# Appendix — Giles Lowery Stockyards, Inc. v. Department of Agriculture > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385005_0672%3A2 ## Record - **Collection:** Supreme Court brief - **Document type:** Appendix - **Published:** January 1, 1978 - **Citation:** 436 U.S. 957 ## Text 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. A2 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. A3 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 A4 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 A5 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 Al0 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 Al2 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. Al5 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. Al6 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 Al7 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 f [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385005_0672%3A2. Public record. Not legal advice.