972,

annual report. Complainant concluded that the rates and

charges proposed in Tariff IV were unreasonable, and sus-

pended the operation of the tariff for a period of 60 days

(Stipulation 1; Tr. 6-7, 75-78, 144-145, 151-152).

5. Complainant’s original conclusion that the rates

and charges proposed in Tariff IV were unreasonable was

based on the fact that the proposed tariff was supported

only by respondent’s annual report submitted for the

period ending June 30, 1972. Since the complainant did

not have any current information from the respondent

justifying an increase, the proposed tariff was suspended

for 60 days.

Subsequently, the complainant conducted an audit of

respondent’s books and records for the period July 1, 1972,

through June 30, 1973, which is the respondent’s fiscal

year. This is the “base period” used by complainant for

the purposes of this rate proceeding. The complainant’s

present conclusion that the respondent’s rates and charges

proposed in Tariff IV are unreasonable is based on that

audit of respondent’s books and records (Tr. 6-7).

6. The method followed by the complainant in ana-

lyzing respondent’s Tariff IV, which is the same method

followed by complainant in analyzing all auction rates

(except that usually an audit is not made), is set forth

as Exhibit X attached to Stipulation 3 filed August 9, 1974

(see Tr. 10-11, 145-146; Comp. Ex. 1).

The rate analysis begins with an examination of the

stockyard’s cost of operation. Most of the market’s ex-

penses are presumed to be reasonable and necessary for

efficient operation of the stockyards unless shown other-

wise. In the resent case, of the $203,846.57 shown on

respondent’s books and records as total expenses for the

A23

base period, 62% thereof, or $125,764.37, were accepted by

complainant as reasonable and necessary.

Any expenses which complainant determines are not

properly chargeable to the stockyards are subtracted from

the total expenses. Four categories of expenses which

are properly chargeable to the stockyards are subtracted

and later replaced by allowances which the complainant

determines to be reasonable for such expenses. Such al-

lowances may be more or less than the actual expenses

of the market. The expenses replaced by allowances are

as follows:

First, the compensation paid by a market to an owner

for his work and for his management is removed and

replaced by allowances for work and management deter-

mined by complainant’s formula.

Second, interest paid by the stockyards is removed

from the total expenses, and an allowance is later included

for a return on working capital. Third, bad debts are

excluded and replaced by an allowance based on industry

averages.

Fourth, “Business Getting and Maintaining” expenses

are removed and replaced by an allowance. The category

of Business Getting and Maintaining expenses includes

losses sustained by the market as market support activ-

ities.

After the various expense items are removed from the

total expenses, the resulting figure is referred to as the

“Adjusted Expenses,” which totalled $125,764.37 in the

present case.

To the Adjusted Expenses are added the complainant’s

allowances for “Compensation for Working Owners;”

“Owner’s Management and Interest on Working Capital;”

A24

“Business Getting and Maintaining” expenses; and “Bad

Debts.” In addition, the complainant adds to the Adjusted

Expenses an allowance for the return on buildings and

equipment (computed at 8% of original cost, less depre-

ciation), an allowance for the use of land in connection

with the stockyards and an allowance for operating margin.

The Adjusted Expenses together with the sum of the

allowances equals the Total Reasonable Revenue Require-

ments” of the market.

A comparison of the Total Reasonable Revenue Re-

quirements with the Total Revenue (Selling Commissions

and Yardage) resulting from the market’s tariff is the final

step which shows whether the market’s present rates

result in Total Revenue greater than the market’s Total

Reasonable Revenue Requirements.

The complainant’s cost and revenue analysis for the

respondent’s stockyards for the base period July 1, 1972,

through June 30, 1973, is shown in Figure 1, which follows.

The individual items on Figure 1 are discussed seriatim

in the following Findings of Fact.

1.

2.

21.

22.

A25

LUFKIN LIVESTOCK EXCHANGE

LUFKIN, TEXAS

COST AND REVENUE ANALYSIS FOR RATE PURPOSES

$203,846.57

$20,377.29

30,467.81

AFTER AUDIT

(BASE PERIOD 7/1/72—6/30/73)

Adjustments

(Removals)

Expenses per Rate Audit

LESS: Compensation to

Owner

Salary $14,070.00

Solicitor’s Fee 6,307.29

Total

Compensation

LESS: Interest paid 14,537.05

Bad debts 4,410.23

Pasture rent 300.00

Trucking &

Hauling 9,370.78

Church

contributions 70.00

Donations 461.00

Non-Auction

Market Expenses 1,318.75

Total

LESS: Business Getting &

Maintaining

Expenses

Advertising 2,497.34

Solicitor’s Expense 500.00

Market

Per 24,239.76

Market Sup

[4,063.59]

1 — Support

[20,176.17]

Total

Adjusted Expenses ($203,846.57

less L 5, 13, 21)

27,237.10

125,764.37

22.

36.

A26

Adjustments

(Additions)

Adjusted Expenses 125,764.37

PLUS: Compensation for

Working Owners 15,839.40

Allowance for

Owner’s Manage-

ment and Interest

on Working

Capital 4,259.10

Total allowance for

Owner’s Efforts 20,098.50

. PLUS: Allowance for

Business Getting

and Maintaining

(L 16+17+19) 7,060.93

Allowance for re-

turn on buildings

and equipment 2,398.60

Allowance for

use of land 3,407.28

Allowance for ad-

ciation 609.81

Allowance for

Bad Debts 2,769.89

16,246.51

(L 227257731) 162,109.38

. PLUS: Allowance For

Operating

Margin 22,715.20

Total Reasonable Revenue

Requirements 184,824.58

Total Revenue (Selling Com-

missions & Yardage) Per

Audit 214,175.41

Current Revenue in excess of

requirement (L 35 — L 34) 29,350.83

Figure — 1

A27

7. The respondent’s total expenses in the rendition

of auction market services during the base period (July 1,

1972-June 30, 1973), as shown by its books and records,

were $203,846.57 (Fig. 1, line 1; Tr. 12).

8. During the base period, respondent paid to Mr.

Giles Lowery, who owns 100% of the corporate stock of

the respondent, $20,377.29, consisting of $14,070 in salary

and $6,307.29 as a livestock solicitor’s fee (Fig. 1, lines

3-5). The compensation of $20,377.29 paid by respondent

to its working owner was removed by complainant since

it was not an amount arrived at through arms-length bar-

gaining (Tr. 13-14, 79-88). An allowance to compensate

Mr. Lowery as a working owner was later added (see

Finding 17, infra).

9. During the base period, respondent paid $14,537.05

in interest on outstanding debts (Fig. 1, line 6). Such

interest was paid on a Small Business Administration loan

to liquidate debts, and not for capital improvements.

This interest expense was removed by complainant on

the grounds that it should not be borne by the consignors

of livestock, the ratepayers, but by the corporation’s share-

holders. If such interest is not removed, the ratepayers

would be paying twice for the borrowed funds, once in

the form of interest and once in the form of depreciation

expenses allowed on depreciable assets purchased with

the borrowed funds (Tr. 14, 88-91). No issue is raised

on appeal with respect to this item.

10. During the base period, respondent incurred bad

debt losses of $4,410.23, which were removed by complain-

ant (Fig. 1, line 7). Since a stockyard operator is required

by the Act and the regulations (7 U.S.C. 208, 213; 9 CFR

201.43) to pay consignors by the next business day fol-

lowing the sale of their livestock the net proceeds thereof,

A28

whether or not the purchasers pay, stockyards may, and

generally do, incur some bad debt expense. However, in

some cases, an extraordinarily large bad debt expense for

a particular year has been the sole basis for a request to

increase rates. In order to prevent requests for increased

rates from being based on what complainant regards as

unreasonable bad debt expenses, actual bad debt expenses

are removed and replaced with an allowance, discussed

in Finding 23, infra (Tr. 14, 92-94, 169).

11. During the base period, respondent paid $300 for

rent on a pasture about 5 or 10 miles distant from the

auction market (Fig. 1, line 8). This was excluded by

complainant because complainant determined that the pas-

ture was not used or useful for auction market purposes

(Tr. 15, 95-97).

12. During the base period, respondent expended

$9,370.78 for trucking and hauling services (Fig. 1, line 9).

This was deducted from the allowed expenses because the

respondent’s records were inadequate and did not indicate

that consignors of the market had benefited from these

expenses (Tr. 15-17, 95-105; Comp. Ex. 2).

13. During the base period, respondent made contri-

butions to churches of $70.00 and donations to other orga-

nizations and individuals of $461.00 (Fig. 1, lines 10 and

11). These expenses were removed by complainant be-

cause it is not considered reasonable that ratepayers make

involuntary donations to charities not of their choice

(Tr. 17-18, 105-106). No issue is raised on appeal with

respect to these items.

14. During the base period, respondent incurred mis-

cellaneous expenses of $1,318.75, which were deducted by

complainant on the ground that the expenses were not

related to the auction market business (Fig. 1, line 12).

A29

The $1,318.75 deducted by complainant consists of the

following items:

(a) the proportionate share ($167.82) of a bond

premium covering the Bay City operation (Tr. 18-19, 107;

Comp. Ex. 3);

(b) franchise taxes of $93.94 applicable to Bay City

Livestock Exchange, but paid by the Lufkin Livestock

Exchange (Tr. 19, 111; Comp. Ex. 3);

(c) legal fees of $25 and accounting fees of $500

which were for services received in the year preceding the

base period (respondent’s accounts are kept on an accrual

basis, i.e., expenses are to be entered on the books when

accrued and not when paid) (Tr. 19, 111-112, 354; Comp.

Ex. 3); and

(d) a depreciation expense ($292.95) and a utility

expense ($239.04), totalling $531.99, associated with a

house adjacent to the auction market, which is furnished

by the market to Mr. Leonard Miller and occupied by

Mr. Miller and his family.

The employee, Mr. Miller, is a caretaker-custodian

who is at the market seven days a week. He is required

to live in the house furnished by the market. He pre-

vents vandalism and answers the telephone during the

week when office personnel are not at the market. He

helps receive cattle if they are consigned early; does minor

repairs; keeps the grass cut; cleans up; and is “kind of a

utility man” (Tr. 19, 107-111, 379-380; Comp. Ex. 3). The

employee, Mr. Miller, receives a salary of approximately

$250 per week.

The complainant removed the expenses incident to

this house because complainant felt it is inappropiate for

for ratepayers to be asked to support an auction market

A30

employee’s family beyond the amount of the salary paid

that employee (Tr. 19, 107-111; Comp. Ex. 3).

Of the foregoing miscellaneous items totalling $1,318.75,

the respondent challenges on appeal only the last item re-

lating to the $531.99 associated with the house occupied

by Mr. Leonard Miller. *

15. During the base period, respondent's books and

records showed Business Getting and Maintaining ex-

penses totalling $27,237.10 (Fig. 1, line 21). Of this

amount, $2,497.34 was expended for advertising designed

to promote the interests of consignors (Fig. 1, line 16);

$500 was expended as livestock “solicitor’s expense” (Fig.

1, line 17); and $24,239.76 was entered in an account la-

beled by respondent as “market support” (Fig. 1, line

18). Of the $24,239.76 “market support” expenses, only

$4,063.59 could be verified and confirmed by complain-

ant’s audit (Fig. 1, line 19).

All of the Business Getting and Maintaining expenses

totalling $27,237.10 were deducted by complainant (Fig.

1, line 21), but the expenses for advertising ($2,497.34),

livestock solicitor’s expense ($500) and the confirmed

market support expenses ($4,063.59) were subsequently

added back by complainant (Fig. 1, line 26).

Market support is the term generally used in the auc-

tion market business to describe the bidding by a market

operator or his representative at auction which bidding

ends in the purchase of the animal by the market. Such

bids are placed not with the intention to purchase the

animal, but rather to stimulate bids from other buyers.

This process is entirely voluntary; many markets do not

‘engage in it.

Animals purchased through market support are either

again run through the auction ring at the same market or

A31

transported to another market for sale. The market sup-

port account at a market is charged with the losses, if any,

associated with disposing of such animals. Where appli-

cable, these losses include transportation costs, feed costs

and the difference between the purchase price at which

the market bought the animal and the selling price of

the animal when the market sold it.

Complainant treated as confirmed market support ex-

penses those expenses resulting from the purchase by re-

spondent at respondent’s market of specific, identifiable

cattle consigned to the market, plus expenses flowing from

the sale by respondent of such cattle to named, identifi-

able, third-party purchasers. In other words, in order to

confirm market support expenses, it is necessary to trace

the animals head-by-head from consignors to ultimate pur-

chasers (Tr. 23-29, 117-127, 134-142, 147-149, 334; Comp.

Ex. 5).

16. Subtracting the foregoing deductions referred to

in Findings 8-15, supra, which total $78,082.20, from the

respondent’s total book expenses of $203,846.57 results in

the respondent’s Adjusted Expenses of $125,764.37 (Fig.

1, line 22). Under the complainant’s rate analysis proce-

dure, various additions are made to the market’s Adjusted

Expenses (Fig. 1, lines 23-33). These additions are set

forth in the following Findings of Fact.

17. The complainant added an allowance of $15,839.40

to compensate Mr. Giles Lowery as a “working” owner of

the respondent stockyards during the base period (Fig. 1,

line 23). Mr. Lowery’s primary function at the weekly

auction sale is to serve as “starter.” A “starter” sets the

the starting price or opening bid of consigned cattle when

such cattle are placed in the auction ring and put up for

sale (Tr. 160).

A32

The allowance of $15,839.40 made for respendent’s

working owner was derived from a compensation formula

used by complainant in rate analyses (Comp. Ex. 6; see, also,

Comp. Ex. III attached to Stipulation 3, filed August 9,

1974). The compensation formula provides 50¢ per animal

unit on the first 20,000 units sold at the market, 25¢ per

unit on the next 20,000 and 5¢ per unit for each unit over

40,000. One cattle, one horse or one mule equals one animal

unit under this formula. A hog equals one-third of a unit

and a sheep equals one-fourth of a unit (Comp. Ex. 6).

During the base period, the respondent stockyards re-

ceived on consignment 56,788 animal units, consisting of

56,292 cattle, 827 hogs, and 220 horses (Comp. Ex. 6).

18. The complainant added an allowance for Own-

er’s Management and Interest on Working Capital during

the base period of $4,259.10 (Fig. 1, line 24). This allow-

ance was computed on the basis of 6.25¢ per animal unit

for management ($3,549.25) and 1.25¢ per animal unit for

interest on working capital ($709.85). These amounts are

allowed whether or not the owner is actively engaged in

the operation of the market on sale days (Tr. 30-33, 160-

163, 207-218, 273-287; Comp. Exs. 6, 12; Comp. Exs. IV

and IX attached to Stipulation 3, filed August 9, 1974).

The portion of the allowance for interest on working capi-

tal is not challenged on appeal.

19. An allowance of $7,069.93 was added for respon-

dent’s Business Getting and Maintaining expenses during

the base period (Fig. 1, line 26). This allowance is based

on 25¢ per animal unit sold at auction during the base

period, or actual, confirmed expenses during the base pe-

riod, which ever is less. In this case, the allowance was

based on the actual, confirmed expenses referred to in

Finding 15, supra.

A22

20. An allowance of $2,398.60 was added for respon-

dent’s return on buildings and equipment during the base

period (Fig. 1, line 27). This allowance was computed on

the basis of 8% of the original cost of the buildings (and

improvements) and equipment, less depreciation.

Records filed with complainant show that as of De-

cember 31, 1967, the undepreciated book value of the Luf-

kin Livestock Exchange facility was $76,817.18. Accumu-

lated depreciation of $51,383.55 left the net book value of

the buildings and equipment of $25,433.63 as of this date.

In December of 1968, Mr. Giles Lowery purchased the fa-

cility from its original owner, and the operation changed

from a calendar year basis to a fiscal year basis ending

on June 30 of each year. It was, therefore, necessary to

estimate the net book value of the assets as of December

31, 1968, a year for which no annual report for Lufkin

Livestock Exchange was submitted to complainant. Since

more than $5,000 in depreciation had been taken in 1967,

a similar amount would reasonably have been taken in

1968 had the facility remained in the hands of the original

owner. For this reason, the net book value of respon-

dent’s buildings and equipment was set at $20,000 as of

December 31, 1968. A number of capitalized improve-

ments and annual depreciation from that date resulted in

the net depreciated book value of respondent’s buildings

and equipment of $27,130.67 as of June 30, 1973, the close

of the base period.

The foregoing book value of buildings and equipment

of $27,130.67 was increased by the net value of unloading

docks constructed during the base period at a cost of $6,-

098.13. Deducting depreciation on the docks of $609.81

left a book value of $32,618.99. However, complainant

subtracted from that figure $2,636.53, the book value of

the house occupied by Mr. Miller, referred to in Finding

A34

14, supra, on the ground that the house is not used and

useful for auction market purposes. This left $29,982.46

as the final net book value of respondent’s buildings and

equipment used and useful for auction market purposes

(Tr. 8, 34-37, 127-132, 165-167; Comp. Ex. 7).

21. The complainant added an allowance of $3,407.28

for the stockyard’s use of land during the base period (Fig.

1, line 28). The $3,407.28 is based on 6¢ per animal unit

sold by the stockyards during the base period. The basis

for this formula was explained by Jack W. Brinckmeyer,

Chief, Rates, Services and Facilities Branch, Packers and

Stockyards Administration, as follows (Tr. 167-168):

Land values has been a problem. [In] 1958 when

I started handling the rate work for our agency we

were exploring several methods of determining the

value of land, what we should use. If we went back

to the original cost as the Hope Natural Gas said we

could, it would have had a very startling effect on

the industry.

So after trying to index it on farm prices of land

and several other things we determined that some al-

lowance for the use of land based on the unit of live-

stock would probably be the most fair way to the

regulated industry and to the rate payer and treat

each one of them fairly.

In the early 1960’s appraisals had been made of

several of the major stockyards. This included Sioux

City, St. Paul, Oklahoma City, Louisville, Kentucky,

and the land appraisals at that time and the units of

livestock were evaluated to determine what the unit

allowance would be.

From reviewing those firm’s annual reports and

the appraisal of the land at those stockyards we came

A35

up with a unit cost of five point eight-eight cents per

unit.

We recommended to the administrator, the Pack-

ers and Stockyards Administration, that we adopt the

method of allowing a use for land of six cents per

unit. We adopted that approximately [in] 1969, as

I recall, and since that date all land values of stock-

yards is based on six cents per unit.

The old method of trying to use appraisals, if you

appraised it one day and the next day it was outdated,

each individual person had his ideas, we had to fol-

low in determining how much was used and useful

such as this, with this allowance the stockyard oper-

ator knows that he’s going to receive six cents for

each unit of livestock that he handles. If he wants

to utilize less acres of land he gets a better return

for his property. If he wants to spread it out we don’t

have to go through the problem of determining the

useful area and value or trying to determine the orig-

inal cost. Most of the markets have no records that

will support their original cost of the land.

Mr. William J. Jones, Regulatory Marketing Special-

ist, who is employed by complainant as a livestock market

appraisal expert, studied the physical plant of the Lufkin

Livestock Exchange and concluded that of the 25 plus

acres used by the respondent in its operations, approxi-

mately 6% acres are used and useful for stockyard pur-

poses (Tr. 37, 167-168, 249-272; Comp. Exs. 9-11).

Mr. William Jake Lyons, respondent’s expert on land

appraisal, testified that the land in question at the time of

the hearing was worth $2,050 per acre (Tr. 366-368; Resp.

Ex. 5). Assuming this valuation to be correct, the total

value of the 64 acres of land used and useful for stockyard

A36

purposes is $13,325. At the complainant's established rate

of return, 8%, respondent’s allowance for return on land

based on its present value would be $1,066, which is less

than one-third of the allowance computed by complainant

using the livestock receipts formula. No issue is raised

on appeal with respect to this item.

22. An allowance of $609.81 was added for additional

depreciation taken on the unloading docks installed by re-

spondent, which are referred to in Finding 20, supra. It

was stipulated that the cost of these facilities should be

capitalized and the appropriate depreciation expense taken

(Tr. 37-38; Stipulation 2). No issue is raised on appeal

with respect to this item.

23. An allowance of $2,769.89 was added for bad debts

during the base period (Fig. 1, line 30). The allowance for

bad debts is computed on the basis of .0003 times the gross

value of livestock sold on commission by respondent during

the base period (Tr. 169-170).

24. An allowance of $22,715.20 was added for an op-

erating margin (Fig. 1, line 33). The allowance for op-

erating margin is computed on the basis of 40¢ per animal

unit sold at the auction during the base period.

The purpose of the operating margin is to provide

revenue above the actual cost of providing auction ser-

vices to take care of contingencies. Otherwise, unexpected

changes in costs or revenues would place an unwarranted

burden on the market operator during the period it would

take him to secure a rate change. The operating margin

also includes an allowance for the market’s income taxes, if

any; but most auction markets do not have to pay income

taxes as a separate entity from the owners (Tr. 39-40, 170-

172, 274-277; Comp. Ex. 12). No issue is raised on appeal

as to this item. m

A37

25. Adding the foregoing allowances referred to in

Findings 17-24, supra, which total $59,060.21, to the respon-

dent’s Adjusted Expenses of $125,764.37, results in the re-

spondent’s Total Reasonable Revenue Requirements of

$184,824.58 (Fig. 1, line 34).

26. The respondent’s total revenue derived from sell-

ing commissions and yardage during the base period was

$214,175.41 (Fig. 1, line 35). This figure was determined

by complainant from respondent’s books and records (Tr.

40, 134).

The respondent’s total revenue of $214,175.41 includes

about $16,648.63 paid by livestock sellers in connection with

livestock purchased by the respondent for market support

during the base period (Tr. 134-149, 317-323, 328, 330-336;

Resp. Ex. 2).

27. The complainant determined that the current rev-

enue received by the respondent during the base period

exceeded its reasonable revenue requirements by $29,350.83

(Fig. 1, line 36), i. e., the difference between the respon-

dent’s total reasonable revenue requirements during the

base period (Fig. 1, line 34), and the respondent’s total

revenue received during the base period (Fig. 1, line 35).

Accordingly, the complainant proposed a tariff (Comp.

Ex. 8) which would, if applied to the livestock receipts at

respondent’s auction market during the base period, pro-

duce several thousand dollars more than the reasonable

revenue requirements of $184,824.58 (Tr. 58-59; Comp. Ex.

8). Rates for additional services other than regular selling

and yarding services are also set forth in the complainant’s

proposed tariff in paragraphs B, C, D, and E thereof (Tr.

41-43, 57-58; Comp. Ex. 8).

The complainant’s proposed tariff is based on a per-

head-weight schedule, as opposed to the valuation type

A38

tariff presently in effect at the market and at neighboring

markets. For example, the complainant’s proposed tariff

would provide for a selling and yardage charge of $3.00

per head for cattle weighing less than 300 pounds, and

$3.50 per head for cattle weighing 300 pounds, and more.

Under a valuation tariff, the rate per head increases

as the value increases, e.g., up to $49.99, $2.50 per head;

$50.00 through $99.99, $3.50 per head; $100.00 through

$149.99, $4.50 per head; and $150.00 and over, $5.00 per

head (Resp. Ex. 1, p. 5).

A per-head-weight schedule provides for rates that

are stable, regardless of price fluctuations. Such a sched-

ule is nondiscriminatory and reflects more accurately and

uniformly than valuation tariffs the cost of the service

performed (Tr. 172-176, 225-232).

28. The rates and charges contained in the com-

plainant’s proposed rate order (Comp. Ex. 8) are reason-

able and nondiscriminatory, and are the rates and charges

which respondent should assess for its services and the

use of its facilities.

CONCLUSIONS OF LAW

The Packers and Stockyards Act requires that all rates

or charges made by a stockyards owner or operator be

“just, reasonable, and nondiscriminatory” (7 U.S.C. 206).

There is no judicial decision involving an auction stock-

yards interpreting or applying that broad statutory stand-

ard. The three administrative proceedings involving

3. Secretary of Agriculture v. Norfolk Horse and Mule Com-

mission Sales Company, 1 Agriculture Decisions 372 (1942);

Secretary of Agriculture v. H. L. Bowman, 1 Agriculture Decisions

425 (1942); In re Foust-Yarnell Stock Yards, 4 Agriculture Deci-

sions 826 (1945).

A39

rates and charges at auction stockyards were decided more

than 30 years ago, during which time there have been

major changes in ratemaking principles. Hence, for all

practical purposes, this is a case of first impression which

will serve as a guide for the Department’s rate policy in-

volving about 2,000 auction stockyards. Accordingly, the

case warrants an extensive discussion of the numerous

issues raised on appeal.

I. Ratemaking Principles Applicable to Auction Stockyards

At the outset, the respondent challenges (Appeal, pp.

1-4) the Department’s entire procedure for determining

rates at auction stockyards because the Department does

not follow the traditional public utility ratemaking pro-

cedure, which consists of determining a utility’s rate base

and the reasonable rate of return which the utility owners

are entitled to earn on the rate base, after allowance for

reasonable operating expenses, depreciation and taxes.

The Department follows that traditional public utility

ratemaking procedure for terminal stockyards, but not for

auction stockyards, in view of the great differences be-

tween terminal stockyards and auction stockyards.

The owners of a terminal stockyards provide the land,

buildings and facilities where livestock are bought and

sold. The selling function is performed by independent

market agencies which sell livestock by private treaty in

pens and office space assigned by the stockyards company.

The owners of large terminal stockyards invest millions

of dollars in the stockyards. For example, the rate base

for the St. Paul terminal stockyards was $5.1 million (In

re St. Paul Union Stockyards Company, 21 Agriculture

Decisions 1216, 1315 (1962)). The terminal stockyard

owners’ entire income depends on the return allowed on

their investment in the stockyards. From the standpoint

A40

of the source of their income, terminal stockyard owners

are analogous to the owners of railroads, electric com-

panies, and other large public utilities. Accordingly, the

Department follows the traditional ratemaking procedure

of establishing a rate base for the terminal stockyards and

a rate of return which the owners are entitled to earn on

the rate base, after allowance for reasonable operating

expenses, depreciation and taxes.

On the other hand, the investment in an auction stock-

yards is generally less than $50,000 (Tr. 199), or only 1%

or 2% of the investment in the large terminal stockyards.

The great majority of the auction market owners actively

work at their auction markets, and a large part of their

stockyards income comes from the allowance computed

by the Department for a working owner. From the stand-

point of the source of their income, working auction own-

ers are analogous to owner-operators of individual taxi-

cabs. Since Giles Lowery, the respondent’s owner, is a

working auction market owner, this case must decide what

ratemaking principles apply to an auction stockyards with

a working owner. There is no need, and it would not be

appropriate) to consider whether any different ratemaking

principles would apply to the relatively few auction mar-

kets in the country which do not have working owners.*

In St. Joseph Stock Yards Co. v. United States, 298

U.S. 38, 49, involving a $3.7 million terminal stockyards

(298 U.S. at 55), the Court stated (298 U.S. at 49):

The question is not one of fixing a reasonable

charge for a mere personal service subject to regula-

tion under the commerce power, as in the case of

4. This should not be construed as an indirect suggestion

that different principles would apply—but simply as an expres-

sion of the fact that no consideration is being given in this case to

the question of rates at an auction market where the owner does

not work at the market.

A4l

market agencies [at a terminal stockyards] employ-

ing but little capital. * * * Here, a large capital in-

vestment is involved and the main issue is as to the

alleged confiscation of that investment.

Auction market owner-operators resemble market

agencies at a terminal stockyards (where a large part of

their income results from “personal service”) more nearly

than they resemble owners of a terminal stockyards (where

100% of their stockyards income comes from the return on

their investment). This “personal service” aspect of auc-

tion market owner-operators compels the use of ratemak-

ing principles quite different from those used generally in

public utility ratemaking proceedings.

Another significant difference between terminal stock-

yards and auction stockyards is that there has never been

a problem in this country of two competing terminal stock-

yards being built in the same city or within a few miles

of each other. Hence there has never been a problem re-

sulting from the construction of too many terminal stock-

yards.“ On the other hand, there have been serious prob-

lems in some areas of the country resulting from the con-

struction of too many auction stockyards. It is not unusual

in some areas to have two auction stockyards in the same

town, and perhaps six or eight auction stockyards, or more,

within less than an hour’s drive away.“

5. However, as the livestock industry has changed over the

years, about half the terminal stockyards in operation in 1922

have ceased operations (e.g., Chicago) or converted to an auction

market (e.g., Denver). See Packers and Stockyards Resume, Vol.

XIII, No. 7 (P&SA, U.S. D. A., December 19, 1975), p. 34.

6. For example, in a recent Packers and Stockyards case

which I decided, In re Overland Stockyards, Inc., 34 1

Decisions 1808 (decided Decem 23, 1975), the record shows

that there were two auction ards located in the same town

and five other auetion within 25 miles. See, also,

— 4 Ex. IX, p. 11, attached to Stipulation 3, filed August 9

A42

It is important to note that anyone is free to build a

stockyards wherever and whenever he pleases. No fran-

chise or certificate of public convenience and necessity is

required (see 9 CFR 203.8(e)). The Secretary is required

to “post” every stockyards which is built irrespective of

whether or not it is needed (7 U.S.C. 202), and to register

every “market agency” who chooses to operate an auction

stockyard (7 U.S.C. 201, 203). (Similarly, no governmen-

tal permission to cease operating a stockyards is required).

The respondent’s stockyard is located in Texas. A

study published by Texas A. & M. University in 1966 con-

cluded that “from the standpoint of operational efficiency,

there are too many auctions in operation in Texas” (Comp.

Ex. IX, p. 3, attached to Stipulation 3, filed August 9, 1974)."

Specifically, the study concluded that 37% of all Texas

auction markets were submarginal or marginal in efficiency

because of the small volume of livestock they handled (id.

at p. 2). The study concluded that the “prospect of auc-

tions solving the efficiency problems of small markets

through general increases in volume do not appear bright”

(ibid.). The study explained why speculative capital has

been available to invest in auction markets even in fringe

areas of potential profitability as follows (id. at pp. 11-12):

One of the primary determinants of whether a

livestock market will be located in a town or commu-

nity is pressure from local business and community

leaders. In smaller communities particularly, an auc-

tion is considered to have an economic influence well

beyond its contribution to the general sales base.

7. The Texas A. & M. study is authored by Charley V.

Wootan, Associate Executive Officer, Texas Transportation In-

stitute, and John G. McNeely, Professor, Department of Agri-

cultural Economics and Sociology, Texas A. & M. University. It

is titled: Factors Affecting Auction Market Operating Costs

(B-1056, October 1966).

A43

An auction market draws business to a community.

Receipts from the sale of livestock are often banked

and spent in the community where the auction is lo-

cated. A multiplier effect from the primary source of

income results in continued transfer of money within

a community, giving a greater impact upon the eco-

nomic activity than just the initial amount of money

introduced into the community.

This anticipation of economic side benefits has

caused many auctions to be started in areas already

adequately served by facilities in nearby communities.

Also it probably has been responsible for auctions

being established in areas that do not have potential

marketing volumes to support adequately a market of

efficient size.

There appears to be adequate speculative capital

available to establish markets in even the fringe areas

of potential profitability. Many of these markets

must be refinanced one or more times as the original

owners find they cannot be operated profitably. The

ready availability of both capital and potential auction

operators has kept the number of markets fairly con-

stant during the past several years, even though many

locations have proven unprofitable.

The problem of high unit costs and inefficiency be-

cause of too many auction stockyards is not, of course,

limited to Texas. See Williams and Stout, Economics of

the Livestock-Meat Industry (1964), p. 254; Fowler, The

Marketing of Livestock and Meat (1961), p. 298.

Obviously, it is not in the public interest to have too

many stockyards in an area. As stated in the Texas A.

& M. study referred to above (id. at pp. 3, 5):

A44

The continuing large number of high cost, ineffi-

cient small-volume firms is evidence of considerable

overinvestment in livestock auction markets. This

overinvestment in plant, equipment, labor and asso-

ciated marketing expenses results in a much higher so-

cial cost of auction operations than would exist with

fewer firms having higher volumes and lower unit

costs.

892 *+ *¢

Overcapacity and its resulting inefficiencies are

important to the public in general as well as to the

operators of the markets and to livestock producers

who use those facilities.* * *

He [i.e., the livestock producer] may be subject

to indirect losses, though, that are less noticeable but

potentially greater in size [than from higher market-

ing charges]. These occur when either excessively

small market size or high unit costs restrict the auc-

tion in its market performance.

Unnecessary marketing expenses resulting from too

many stockyards injures producers and consumers since

“fe]xpenses incurred in the passage through the stock-

yards necessarily reduce the price received by the ship-

per, and increase the price to be paid by the consumer”

(Stafford v. Wallace, 258 U.S. 495, 515).“

8. Another problem resulting from too many stockyards in

an area is that the auction owners, in an effort to maintain ad-

equate volume to attract buyers, may engage in extensive dealer

operations to personally bring sufficient livestock to the market

to attract buyers. Where a number of auction owners in the same

area are engaging in this practice, it may result in the same

animals moving through several auction markets during a period

of a few days, which results, of course, in undue stress to the

animals and unnecessary marketing expenses. In addition, the

unnecessary proliferation of auction markets requires an increased

number of buyers to cover the increased number of markets,

which adds further unnecessary marketing expenses.

A45

In these circumstances, livestock sellers and consum-

ers should not be burdened with stockyard rates suffi-

ciently high to insure that every auction market owner

will be able to pay all of his reasonable expenses and make

a reasonable return on his rate base. The cases holding

that it is a confiscation of property in violation of the due

process clause of the Fifth Amendment to the Constitu-

tion to establish a stockyards rate that does not yield a

reasonable return on the owners’ rate base, after reason-

able expenses, involve terminal stockyards (Denver Stock

Yard Co. v. United States, 304 U.S. 470, 475; St. Joseph

Stockyards Co. v. United States, 298 U.S. 38, 49). The

holdings in those terminal stockyard cases should not be

extended to auction stockyards as to which the facts and

public interest are essentially different.“

In view of the significant differences between auc-

tion stockyards and other public utilities, including termi-

nal stockyards, the rate base-rate of return procedure fol-

lowed as to other public utilities is not appropriate for

use (except in a very limited respect, discussed below,

relating to the allowance for buildings and equipment) in

auction stockyard rate proceedings. Accordingly, it is not

appropriate in an auction stockyard rate proceeding to

determine by the use of a rate base and rate of return

formula whether the permitted rates confiscate property

in violation of the due process clause of the Fifth Amend-

ment to the Constitution.

9. Although the respondent stockyards handles sufficient

volume to be efficient, the problem of too many stockyards, re-

sulting in many inefficient markets, is applicable to respondent’s

argument-that every auction market must be permitted a rate

that will yield a fair return on its rate base, i.e., a non-confiscatory

rate. But of even more importance req a rejection of

respondent’s argument is the fact that a large portion of an auction

stockyard owner’s return is based on personal service, and, there-

fore, the return on his investment is only a small fraction of his

total return from the stockyards.

A46

But even in those public utility proceedings where it

is appropriate to determine whether the rates are confis-

catory because a reasonable return, after expenses, is not

allowed on the rate base, it is recognized that the rights

of the public must be considered. And, in particular cir-

cumstances (e.g., where there is lack of adequate volume),

the public interest requires and justifies the fixing of

public utility rates that are not as high as would ordi-

narily be fixed under the customary ratemaking princi-

ples.

It cannot, however, be laid down as an absolute

rule, that in every case, a failure to produce some

profit to those who have invested their money in the

building of a road is conclusive that the tariff is un-

just and unreasonable, because this may be the result

of wasteful or extravagant management; the con-

struction may have been at a time when material and

labor were at the highest price, so that the actual cost

far exceeds the present value; or the road may have

been unwisely built in localities where there is not

sufficient business to sustain a road. Likewise, if by

reason of its ill-advised contracts with other carriers

rates fairly equivalent to the value of the services

rendered fail to yield a fair return, the carrier must

bear the loss. It is well established, therefore, that

a corporate carrier cannot, as of right, and without

reference to the interests of the public, realize a given

percent on its capital stock, since stockholders are

not the only persons whose rights or interests are to

be considered (footnotes omitted) .’°

[Rlates are not necessarily confiscatory although

they do not pay a reasonable return on the invest-

10. 64 Am Jur 2d, Public Utilities, § 217, p. 724.

A47

ment, since the plant may have been constructed on

too large a scale.“

The interest both of the public and of the utility

should be considered, but it is not always possible to

do full justice to both, and where this is the case, the

rights of the public must prevail.”

The applicable rule was stated in a concurring opin-

ion by Mr. Justice Black, Mr. Justice Douglas and Mr.

Justice Murphy in Federal Power Commission v. National

Gas Pipeline Company, 315 U.S. 575, 607-608, as follows:

The consumer interest cannot be disregarded in

determining what is a “just and reasonable” rate.

Conceivably, a return to the company of the cost of

the service might not be “just and reasonable” to the

public. The correct principle was announced by this

Court in Covington & Lexington Turnpike Co. v. Sand-

ford, 164 U.S. 578, 596: It cannot be said that a cor-

poration is entitled, as of right, and without reference

to .e interests of the public, to realize a given per

cent upon its capital stock. When the question arises

whether the legislature has exceeded its constitu-

tional power in prescribing rates to be charged by a

corporation controlling a public highway, stockhold-

ers are not the only persons whose rights or interests

are to be considered. The rights of the public are not

to be ignored. It is alleged here that the rates pre-

scribed are unreasonable and unjust to the company

and its stockholders. But that involves an inquiry as

to what is reasonable and just for the public. If the

establishing of new lines of transportation should

11. 64 Am Jur 2d, Public Utilities, § 191, p. 706.

12. 64 Am Jur 2d, Public Utilities, § 191, p. 705.

A48

cause a diminution in the number of those who need

to use a turnpike road, and, consequently, a diminu-

tion in the tolls collected, that is not, in itself, a suf-

ficient reason why the corporation, operating the road,

should be allowed to maintain rates that would be

unjust to those who must or do use its property. The

public cannot properly be subjected to unreasonable

rates in order simply that stockholders may earn div-

idends.“ Cf. Chicago & Grand Trunk Ry. Co. v.

Wellman, 143 U.S. 339, 345-346; United Gas Co. v.

Texas, 303 U.S. 123, 150-151.

Accordingly, even if the validity of auction market

rates were to be tested by whether they provide a rea-

sonable rate of return on the applicable rate base, after

reasonable expenses, there is no basis for respondent’s

contention that every auction market owner is entitled to

a reasonable return on his rate base, irrespective of

whether the market handles an adequate volume of live-

stock.

Considering all of the facts and circumstances relat-

ing to the livestock industry, it is my view, and I so hold,

that with respect to auction stockyards the due process

clause of the Fifth Amendment to the Constitution re-

quires rates that produce sufficient revenue to enable a

prudently managed auction stockyards to remain in busi-

ness only if (i) the auction stockyards handles a suffi-

cient volume of livestock to be a reasonably efficient live-

13. The Covington & Lexington Turnpike decision quoted

from above continues (164 U.S. at 597): “If a corporation can-

not maintain such a highway and earn dividends for stockholders,

it is a misfortune for it and them which the Constitution does not

— to be remedied by imposing unjust burdens upon the

public.“

A49

stock market; and (ii) the investment in the auction

stockyards was prudent (i.e., see the quoted material ref-

erenced by footnotes 10 and 11 above). (Under this stan-

dard, which does not guarantee the survival of inefficient

markets, the Department could, if it desired, determine

just and reasonable rates on an area basis, based on in-

vestment and expense data determined to be prudent and

reasonable.)

Where the criteria in the preceding paragraph are

met, the complainant discharges its duty to an auction

stockyards owner and treats the ratepayers fairly where

the rates are set at the lowest level that will provide reve-

nue sufficient for (i) all of the market's operating ex-

penses prudently and economically incurred; (ii) an an-

nual charge for depreciation based on the expected life

of the stockyards; (iii) taxes imposed on the stockyards;

(iv) interest on debt prudently incurred; and (v) a rea-

sonable return to the owner for his prudent investment

and personal services (considering as a unit all of the in-

come received from the stockyards, including allowances

for a working owner, owner’s management, interest on

working capital, return on uildings and equipment, use

of land, and that portion of the operating margin which

is reasonably expected to be available for the owner’s per-

sonal use at the time).“ Cf. In re St. Paul Union Stock-

14. The study published by Texas A. & M. University, re-

ferred to above, considered markets handling 15,000 animal units

“inefficient” and “submarginal,” and markets handling less than

25,000 animal units “at a disadvantage from the standpoint of

efficiency and * * only marginal” (Comp. Ex. 9, p. 2, attached

to Stipulation 3, filed August 9, 1974). However, it is for com-

plainant to determine in the first instance what volume should

be used for the purposes of this standard. The ndent’s

volume of 56,788 animal units (Finding 17, supra) would not be

close to the line, wherever it is drawn.

15. The omission of “ability to attract capital” is deliberate

since, as shown above, a major problem in the livestock auction

industry is that too much capital is attracted, even to marginal

m ,

A50

yards Company, 21 Agriculture Decisions 1216, 1291

(1962); Federal Power Commission v. Hope Gas Co., 320

U.S. 591, 605; 64 Am Jur 2d, Public Utilities, § 135.

II. Rate Regulation in Public Interest

The respondent argues that in view of the significant

changes that have occurred in the livestock industry since

the enactment of the Packers and Stockyards Act in 1921,

including the great number of auction markets now in

existence, there is no longer any justification for rate reg-

ulation.

Respondent is, of course, correct in arguing that there

have been great changes in the livestock industry since

1921.“ When the Act was passed, most livestock moved

by railroad. Hence the few terminal stockyards in the

United States, which were located at rail centers, had vir-

tually monopolistic positions.“ It was such terminal stock-

yards that the Court referred to in 1922 as the “great

stockyards” which “are but a throat through which the

current [of livestock] flows” (Stafford v. Wallace, 258

U.S. 495, 497, 514, 516).

Since auction stockyards were “practically nonexis-

tent in 1920,’"* the Congressional Committee was refer-

ring to terminal stockyards when it said in 1920 and 1921

in the legislative history of the Act (Sen. Rep. No. 429,

16. See Engelman, Trends in Livestock Marketing Before and

After the Consent Decree of 1920 and the Packers and Stockyards

Act of 1921, Statement to the Subcommittee on SBA — SBIC

Legislation, House Small Committee (P&SA, U.S.D.A., June 23,

1975).

17. It was estimated in 1921 that there were only 30 to 50

stockyards in the entire country which would be regulated by the

Act at that time (H. Rep. No. 77, 67th Cong., Ist Sess., p. 10).

18. Williams and Stout, Economics of the Livestock-Meat

Industry (1964), p. 232. See, also, Fowler, The Marketing of

Livestock and Meat (1961), p. 255.

A51

66th Cong., 2d Sess., p. 3; Sen. Rep. No. 39, 67th Cong., Ist

Sess., p. 7):

The enactment of this bill is recommended upon

the ground that the great public markets in which is

handled the live stock that supplies the demand for

the American consumption of 19,000,000,000 pounds

of meat and meat products annually are public utili-

ties and that as such they should be subject to super-

Gana*?

With the improvement of roads and trucks, livestock

no longer was limited to rail movement, and the auction

industry developed rapidly. By 1949, there were almost

2,500 auction stockyards in the United States.“ Many of

these stockyards were too small to meet the regulatory

criterion set forth in the Act, which stated that the Act

did not apply to stockyards “of which the area normally

available for handling livestock, exclusive of runs, alleys,

or passage ways, is less than twenty thousand square feet”

(7 U.S.C. 202(a)). In 1958, following extensive hearings,

Congress determined that it was in the public interest to

extend the regulatory provisions of the Act to all of the

auction stockyards in commerce, including those which

were too small to meet the 20,000 square foot limitation.

The legislative history of the 1958 amendments states

(Sen. Rep. No. 1048, 85th Cong., Ist Sess., pp. 3-4):

Livestock markets

When this act was passed in 1921, there were rel-

atively few livestock markets and these were located

primarily in large terminals. Most of the interstate

movement of livestock was by railroad. In the early

years of operation under the act all of the eligible

19. Packers and Stockyards Resume, Vol. XIII, No. 7 (P&SA,

U.S.D.A., December 19, 1975), p. 34.

A52

markets were posted and the record shows that until

1930 these averaged less than 80 for the entire United

States.

As transportation facilities—particularly roads and

trucks—improved, railroads ceased to be an important

limiting factor on livestock movement and the character

of livestock marketing began to change. More auction

markets developed: In 1930 there were 73 posted

stockyards; by March 18, 1957, this number had in-

creased to 439 and the Department of Agriculture esti-

mates that there are at least an additional 500 stock-

yards still unposted which are eligible for posting (en-

gaged in interstate commerce and with an area of 20,000

square feet or more).

More important, there have developed throughout

the country an additional 1,400 or 1,500 country auc-

tions and livestock markets which are engaged in

interstate commerce but which are not under the

jurisdiction of the Packers and Stockyards Act because

of the size limitations in the act. Although these mar-

kets are technically under the jurisdiction of the Fed-

eral Trade Commission, there has been no effort by

the FTC to regulate trade practices on these markets.

Equally significant is the growth which has taken

place in country buying—buying by packers or by live-

stock dealers direct from the producer, without the

animals going through a public stockyard or market.

There was little or no such buying At the time the

Packers and Stockyards Act became law but it is today

a common practice in almost every part of the country

and more than 40 percent of all livestock sold moves

in this manner. The Department of Agriculture has

no jurisdiction over this country buying except that

which is done by buyers for packers.

A53

CHANGES MADE BY THIS BILL

From the foregoing it is obvious that the area in

which the Packers and Stockyards Act is designed to

operate has changed so substantially since 1921 that

the Secretary of Agriculture is today charged by the

act with responsibility over businesses and operations

which could never have been intended by the framers

of the legislation and is, on the other hand, powerless

to take any action in some matters which have become

an important and vital part of the livestock and meat

packing industry. The bill reported herewith is a com-

mittee bill, drafted by the committee following exten-

sive hearings on this matter. It is designed to amend

the Packers and Stockyards Act so as to make it once

again an effective instrumentality for the regulation

of the livestock and meatpacking industry and for the

protection of both producers and consumers. Specific

changes are made in the act to meet the problems out-

lined above. These changes are:

(5) The Secretary of Agriculture is given juris-

diction over all livestock marketing involved in inter-

state commerce including country buying of livestock

and auction markets, regardless of size.

Notwithstanding the drastic changes in livestock mar-

keting since 1921, and the competition now afforded by

some 2,000 auction stockyards, I believe that it is still in

the public interest to regulate stockyard rates. Based

on discussions with leading livestock marketing experts

throughout the United States from December 1962 to Jan-

uary 1971, during which time I was administrator of the

Packers and Stockyards Act regulatory program, I believe

that stockyard rates would double in the absence of rate

A54

regulation, thereby substantially increasing marketing costs,

to the detriment of producers and consumers. But neither

respondent’s view nor my view in this respect is of any

consequence since Congress decided in 1921 that it is in

the public interest to regulate stockyard rates, and re-

affirmed and extended that decision in 1958. Only Con-

gress can alter that decision.

III. Base Period

The complainant’s rate analysis in this case is based

on its audit of the respondent’s books and records for re-

spondent’s fiscal year 1973, i.e., July 1, 1972-June 30, 1973.

The respondent contends that the complainant should have

used the figures for respondent’s 1974 fiscal year’s operation.

The respondent’s last sale for its 1974 fiscal year was

held on June 24, 1974 (Tr. 53), which was just one day

prior to the beginning of the oral hearing in this case.

The complainant used respondent’s 1973 fiscal year

figures because they were the latest figures available for

an entire fiscal year, and they involved the fiscal year in

which the respondent requested the rate increase which led

to the present proceeding. Since it takes several months

to make a complete audit of an auction market’s operations

in order to prepare for a rate hearing, the 1974 fiscal year

figures could not have been analyzed in time for the hearing

which began on June 25, 1974 (Tr. 235-236).

Although it is possible to use figures for less than a

year’s operations and annualize them, complainant prefers

to analyze a full year’s operations since this produces more

reliable figures. The volume of livestock received at an

auction market varies, to some extent, depending on the

season of the year; also the time when various costs are

incurred and entered in the records varies throughout the

A55

year. Accordingly, it is much more accurate to analyze a

full year’s operations rather than a portion of a year (Tr.

145-146).

Mr. Jack W. Brinckmeyer, Chief of complainant’s Rates,

Services and Facilities Branch, testified (Tr. 235):

You have to establish a test period and move forth

from there. If you continue to try to update it you

would never reach a point where you could make a de-

termination of what the reasonable costs were.

In the case of In re St. Paul Union Stockyards Co., 21

Agriculture Decisions 1216, 1225 (1962), a “cut-off” date

of October 31, 1957, was established because it was found

“impracticable to keep revising the evidence adduced so as

to have it current as of the conclusion of the proceeding.”

The case was decided five years later. The Judicial Of-

ficer stated in that case (21 Agriculture Decisions at 1225):

It was recognized, of course, that the record would

not be wholly reflective of current conditions at the

time of the issuance of the final order in the pro-

ceeding, but it was believed desirable to obtain a

resolution of the sharp conflict between the parties

as to the basic concepts and principles which should

govern the determination of such matters as (1) the

property of respondent that should be considered used

and useful for the rendition of stockyard service and

included in the rate base, (2) the valuation of such

property and the allowance for working capital upon

which respondent is entitled to earn a fair return,

(3) the rate of return respondent is entitled to earn,

(4) the amounts allowable for repairs and deprecia-

tion, and (5) other expenses allowable in the furnish-

ing of stockyard services.

A56

In the Palestine, Texas case (Gas Utilities Docket No.

494) relied on by the respondent (Brief, p. 4) and attached

as an appendix to the respondent’s brief, the calendar year

1971 was used as the test year; hearings on the matter

were held March 16 and April 12, 1973; and the decision

was served May 9, 1974.

The respondent is particularly interested in having the

1974 fiscal year figures used because its volume dropped

22.5% from fiscal year 1973 to fiscal year 1974.“ Pre-

viously, however, the respondent’s volume of livestock

had been “fairly stable” (Tr. 44), “ and the complainant

believed that the decline in fiscal year 1974 was a tem-

porary phenomenon resulting from livestock producers

temporarily holding their cattle from market (Tr. 153,

290-295).

In view of the significant decline in respondent's live-

stock receipts from fiscal year 1973 to fiscal year 1974,

Mr. Ralph R. Hammond, the complainant's auditor respon-

sible for the rate audit in this proceeding, admitted on

eross- examination that it's le“ that a much truer

picture of what the condition is today might be obtained

by making an audit for 10 or 11 months in fiscal year 1974

and annualizing the figures (Tr. 154).

In this case, however, since the hearing began on

June 25, 1974, and since it takes several months to audit

an auction market for the purposes of a rate proceeding

(Tr. 235-236), the complainant could not have audited

figures for 10 or 11 months in fiscal year 1974; at best,

it could have taken figures for 6 or 7 months, and an-

20. Computed from Comp. Ex. 6 (57,339 head in F. v. 1973)

and Resp. Ex. 4, p. 2 (44,464 head in F.Y. 1974).

21. Respondent’s volume of cattle marketed in fiscal y

1970-1973 were 56,011 head, 54,379 head, 59,463 head, and 56.292

head, respectively (Comp. Ex. 9).

457

nualized them. This would have been entirely unsatisfac-

tory (Tr. 145-146).

Moreover, assuming that the complainant's view was

correct that the fiscal year 1974 decline in livestock re-

sulted from the temporary withholding of livestock by

producers, the 1973 fiscal year receipts would give a much

better indication of respondent's future receipts than the

1974 fiscal year receipts. Since ratemaking looks to the

future, temporary abnormalities should not form the basis

for future rates. St. Joseph Stock Yards Co. v. United

States, 298 U.S. 38, 46-49.

The time lag problem complained of by respondent

in this case is inherent in any protracted rate proceeding.

However, there is a simple remedy available to the respon-

dent which does not involve the impossible task of try-

ing to continually update the evidence. Respondent has

merely to file an application for increased rates based on

more recent data, and it will be acted upon by complainant,

irrespective of the outcome of this proceeding (Tr. 54, 56,

235). See, e.g., Federal Power Commission v. Hope Gas

Co., 320 U.S. 591, 615.

Once the validity of the complainant’s procedure is

determined in this proceeding, any changes required to be

made in the complainant’s proposed rate order resulting

from changed circumstances can be easily taken care of

by a request for a rate increase based on such changed

circumstances. In order to be sure that the complainant

will have adequate time following the completion of this

proceeding, including possible judicial review thereof, in

which to analyze a request for a rate increase based on

later data, the effective date of the final order in this

proceeding will be delayed for 30 days, which will be

further extended if necessary.

A58

IV. Allowances in Lieu of Actual Expenses

The respondent contends (Appeal, pp. 4-5) that the

complainant’s ratemaking procedure is invalid because

complainant substitutes allowances for various actual ex-

penses. However, as shown in Finding 6, supra, 62% of

respondent’s actual expenses were accepted by complain-

ant as reasonable and necessary. Complainant substitutes

allowances for actual expenses with respect to only four

categories of expenses, viz., (i) interest on working capital;

(ii) owner’s compensation (as worker and/or manager);

(iii) business getting and maintaining; and (iv) bad debts.

The respondent does not challenge on appeal the

amount of the allowance for the first item, interest on

working capital. As to the second and third items (the

amount of the allowance for the third item is not chal-

lenged on appeal), in Tagg Bros. v. United States, 280 US.

420, 440-442, the Court affirmed the Secretary’s rate deter-

mination under the Packers and Stockyards Act “based

upon an assumed cost of the service [including owner’s

compensation and business getting and maintaining ex-

penses] which disallowed expenses actually incurred”

(280 U.S. at 441). As to the fourth item, bad debts, the

Court in the Tagg Bros. case affirmed the Secretary’s

rate order notwithstanding the fact that the Secretary

removed bad debts as an expense, and made no allowance

whatever for bad debts (280 U.S. at 441-442). A fortiori,

an allowance for bad debts based on the industry average

bad debt experience is valid. Hence the Tagg Bros. case is

squarely in point with respect to the challenged allowances.

In addition, the complainant’s substitution of reason-

able allowances for an owner’s determination of his own

worth is supported by United Gas Co. v. Texas, 303 US.

123, 148-151, concuring opinion by Mr. Justice Black;

A.T.&T. Co. v. United States, 299 U.S. 232, 239; Western

— —

459

Distrib’g Co. v. Comm'n, 285 U.S. 119, 125-127; and Chicago

&c. Railway Co. v. Wellman, 143 U.S. 339, 345-346.

The allowances specifically challenged will be further

discussed in the two following subsections.

A. Owner’s Compensation

Mr. Giles Lowery, the President and sole owner of the

respondent stockyards, paid himself a salary of $14,070.00

and a livestock solicitor’s fee of $6,307.29, or a total of

$20,377.29 during the base year (Findings 3 and 8, supra).

This amount was removed by complainant from respon-

dent’s expenses and replaced by allowances for Mr.

Lowery’s efforts as a working owner ($15,839.40) and

manager ($3,549.25) of the market in the total amount of

$19,388.65, or $988.64 less than Mr. Lowery’s salary and

fee received from the stockyards (computed from Find-

ings 8, 17 and 18, supra). An additional $709.85 was

allowed by complainant for Mr. Lowery’s interest on his

working capital (Finding 18, supra), but the allowance for

interest is excluded from the discussion herein since it is

different from the allowance for Mr. Lowery’s efforts as a

worker and manager of the market.

The petitioner contends on appeal that Mr. Lowery’s

efforts as a worker and manager justify his compensation

of $20,377.29 (Appeal, pp. 9-10). The complainant’s allow-

ances for Mr. Lowery’s efforts as a working owner and

manager are only 4.85% less than the compensation re-

ceived by Mr. Lowery from the stockyards ($988.64 —

$20,377.29). Although the difference between complain-

ant’s allowances and Mr. Lowery’s compensation is small,

the principle is important since the compensation which

the owner of a stockyards pays himself is not an arms-

length transaction. It is, therefore, essential that the com-

A60

plainant substitute an allowance for the owner’s compensa-

tion as a worker and manager (Tr. 13-14, 79-88, 159).

The allowance of $15,839.40 made for Mr. Lowery as

a working owner of the respondent stockyards was derived

from a compensation formula used by complainant in rate

analyses. The compensation formula provides 50¢ per

animal unit on the first 20,000 units sold at the market, 25¢

per unit on the next 20,000 and 5¢ per unit for each unit

over 40,000. One cattle, one horse or one mule equals one

animal unit under this formula; a hog equals one-third of a

unit; and a sheep equals one-fourth of a unit (Finding 17,

supra).

The concept of the animal unit was devised because

the cost associated with the sale of different species varies

according to the species; but revenue analysis requires con-

sistent treatment of all livestock sold at a market. The

conversion formula adopted by complainant was supported

by a statistical analysis by Mr. Everett Stoddard, an Agri-

cultural Economist for complainant (Tr. 274-275; see, also,

Comp. Ex. IX, pp. 9-11, attached to Stipulation 3, filed Au-

gust 9, 1974).

The 20,000 break in the compensation formula derives

from In re Market Agencies at Sioux City Stock Yards, 9

Agriculture Decisions 4, 92 (1950), where it was found that

20,000 units is a reasonable yearly sales volume for one

cattle salesman, although some salesmen can sell twice that

number, or more. Of course, there are no cattle salesmen

at an auction market, but complainant analogizes one cattle

salesman to one working owner (Tr. 159-162, 207-218).

The 40,000 break is based on the concept that above

this point additional people probably will have to be hired

to accomplish the task (Tr. 161; see, also, Comp. Ex. IX,

pp. 19-20, attached to Stipulation 3, filed August 9, 1974).

A61

The 5¢ per unit compensation on sales above 40,000 per

year is designed to give the working owner some incentive

to increase his volume (Tr. 161).

The Sioux City case, supra, holds that the allowance

for a working owner should be no greater than the going

rate for the work that the owner actually performs; that

is, the allowance should equal the amount for which the

market could hire a third party to perform the job. Mr.

Giles Lowery’s primary function at the respondent stock-

yards is to serve as the starter at the weekly auction (Tr.

160). Starters generally receive $100 per weekly sale, or

less (Tr. 160, 213; Comp. Ex. III attached to Stipulation 3,

filed August 9, 1974).

The complainant’s present formula for computing a

working owner’s allowance was adopted in 1970, and is

reviewed yearly. Mr. Jack W. Brinckmeyer, Chief of

complainant’s Rate Branch, testified that the formula still

provides more than adequate compensation for a market’s

working owner (Tr. 207-209).

Added to Mr. Lowery’s allowance of $15,839.40 as a

working owner is an allowance of $3,549.25 as the manager

of the market. The allowance for management is based

on 6.25¢ per animal unit, and is allowed irrespective of

whether the owner works at the market.

The 6.25¢ figure derives from the Sioux City case,

supra (9 Agriculture Decisions 4, 99), where such amount

was deemed reasonable. In 1970, in order to determine

whether the allowance was still reasonable, complainant

surveyed markets having pure management costs, that is,

markets having managers performing no other function.

That survey indicated that management costs averaged 5.3¢

per animal unit sold. In other words, the survey indicated

6.25¢ per animal unit is generous (Tr. 161-163, 215-217).

A62

In determining the reasonableness of the complainant’s

allowances for Mr. Giles Lowery’s compensation, an im-

portant consideration is the fact that owning and manag-

ing a market such as the respondent stockyards is not a

full-time occupation. The market has a livestock sale only

one day a week. In addition to working at that sale, Mr.

Giles Lowery operates an auction market at Bay City,

Texas, he is engaged in business as a livestock dealer and

he has other business activities (Tr. 208, 218).

Considering all of the facts in this case, if the com-

plainant’s allowances for Mr. Giles Lowery’s compensation

as the owner and manager of the market are in error, the

error is in respondent’s favor.

An obvious shortcoming of the complainant’s allow-

ances for owner’s compensation is that they provide the

same rate irrespective of the quality of the work or the

extent of the owner's effort.” However, this shortcoming

is partially diminshed since the owner’s actual compensa-

tion is based on the rate times the volume; and it is likely

that increased effort or excellence of effort will result in

greater volume, and thus greater compensation. But even

with this shortcoming, the allowance is superior to a de-

termination by a market owner as to his own worth.

B. Bad Debts

The respondent’s bad debt losses of $4,410.23 incurred

during the base period were removed by complainant and

replaced with an allowance of $2,769.89 (Findings 10 and

23, supra). The allowance for bad debts was computed on

the basis of .0003 times the gross value of livestock sold by

22. Complainant’s attorney stated in response to a question

by the Judicial Officer that if a working owner performed func-

tions greatly in excess of a normal working owner’s functions,

the allowance for a working owner would be increased.

A63

the respondent at the stockyards during the base period

(Tr. 14, 39, 92-95, 146, 169). The allowance is included by

complainant even if a market has no bad debts (Tr. 146).

The rationale for the allowance was explained by Jack W.

Brinckmeyer, Chief of complainant’s Rate Branch, as fol-

lows (Tr. 169-170):

As Mr. Hammond testified, and I think we started

making this allowance approximately five or six years

ago, at one time there was no allowance made for bad

debts.

They were just taken out of the formula [a]nd

forgot[ten] about.

But we realized that since the market operator

was required to pay for the livestock when it was sold

and that he had to make collections that there could

be some losses from these activities.

However, there again experience showed that the

market operator if he had an extraordinary bad debt

in one year this was basically his whole justification

for trying to modify an increase in rates.

In 1968 we surveyed the entire auction industry

in the United States to determine the bad debt losses

for the years 1965 and 1966.

That survey showed that the bad debt loss for

those two years averaged this .0003 in relation to the

[gross] value of livestock sold.

So it was determined that we would take out

whatever bad debts were shown and replace them

by this allowance based on the experience of the in-

dustry, based on the philosophy that if this amount

[was] provided for rates each year that over a period

of time that should have equaled the amount of bad

A64

debts that a prudent management would have at their

market.

Again, to see that our figures were still reliable

and current or at least reliable, last year for the [years]

1972 and 1973 bad debt losses have been surveyed for

the auction industry, and I don’t have the exact figures

here, but I think in 1972 it was .00019 and in 1973 it

was .0002 something.

Both years show that the average put together

that it would be less than .0003 so we're continuing

to use that factor for our allowance for bad debts.

For many years, the complainant removed all bad

debt expenses and made no allowance for bad debt losses.

However, in 1968 or 1969, the complainant began making

an allowance based on the stockyard industry’s average

bad debt experience (Tr. 169). The allowance is reason-

able. If a market operator is prudent, his bad debt ex-

perience should, over a period of years, be close to the

industry average. If he is imprudent, there is no basis

for making his particular shippers suffer the consequences

of his imprudence.

Even if a market owner suffers bad debt losses over

the years greater than the industry’s average, without any

negligence or imprudence on his part, there is no reason

to make his shippers suffer the consequences of such losses.

A market owner is not required to extend credit to

any buyer. He can demand cash from all purchasers, or

from particular purchasers who have not established their

financial standing with the market owner. Moreover,

when credit is extended, the purchaser ordinarily pays for

the livestock within a week. The regulations issued un-

der the Act require packers, market agencies and dealers

purchasing livestock to pay for such livestock before the

A65

close of the next business day following the purchase

thereof, unless otherwise expressly agreed between the

parties before the purchase of the livestock (9 CFR 201.43

(b)). The Department stated in the explanation accom-

panying this regulation (29 F.R. 1796):

The purpose of the amendment is to establish a

uniform rule regarding payment for livestock pur-

chased by packers, market agencies, and dealers con-

sistent with (1) the established custom that sales of

livestock are on a cash basis, and (2) the provisions

of present § 201.43 of the regulations under which

market agencies selling livestock on a commission ba-

sis transmit or deliver net proceeds to shippers before

the close of the next business day following the sale

of the shippers’ livestock.

The foregoing “prompt payment” regulation, together

with the custom either to demand cash payment, or, more

frequently, to require payment in a few days, results in

extremely small bad debt losses in the stockyards indus-

try.

The respondent argues that the First Bank and Trust,

Lufkin, Texas, a banking corporation with $50 million in

assets, had a bad debt experience of one-half of one per-

cent (Tr. 420; Appeal, pp. 10-11). However, banks are in

the business of lending money on a long term basis

whereas the livestock industry is essentially “on a cash

basis” (29 F.R. 1796). This explains why the stockyards

industry has a much lower bad debt experience than the

banking industry.

If the complainant allowed bad debt losses up to one-

half of one percent, the respondent could be allowed bad

debt losses up to $55,000 for the base year ($11,000,000

x .005; Appeal, pp. 10-11). That would be entirely un-

reasonable in the stockyards industry.

A66

V. Pasture Rent

The $300 rent expended by respondent for a pasture

about 5 or 10 miles distant from the auction market was

excluded by complainant because complainant determined

that the pasture was not used and useful for auction mar-

ket purposes (Finding 11, supra).

The original determination by the complainant’s au-

ditor, Ralph R. Hammond, to remove the $300 pasture rent

was made after he talked to Mr. Giles Lowery and learned

how far away the pastureland was located (Tr. 95-97). At

the oral hearing, Mr. Hammond’s conclusion was sup-

ported by the testimony of William J. Jones, complain-

ant’s stockyards appraisal expert. Mr. Jones testified

that only 6% acres of land were used and useful for re-

spondent’s stockyards business, including the holding of

market support livestock (Tr. 249-272). In Mr. Jones’

opinion, even the 16 acres of pastureland adjacent to the

respondent’s market were not used and useful for respon-

dent’s stockyards business, including the holding of mar-

ket support livestock (Tr. 262-263). There is no testi-

mony on behalf of the respondent to the contrary. Ac-

cordingly, the record in this case compels the conclusion

that complainant correctly removed the $300 pasture rent

from respondent’s expenses.

Although there is no testimony in this case to the ef-

fect that the rented pastureland in question was actually

used during the base period to hold market support live-

stock, even if such pastureland had been used in that fa-

shion during the base period, the $300 pasture rent would

properly be allowed only if such additional land were rea-

sonably necessary to hold such market support livestock.

There is nothing in the record in this case to contradict

complainant’s expert testimony that the rented pasture-

land was not used and useful by the respondent stock-

yards.

A67

VI. Trucking and Hauling

The complainant removed from respondent’s expenses

$9,370.78 expended for trucking and hauling services be-

cause the respondent’s records were inadequate to show

that consignors of the market had benefited from the

trucking and hauling (Finding 12, supra).

The respondent contends that the trucking and haul-

ing expenses were incurred in connection with trucking

market support livestock (Appeal, pp. 11-12). Trucking

expenses for market support livestock are a legitimate

stockyards expense (Tr. 98-99, 102-103). However, Mr.

Hammond, the complainant’s auditor, testified that he

could not ascertain from the respondent’s records that any

of the excluded trucking expenses were incurred in con-

nection with respondent’s market support livestock (Tr.

15-17, 98-105).

There is no testimony in the present record to estab-

lish that the $9,370.78 in question was expended for truck-

ing market support livestock. In these circumstances, the

complainant properly disallowed the $9,370.78 trucking

On October 4, 1972, three months after the beginning

of the base year involved in this proceeding, the respon-

dent stockyards was ordered to “keep accounts, records

and memoranda which fully and correctly disclose all

transactions involved in its business as a market agency

subject to the Act“ (In re Giles Lowery Stockyards, Inc.,

31 Agriculture Decisions 1257, 1261). If the respondent

had complied with that Order, and if the $9,370.78 was

spent for trucking market support livestock, respondent

would have had no difficulty establishing this item as a

legitimate expense. However, respondent did not com-

ply with the Order to keep records fully and correctly

A68

disclosing all transactions involved in its stockyards busi-

ness and respondent did not establish at the hearing that

the $9,370.78 was spent for trucking market support live-

stock.

In this case, t is particularly inappropriate to assume

that the trucking expenses in question were in connection

with market support livestock at respondent’s Lufkin,

Texas, stockyards inasmuch as Giles Lowery is also en-

gaged in the livestock business at Bay City, Texas, and as

a livestock dealer. But even if Giles Lowery had no other

livestock business, respondent still would have to have

records to prove the nature of its expenses, including

trucking expenses.

The respondent contends that the “testimony reflects

that $3 per animal is or should be a reasonable amount

for trucking and hauling ([Tr.] 102-103).” But the rec-

ord does not support respondent’s contention in this re-

spect. When Mr. Hammond was asked what the average

cost of hauling market support livestock was, he replied

(Tr. 102):

A. It depends on where it’s being hauled and

what distance. I mean, it varies. I suppose you could

get two or three hauled for $5 to some market and

maybe two or three hauled for 25 to a further mar-

ket. I don’t know.

Specifically, when asked whether $3 per animal is an

unreasonable amount for trucking, he replied (Tr. 103):

I don’t know. I don’t know what the going rate

is for hauling cattle in this area.

Hence there is nothing in the record to show the aver-

age cost of hauling market support livestock. Moreover,

there is nothing in the record to show that the $9,370.78

A69

was spent for trucking respondent’s market support live-

stock.

Presumably, the respondent is now maintaining

proper records with respect to its market support live-

stock. If the respondent requests increased rates based

upon changed circumstances since the base year, presum-

ably respondent will be able to justify any legitimate

trucking expenses incurred in connection with market sup-

port livestock. In such circumstances, respondent’s fail-

ure to verify its alleged expenses in connection with truck-

ing market support livestock during the base year would

not adversely affect respondent.

VII. Caretaker’s House

The complainant disallowed as legitimate expenses the

depreciation expense and utility expense, totaling $531.99,

associated with a house adjacent to the auction market

which respondent furnishes rent free to Mr. Leonard Miller

for his own use and the use of his family (Finding 14(d) ).

The house is a modest frame house that would rent for

about $60 a month (Tr. 109, 111).

The record in this case does not show that Mr. Miller’s

total compensation of $250 per week plus free rent is un-

reasonable considering all of his duties, including being

a caretaker seven days a week at the market. Hence the

complainant erred in disallowing the expenses incident to

this house.

The complainant’s objection to the house expenses

seems to be in the nature of a conceptual objection to allow-

ing expenses incident to any house used by Mr. Miller’s

family. But that viewpoint is too narrow. There is nothing

improper in furnishing a house adjacent to the stockyards

to a caretaker and his family so that he may effectively

A70

perform his duties for the market. The expenses incident

to the house should be allowed as reasonable expenses un-

less it is determined that the total compensation to the

caretaker is unreasonable. The record in this case does not

support the position that Mr. Miller’s total compensation,

including the rental value of the house, is unreasonable.

Although this increases the respondent’s reasonable

revenue requirements by $531.99, the complainant’s pro-

posed tariff would produce several thousand dollars more

than the reasonable revenue requirements determined by

complainant (Finding 27, supra). Accordingly, the com-

plainant’s error as to this item would not result in a change

in complainant’s proposed tariff.

VIII. Market Support

In determining the total revenue received by respon-

dent stockyards, the complainant included approximately

$16,648.63 in commissions paid by the consignors in connec-

tion with livestock purchased by the market for market

support (Finding 26, supra). The respondent contends that

such commissions should not be included as part of its total

revenue (Appeal, pp. 13-14).

Market support purchases by a market do not occur

because the market has guaranteed the price at which the

livestock will be sold. It is unlawful for a stockyards to

guarantee the price at which consigned livestock will be

sold (9 CFR 201.64). However, some markets, including

the respondent, bid on livestock, at times, hoping to stimu-

late further bids; but if no further bids are received, the

market becomes the purchaser of the livestock.

The complainant regards the commissions paid by the

consignors in connection with such market support pur-

chases by respondent as revenue received by the market.

A7l

For example, if a farmer consigns a cow to a stockyards

for sale and the market bids $300 for market support pur-

poses, and becomes the owner of the cow, assuming that the

commission on the sale of such cow is $5, the market pays

the farmer the net proceeds of $295, and the complainant

regards the stockyards as having received $5 commission

from the consignor.

The accounting by the market to the consignor is the

same irrespective of whether the market buys the animal

for market support or whether a third party buys the

animal from the consignor, except that the name of the

purchaser would be different. For example, in the hypo-

thetical example referred to in the preceding paragraph,

the market would send a check to the farmer for the net

proceeds ($295), and the market’s accounting would show

that the market received a $5 commission from the farmer.

The identical accounting would be made if a third party

bought the cow, even if he subsequently failed to pay for

the cow.

Under the Act, stockyards act as the agent of the seller.

Hence the seller pays the commission—not the buyer. In

practice, rather than paying the gross proceeds from the

sale of livestock to the consignor and then having the con-

signor pay the commission and other charges, if any, to the

stockyards, a single check for the net proceeds is sent by

the market to the consignor. Specifically, the regulations

provide, in this respect (9 CFR 201.43 (a)):

§ 201.43 Payment and accounting for livestock and

live poultry.

(a) Market agencies and licensees to make prompt

accounting and transmittal of net proceeds. Each mar-

ket agency shall, before the close of the next business

day following the sale of any livestock consigned to it

A72

for sale, transmit or deliver to the consignor or shipper

of the livestock, or his duly authorized agent, in the ab-

sence of any knowledge that any other person, or per-

sons, has any interest in the livestock, the net proceeds

received from the sale and a true written account of

such sale, showing the number, weight, and price of

each kind of animal sold, the name of the purchaser,

the date of sale, the commission, yardage, and other

lawful charges, and such other facts as may be neces-

sary to complete the account and show fully the true

nature of the transaction.

In practice, the market frequently or usually sends

the check for the net proceeds to the seller before the

purchaser has paid for the livestock. But even before

the market has been paid by the buyer, and even if the

market is never paid by the buyer, the market receives a

commission from the seller when it sends a check for the

net proceeds to the seller just as realistically as if the

market had sent a check to the seller for the full purchase

price and the seller had then sent a check back to the

market for the commission.

Two eminently qualified witnesses expert in account-

ing principles testified for respondent that when the mar-

ket buys livestock for market support, it receives no

income or profit and, therefore, no revenue in the trans-

action (Tr. 317-328, 330-335). Reliance was placed upon

§ 4010 of the accounting principles adopted by the Account-

ing Principles Board, American Institute of Certified Public

Accountants, stating that “profit is deemed to be realized

[when] a sale in the ordinary course of business is

effect ſ ed] unless the circumstances are such that the col-

lection of the sales price [is] not reasonably assured”

(Tr. 321). One of the respondent’s experts testified as to

that accounting principle (Tr. 321-322):

A73

Well, the way that I would fit this quote into this

situation is that at the time the market buys a market

support animal there has been no sale. There’s no

sale to the consignor, but we’re not accounting for the

consignor. We're accounting for the barn or Lufkin

Lowery market.

All there has been is a purchase. There has not

been a sale.

And according to everything that I have ever been

taught about accounting is that you cannot recognize

profit when you buy something.

You can put it on the books at what it cost you.

This is akin to what is known—to a purchase what is

known in accounting terminology as a purchase dis-

count.

Q. You're stating that, then, this is not a revenue to

the barn because the barn has not, in fact, earned

anything?

A. That’s what I’m stating.

Q. When they buy that cow.

A. Yes, sir. ö

Q. The records submitted by the Packers and Stock-

yards Administration erronously suggest that the barn

has, in fact, made a commission on itself; is that not

correct?

A. Les.

The error in the conclusion by the respondent's expert

witnesses results from their failure to recognize or give

weight to the fact that livestock commissions are paid by

the seller not the buyer. Under their view, when the

market buys livestock for market support, no commission

is paid by the seller. But that would violate the Act.

AT74

It is settled that it is a violation of the Act for a stockyards

to fail to charge a commission to any seller or to give a

seller a reduced commission (see, e. g., In re Sebastian

Scirpo, 27 Agriculture Decisions 444, 446-448 (1968); In re

Rock Port Sale Pavilion, Inc., 25 Agriculture Decisions

477, 479-480 (1966); In re Amsterdam Livestock Sales, Inc.,

25 Agriculture Decisions 997, 999-1000 (1966); In re Roy

Taylor, 24 Agriculture Decisions 109, 110-112 (1965); In re

Winfield Livestock, 24 Agriculture Decisions 609, 611-612

(1965); In re Lusk Livestock Commission Co., 24 Agri-

culture Decisions 1074, 1076-1078 (1965); In re Wheatland

Livestock, 24 Agriculture Decisions 1079, 1080-1081 (1965) ;

In re Southern Livestock Auction Co., 24 Agriculture Deci-

sions 1474, 1479-1482 (1965)). Accordingly, all sellers, in-

cluding sellers whose livestock are bought by the market

for market support, must pay a commission. Since a com-

mission is paid by the seller irrespective of whether the

market or a third party buys the livestock, a commission

is received by the market from the consignor in every

transaction, including market support purchases.

The situation insofar as commissions are concerned is

no different when the market buys the animal for market

support than when a third party purchaser fails to pay

for the livestock. In either case, the seller—not the buyer

—pays the commission. Mechanically, the payment is

made by the seller receiving a check for the net proceeds

of the livestock instead of having a check for the gross

proceeds issued to the seller and then having the seller

immediately pay the commission to the stockyards.

In many cases, it would make no difference whether

the complainant’s accounting treatment of commissions in

connection with market support purchases is followed or

the respondent’s approach is followed. Ordinarily, the

revenue received as selling commissions from the sellers

A75

in connection with market support purchases would be

offset by the complainant’s allowance for business getting

and maintaining expenses, including market support losses.

But in this case, the respondent’s records were inadequate

to prove market support expenses except in the amount

of $4,063.59. Hence the complainant’s allowance for re-

spondent’s business getting and maintaining expenses, in-

cluding market support losses, was less than the revenue

received by respondent as commissions from the sellers

in market support transactions during the base year (Find-

ings 15 and 19, supra).

. It may be that the complainant’s treatment of com-

missions received in market support transactions is differ-

ent from that of the Internal Revenue — * he

principles ol accounting acceptable by the Internal Rev-

enue Service are not necessarily appropriate for rate regu-

lation purposes (Tr. 143-144). As recognized in an opinion

of the Accounting Principles Board, American Institute of

Certified Public Accountants, which appears in the Jour-

nal of Accountancy, December 1962, page 67:

1. The basic postulates and the broad principles

of accounting comprehended in the term generally

23. Even where a market’s records are a

uate to

of the market support expenses, the poder Fan 42

market support losses would be lessened. F

5 or exam

— that respondent's records as to — ~y bd.

osses were equate to prove respondent’s alleged losses, under

ae ent’s accounting treatment, $16,648.63 would be subtracted

no 11 respondent's revenue received, but, also, from re-

spondent 1E — Hence, under respondent's theory com

plainant have no control over whether respondent’s busi-

ness gettin j j

- o g and maintaining expenses exceeded 25¢ per animal

A76

accepted accounting principles” pertain to business

enterprises in general. These include public utilities,

common carriers, insurance companies, financial in-

stitutions, and the like that are subject to regulation

by government, usually through commissions or other

2. However, differences may arise in the appli-

cation of generally accepted accounting principles as

between regulated and nonregulated businesses, be-

cause of the effect in regulated businesses of the rate-

making process, a phenomenon not present in nonreg-

ulated businesses. Such differences usually concern

mainly the time at which various items enter into the

determination of net income in accordance with the

principle of matching costs and revenues.

In the stockyards industry, since the commission is

paid by the seller—not the buyer—and since all sellers

are required by law to pay the commission, complainant’s

accounting practice for ratemaking purposes, which in-

cludes in a stockyard’s total revenue commissions paid by

the sellers in connection with livestock bought by the mar-

ket for market support, is manifestly correct.

IX. Return on Buildings and Equipment

The complainant included an allowance of $2,398.60

for the return on respondent’s buildings and equipment

during the base period. This allowance was computed on

the basis of 8% of the original cost, when first dedicated

to the public use, of the buildings (including improve-

ments) and equipment, less depreciation (Finding 20,

supra).

This is the only allowance under complainant’s auc-

tion market rate analysis which is based on a rate of re-

AT77

turn times value. Prior to about 1969, the allowance for

land was computed by multiplying the rate of return times

the value of the land, but the allowance for land is now

computed on the basis of the number of animal units han-

dled at the market, which, in this case, resulted in an al-

lowance more than three times larger than would have

been determined under the pre-1969 formula (Finding 21,

supra).

The respondent challenges the complainant’s use of

original cost, less depreciation, and also the 8% rate of

return (Appeal, pp. 5-7, 14-16). The value and rate of

return must be considered as a unit since the complain-

ant’s allowance is obtained by multiplying the valuation

of the buildings and equipment times the rate of return;

and whenever two figures are multiplied together, the

identical increase in amount can be accomplished by ap-

plying the same percentage increase to either of the fac-

tors which are multiplied together.

For example, if the value of a building is $100 (using

unrealistically small figures to illustrate the point), and

the rate of return is 6%, the allowance would be $6. If,

because of inflation or any other reason, complainant

wanted to increase the allowance by one-third, i. e., to $8,

the increase could be effected by increasing the value of

the building by one-third (to $133.33), which would re-

sult in an $8 allowance at 6% ($133.33 x .06); or the value

of the building could be left at $100, and the rate increased

by one-third (to 8%), which would result in an allowance

of $8 ($100 x .08). Since any desired increase in the al-

lowance can be produced either by increasing the valu-

ation of the building or by increasing the rate of return,

both factors must be considered simultaneously to deter-

mine whether the result is reasonable.

A78

A. Original Cost, Less Depreciation

The respondent criticizes the complainant’s use of

original cost when first dedicated to the public use, less

depreciation, for several reasons.

One objection is that this factor constantly diminishes,

as depreciation is deducted each year, and, therefore, in

time the allowance will allegedly become unreasonably

small. The short answer to this objection is that the full

amount of the depreciation deducted by complainant each

year is allowed as an expense and, therefore, the full

amount of such depreciation is returned to the stockyards

owner by the ratepayers each year. This return of equity

capital to the stockyards owner, resulting from each year’s

depreciation allowed as an expense, is in addition to the

8% return on buildings and equipment. (I was unaware

until late in the oral argument in this case that the return

of equity capital each year, i.e., by allowing as an expense

each year’s depreciation, is in addition to the 8% return

allowed on the stockyard owner’s buildings and equip-

ment.)

Specifically, during the base year, the respondent’s

depreciation on its buildings and equipment was $3,383.01

(Comp. Ex. 7). That entire amount of depreciation, $3,-

383.01, is included in the respondent’s expenses of $203,-

846.57 shown on line 1 of Figure 1; and $3,383.01 is in-

cluded in the respondent’s Adjusted Expenses of $125,-

764.37 shown on line 22 of Figure 1, supra.

Obviously, if a portion of a stockyard owner’s origi-

nal investment is returned to him each year, he should not

earn a return each year on the full amount of his original

investment. His return should be on his original invest-

ment less that portion of his original investment which

has been returned to him.

A79

To use a hypothetical example, if a stockyards owner

built a building in 1950 for $100,000, and depreciated it

over 25 years at the rate of $4,000 per year, in the first

year, $4,000 would be returned to him by the ratepayers

(since $4,000 depreciation would be included in the mar-

ket’s expenses) and, in addition, he would earn the com-

plainant’s rate of return on $96,000. For the second year,

he would receive another $4,000 from the ratepayers (as

a result of the second year’s depreciation included in the

market’s expenses), making a total of $8,000 of his equity

capital returned by the ratepayers during the first two

years, and he would earn the complainant’s rate of return

during the second year on $92,000.

If the stockyards owner in this hypothetical example

wanted to continue to earn the complainant’s rate of re-

turn on the full amount of his original investment, he

would merely have to invest the equity capital returned

to him each year at the same interest rate as complain-

ant’s rate of return.

When the mechanics of complainant’s rate formula

are fully understood, it is obvious that respondent has no

legitimate complaint because of the steady decline in the

value of its buildings and equipment.

The respondent also objects to the complainant’s use

of original cost when first dedicated to the public use, less

depreciation, because that method does not take into ac-

count any increased price paid by a new owner of the

stockyards.

However, a purchaser of a stockyards is buying a reg-

ulated enterprise and, therefore, he should pay no more

for the enterprise than he is willing to pay on the basis

of the rates that the complainant allows. There is ample

precedent in the field of public utility ratemaking cases

A80

to support complainant’s view that an increase in rates

should not be permitted merely because a new owner pur-

chases the property. See, e.g., Re: Jefferson County Sewer

Co., 87 PUR 3d 392, 397 (1971); Re: Canadian Utilities,

Ltd., 80 PUR 3d 385, 399 (1969); Pennsylvania Pub. Util-

ity Comm. v. Penn. Power & Light Co. (15559 et al., Nov.

20, 1956; not reported, but digested in 16 PUR 3d 592);

Donnelley v. Consolidated Water Co. of Utica, 3 PUR

(NS) 173, 183 (1933).

The respondent’s most troublesome objection to the

complainant’s use of original cost, less depreciation, is that

this factor does not rise with inflation. This objection

warrants extensive discussion, extending to the end of

this subsection.

First, even if the return on a stockyard owner’s in-

vestment did not fully keep pace with inflation, he would

be no worse off than many others who have invested in

stocks, bonds and savings and loan associations. Bonds

purchased many years ago yield the same return, year af-

ter year, despite inflation (and, if sold prior to maturity,

would be heavily discounted). Dividends from many com-

mon stocks have not kept pace with inflation (and many

stocks have declined sharply in value). The complain-

ant’s 8% rate of return is much higher than the rate of

return on many of such bonds and stocks bought years

ago; and is at least as high, if not higher, than the rate

of return presently available at many savings and loan

associations. Hence even if the return on a stockyard

owner’s investment did not increase commensurately with

inflation, he would be as well off as many other invest-

ors.**

24. A minor consideration is that, in a very real sense, in-

flation is, in part, a form of indirect taxation by Congress; and

stockyard owners should bear some part of the burden of that

indirect taxation.

A81

The most important consideration as to this issue is

the fact that an auction market owner’s return on his

buildings and equipment is a very minor part of his total

return from the auction stockyards; whereas in the case

of other public utilities, the return on buildings and equip-

ment is a large part of the owner’s total return. Hence it

is nowhere near as important to auction market owners

as to owners of other public utilities that the value of

buildings and equipment keep pace with inflation.

For example, complainant’s rate analysis allowed

Giles Lowery to receive during the base year $48,619.58

more than reasonable expenses and depreciation,” of

which only $2,398.60 thereof, or 4.9% ($2,398.60 — $48,-

619.58), resulted from the allowance for the return on re-

spondent’s buildings and equipment.

Even if the $22,715.20 allowance for operating margin

is excluded from consideration, Giles Lowery’s return over

expenses would still be $25,904.38 ($48,619.58 — $22,715.20),

and the allowance for the return on respondent’s buildings

and equipment is only 9.3% of that amount ($2,398.60 —

$25,904.38). ;

Hence it is clear that the revenue derived from the re-

turn on an auction market owner’s buildings and equip-

ment is a small part of his total return over expenses, and

is negligible compared to the return on buildings and equip-

ment received by the owners of other public utilities.

25. This consists of allowances of $15,839.40 for a working

owner; $3,549.25 for owner’s management; $709.85 for interest on

working capital; $2,398.60 for return on and equipment;

$3,407.28 for use of land; and $22,715.20 for operating margin

(Fig. 1, supra). Some part of the “operating margin” might, of

course, be needed for contingencies, thereby reducing the money

available to the owner. But, on the other the m avail-

able to the owner would increase substantially if his livestock

volume increased significantly. It is not complainant’s practice

to monitor future volume increases, resulting in future increased

income, until the auction owner seeks a future rate increase.

A82

In these circumstances, the livestock auction market

industry would not be seriously affected even if that por-

tion of the owner’s total income resulting from the return

on the auction market’s buildings and equipment did not

increase in any manner with inflation. It could reason-

ably be expected that the auction market industry would

continue to survive and be economically healthy.

The foregoing circumstances, peculiar to the livestock

auction market industry, must be considered in connection

with the respondent’s view with respect to the valuation

of auction market buildings and equipment.

Respondent urges the adoption of a formula for de-

termining the value of auction market buildings and equip-

ment found in Railroad Commission of Texas v. Houston

Natural Gas Corp., 289 S.W.2d 559, wherein the Texas Su-

preme Court endorsed a “reasonable balance” between

original cost less depreciation and reproduction cost new

less deterioration and obsolescence. This would, of course,

require a determination as to the reproduction cost new

of respondent’s buildings and equipment.

Complainant’s position is that the reproduction cost

new less depreciation method of valuation of buildings and

improvements and movables is speculative, unreliable, and

has no real relationship to the actual experience of stock-

yards. It argues that the most reliable, most stable, and

most equitable basis for the valuation of such property is

the original cost of the property when first dedicated to the

public use.

Valuing respondent’s buildings and equipment at orig-

inal cost when first dedicated to the public use minus de-

preciation conforms to the rationale in In re St. Paul Union

Stockyards Company, 21 Agriculture Decisions 1216 (1962).

In that case, the Judicial Officer adopted in principle the

A83

original cost method of valuation (21 Agriculture Decisions

at 1238-1272). The Judicial Officer explained the bases

for favoring original cost, less depreciation, over any for-

mula based on reproduction cost new or trended original

cost as follows:

53. * * The Court of Appeals of Maryland stated in

the case of Chesapeake & Potomac Tel. Co. v. Public

Service Commission, 93 A.2d 249, 254 (1952), that:

Estimates of reproduction cost are conjectural at

best, not merely because they rest on opinion, but

for the obvious reason that probably no plant

would ever be reproduced in its present form.

Even the physical structures to replace the old

would be designed, so far as possible, to compensate

in efficiency and convenience for the higher con-

struction costs.

54. The court quoted from an earlier opinion of the

Maryland Public Service Commission (84 PUR NS 175,

183 (1950):

In short, it is a theoretical reproduction of some-

thing which, as a practical matter if it did not

exist, would not be produced in its present form

and locations. As this highly theoretical process

has questionable probative value in times of nor-

mal and stable economy it has even less value

at the present time.

26. The St. Paul case involved a terminal stockyards rather

than an auction stockyards, and because of peculiarities applicable

to the facts of that particular terminal stockyards (which would

III Irr- Ner-

a “sp 5 inventory” po gh valuation which to some

extent from original , but which totally avo d —

ie ieee reproduction cost new (21 Agriculture — at

A84

55. The Tennessee Railroad and Public Utilities Com-

mission in the case of Re Southern Bell Telephone &

Telegraph Company (100 PUR NS 33, 36 (1953))

stated with reference to reproduction cost estimates

that:

In brief, it constitutes an attempt to estimate the

reproduction cost of old property at present day

prices of material and labor. Such proof is highly

conjectural, speculative, and unrealistic. The com-

pany would hardly think of replacing its old facili-

ties with precise counter parts, or at their original

locations. Technological progress and the growth

of the industry have rendered obsolescent a sub-

stantial portion of these facilities. While present-

day replacement may be somewhat more costly to

install, they are more efficient and economical in

operation (21 Agriculture Decisions at 1246-1247).

81. In his concurring opinion in St. Joseph Stock

Yards Co. v. United States, 298 U.S. 38 (1936), Mr.

Justice Brandeis presents convincing examples of the

magnitude of the task imposed upon regulatory agen-

cies and the courts in applying the rule of Smyth v

Ames [169 U.S. 466, which required consideration, in-

ter alia, of reproduction cost new] — the massive rec-

ords, the delays, the excessive cost, the time con-

sumed by all participants, and the obstacles encoun-

tered. The present proceeding is another classic ex-

ample of the futility of trying to apply the reproduction

cost valuation theory and prescribe rates with reason-

able promptness (21 Agriculture Decisions at 1258-

1259).

A85

96. The trended cost theory is even more conjectural,

speculative, hypothetical, and unrealistic than the re-

production new theory. It has the same basic infir-

mities as the reproduction new theory, except to a

greater degree. The United States Supreme Court

long ago condemned the trended cost theory. In the

case of West v. Chesapeake and Potomac Telephone

Company of Baltimore, 295 U.S. 662, 674 (1935), it was

held that: the method was inept and improper,

is not calculated to obtain a fair or accurate result, and

should not be employed in the valuation of utility

plants for rate making purposes.”

97. In the Hope case the Federal Power Commission

condemned the trended cost estimate as having no

“probative value” since it was “not founded in fact,”

was “basically erroneous,” and produced “irrational

results.” The Commission held that (44 PUR NS at

9): “The reproduction cost studies and the so-called

trended ‘original cost’ studies were the typical, hypo-

thetical conjectures which have plagued rate regula-

tion for more than forty years” (21 Agriculture Deci-

sions at 1263). ,

101. We similarly approve of the net capital invest-

ment or original cost method of valuation for the rea-

sons expressed by the hearing examiner and demon-

strated in the record of this proceeding. As stated by

Mr. Justice Brandeis in his dissenting opinion in South-

western Bell Telephone Company v. Public Service

Commission of Missouri, supra, at p. 290: “The thing

devoted by the investor to the public use is not specific

property, tangible and intangible, but capital em-

barked in the enterprise. Upon the capital so invested

A86

the Federal Constitution guarantees to the utility the

opportunity to earn a fair return. Moreover, an

original cost rate base is determined from facts and

not theories, estimates or speculations and the fixing

of such a rate base at any time simply involves the

adding of capital expenditures and deducting retire-

ments and depreciation as shown by accounting rec-

ords subsequent to any previous date when the rate

base was fixed. The original cost method avoids ex-

pensive appraisals and the controversies incident there-

to (21 Agriculture Decisions at 1266).

If the complainant were required to determine repro-

duction cost new each year for about 2,000 stockyards, its

present rate staff of four professional employees would

have to be increased to at least several hundred profes-

sional employees. Although administrative difficulties

should not be controlling where vital interests are at stake,

as shown above, no vital interest is at stake here. More-

over, as shown in the quoted material above, any use of

reproduction cost new involves a determination which is

highly conjectural, unrealistic and lacking in probative

value.

In Federal Power Commission v. National Gas Pipeline

Company, 315 U.S. 575, the Court sustained an order of the

Commission under the Natural Gas Act. In discussing the

scope of judicial review of rates prescribed by the Commis-

sion, the Court held (315 U.S. at 586):

The Constitution does not bind rate-making bodies to

the service of any single formula or combination of

formulas. Agencies to whom this legislative power

has been delegated are free, within the ambit of their

statutory authority, to make the pragmatic adjust-

A87

ments which may be called for by particular circum-

stances.

In a concurring opinion in that case by Mr. Justice

Black, Mr. Justice Douglas and Mr. Justice Murphy, it is

stated (315 U.S. at 602-606):

While the opinion of the Court erases much which has

been written in rate cases during the last half century

we think this is an appropriate occasion to lay the

ghost of Smyth v. Ames, 169 U.S. 466, which has

haunted utility regulation since 1898. That is espe-

cially desirable lest the reference by the majority to

“constitutional requirements” and to “the limits of due

process” be deemed to perpetuate the fallacious “fair

value” theory of rate making in the limited judicial

review provided by the Act.

The rule of Smyth v. Ames as construed and applied,

directs the rate-making body in forming its judgment

as to “fair value” to take into consideration various

elements—capitalization, book cost, actual cost, pru-

dent investment, reproduction cost. * * * The risks

of not giving weight to reproduction cost have been

great.“ * The havoc raised by insistence on repro-

duction cost is now a matter of historical record.

As we read the opinion of the Court, the Commission

is now freed from the compulsion of admitting evi-

dence on reproduction cost or of giving any weight to

that element of “fair value.”

In Federal Power Commission v. Hope Gas Co., 320

U.S, 591, the Court again considered an order of the Fed-

A88

eral Power Commission prescribing rates under the Natural

Gas Act. The Commission established the rate base on the

basis of the “actual legitimate cost” of the property in-

volved less depreciation (320 U.S. at 596). Evidence of the

cost of reproduction new was given no weight by the Com-

mission on the grounds that it was “not predicated upon

facts” and was “too conjectural and illusory to be given any

weight” (320 U.S. at 597). The Commission also refused

to give any “probative value” to “trended ‘original cost’”

because it was “not founded in fact,” was “basically erro-

neous,” and produced “irrational results” (320 U.S. at 597).

Previously, the Court of Appeals had reversed the

Commission’s order (134 F.2d 287), and among the grounds

for reversal were: (1) that the rate base should reflect

the “present fair value” of the property; (2) that the

Commission should have considered reproduction cost and

trended original cost; and (3) that “actual legitimate cost”

(prudent investment) was not the proper measure of fair

value” where price levels had changed since the invest-

ment.

The Supreme Court reversed the Court of Appeals,

stating (320 U.S. at 602):

We held in Federal Power Commission v. Natural

Gas Pipeline Co., supra, that the Commission was not

bound to the use of any single formula or combination

of formulae in determining rates. Its ratemaking func-

tion, moreover, involves the making of “pragmatic ad-

justments.” * * * And when the Commission’s order

is challenged in the courts, the question is whether

that order “viewed in its entirety” meets the require-

ments of the Act. * * * Under the statutory standard of

“just and reasonable” it is the result reached not the

method employed which is controlling. * * * It is not

A89

theory but the impact of the rate order which counts.

If the total effect of the rate order cannot be said

to be unjust and unreasonable, judicial inquiry under

the Act is at an end.

For the reasons set forth above, it is concluded that

complainant’s use of original cost when first dedicated to

the public use, less depreciation, is not only lawful, but is

highly desirable for ratemaking purposes involving the

livestock auction market industry.

If the auction market owner’s total income is to increase

with inflation, as it must to the extent necessary to insure

that sufficient markets will remain economically viable to

handle the available volume of livestock, the increase

should be accomplished in some manner“ which is not as

time-consuming, burdensome and administratively unwork-

able as respondent’s proposal, which would require a deter-

mination of the reproduction cost new of the market’s build-

ings and equipment.

B. Rate of Return

The complainant used a rate of return of 8%, which

was applied to the value of respondent’s buildings and

equipment (Finding 20, supra).

There is no precedent, administrative or judicial, which

gives any meaningful guideline for determining the rate

of return to be applied to the value of a livestock auction

market’s buildings and equipment.

A90

The complainant cites as a “guide” to determining the

rate of return on buildings and equipment the case of In re

St. Paul Union Sieckyards Company, supra, 21 Agriculture

Decisions 1216, 1291 (1962), in which the Judicial Officer

stated:

We believe we shall discharge our obligations to the

investor and treat the rate payer fairly if we provide

revenues sufficient for the company to pay (a) its

actual operating expenses prudently and economically

incurred; (b) an annual charge for depreciation based

upon the expected life of the properties; (c) taxes;

(d) interest on its debt at the rate actually paid; (e) a

reasonable dividend on its outstanding stock; and (f)

something to be added to the surplus to enable the

company, under good management, to maintain and

support its credit.

However, that case involved a terminal stockyards,

which, as shown above, is quite different from an auction

stockyards. In the St. Paul case, supra, the rate base,

consisting of land, buildings, equipment and working cap-

ital, was $5,118,810 (21 Agriculture Decisions at 1315).

Buildings and equipment alone were valued at $3,294,167,

or 64.4% of the total rate base (ibid.). The Judicial Of-

ficer, applying the criteria quoted in the preceding para-

graph, concluded that the “reasonable rate of return

which the respondent is entitled to earn on the rate base,

after an allowance for all reasonable operating expenses,

depreciation, and income taxes, is 7.75 percent” (ibid.).

The terminal stockyard owners’ income resulted from

applying the 7.75% rate of return to the $5,118,810 rate

base (ibid.).

But as shown above, only 4.9% of Giles Lowery’s

income from the auction market depends on the rate of

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return (or 9.3% if the operating margin is not considered).

Hence the rate of return was decisive as to the total

income of the stockyard owners in the St. Paul case, but

is decisive as to only a very small part of an auction

market owner’s income. Hence the six criteria quoted

above from the St. Paul case provide no meaningful guide-

line as to the rate of return to be applied to the value of

an auction market’s buildings and equipment. If relevant

at all to an auction market, the six criteria would be

useful only in determining whether the auction owner's

total income from the stockyards was just and reasonable.

To the extent that an auction market owner used

borrowed funds to pay for the buildings and equipment,

complainant should give some consideration to the forth

criterion quoted above, viz., “interest on its debt at the

rate actually paid.” In this case, the respondent corpora-

tion borrowed funds from the Small Business Administra-

tion at 8% annual interest (Tr. 89-92). The complainant’s

8% rate of return, therefore, allows respondent to service

its debt.

The complainant also cites for guidance as to the rate

of return to be applied to the value of the respondent’s

buildings and equipment the rate of return allowed in

other regulated industries. This also is a factor that

should be given some consideration. Recent rate cases

show wide variations in the rates of return allowed. The

majority, however, are in the range of 8%. The following

table of rate cases was cited by the Chief Administrative

Law Judge as representative (Initial Decision, p. 28):

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Rate of Date of

Company Citation 174 Decision

Utilities & Indus-

tries Corp. 100 PUR 3d 467, 474 7.57 8-9-73

South Central Bell

Tele. Co. 100 PUR 3d 502, 504 6.93 8-21-73

Union Light, Heat

& Power Co. 100 PUR 3d 518,522 8.67 8-13-73

Pacific Northwest

Bell Tel. Co. 100 PUR 3d 82, 103 8.93 7-14-73

Capital City Water

Co. 100 PUR 3d 124,126 7.76 6-1-73

Kansas-Nebraska

Natural Gas Co.,

Inc. 100 PUR 3d 129,138 8.5 7-26-73

New England Tel.

& Tel. Co. 100 PUR 3d 189,199 893 6-25-73

The complainant’s 8% rate of return is, therefore,

consistent with the rates of return allowed in other reg-

ulated industries, and is just and reasonable in the cir-

cumstances of this case.

Respondent makes much of the case law requirement

that a rate of return for a regulated utility should be

sufficient to “attract” capital. The point is not well-taken,

however, because, as shown above in the first section of

this Decision, the ability to attract capital is not a proper

consideration in an auction stockyards rate case. But even

if it were, the rate of return applied to the value of an

auction market owner’s buildings and equipment deter-

mines such a negligible portion of his total income that it

could not be a serious factor in attracting capital.

Age

Respondent argues that a “small stockyard like this

company has a greater risk and needs a greater return

than other utilities” (Brief, Finding 14). However, no

evidence was introduced to show an actual greater risk

in the stockyards industry, whereas evidence was intro-

duced to show that investment in the stockyards industry

is a relatively safe investment (Tr. 199-200). Moreover,

as shown above, since the rate of return affects such a

negligible portion of an auction owner’s total income, even

if the stockyards industry were not a relatively safe in-

vestment, the rate of return could not have much of an

effect on the situation.”

X. Per-Head-Weight Tariff Schedule

The complainant’s proposed tariff is based on a per-

head-weight schedule, as opposed to the valuation type

tariff presently in effect at the respondent’s market and

at neighboring markets (Finding 27, supra). About 800 of

the 2,000 auction markets in the United States use a per-

head-weight schedule such as that proposed by complain-

ant, and about 1,200 use a valuation type tariff. Both

t

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