in Company Exhibit No. 3, in the amount of $169,960 will, in fact, materialize during the future annual period involved in this rate case. If we were to look only at past experience, we could be forced to conclude that these cost-of-living increases will actually occur. However, we are acutely aware that their occurrence, vel non, is dependent upon national and local economic conditions.

It seems to us that at present, and more so than at any recent time, it is impossible to predict with any certainty the future course of those conditions.

The newspapers, periodicals and journals coming to our attention on a daily basis contain a great number of dicussions and predictions. regarding the direction of the economy and the impact on the inflationary trend. Everything from continued boom to recession is predicted.

We are also aware, of course, of the Administration's efforts to control inflation. Paul W. McCracken, Chairman of the Council of Economic Advisors, and Arthur F. Burns, Presidential Councilor on Economic Matters, have both spoken of a slowdown in price increases and a general easing of inflation by the end of 1969. The Administration has announced its determination to continue its present stringent fiscal and monetary policies to assure this result.

In short, we simply do not believe that at the present time, despite past experience, it would be a prudent course to assume the continuation of an upward trend in the cost of living. To engage in such conjecture is difficult at best, and at this juncture, it seems to us impossible, particularly in the context of striking a proper balance between investors and transit riders. We will not, therefore, allow the additional $169,960 projected by the company for future cost-of-living increases. We will, therefore, allow

additional wage expense totaling $2,630,877.57

5/ In other words, the adjustment made by the Commission

staff on Exhibit No. 5, then, will be further adjusted by adding $258,620 to the hourly increase figure, representing the known six-cent increase on September 28, 1969.

The next disputed expense item involves charter expense. The staff proposed an adjustment of $180,861 to reflect increased mileage for charter work. This adjustment was based on the staff's projection of higher charter revenues than those predicted by the company. We have decided to accept the company's revenue projection. See p. 7, supra. Thus, the staff's suggested figure will be reduced to $43,723, to agree with the company's revenue projection.

Next, the figure of $451,489 for pension contribution increases, as set out in the staff presentation, will be scaled upward to $477,351 in order to coincide with the adjustment in hourly wages made above. There was a question raised in this record as to allowing pension and health fund contributions in view of the fact that the company is in arrears in paying these items. The record indicates, however, that payments are currently being made and there is no basis for concluding that they will not be made in the future annual period. We understand that arrangements are being made to provide collateral security for the arrearages. We find no basis for disallowing this expense.

The next item is the projection of salary increases for non-union personnel. The staff did not accept the company's projected increase of $135,429 because its payroll study for the preceding four calendar years disclosed that, despite annual increases granted to salaried employees, the total salaried payroll cost was actually decreasing each year, due to attrition, failure to replace senior officers as they retired, and replacing other employees, if at all, with persons at a lower wage level. The Commission accepts the stand of the staff on this matter. However, we also accept the data reported by the company in its rebuttal to the effect that a 15-centper-hour increase was granted to salaried employees on August 24, 1969. This increase will amount to $43,556 during the remainder of the future annual period and this sum will be allowed as an operating expense for that period.

This completes the discussion of disputed items of operating expense. As to certain increases, i.e., an item of $115,681 for track removal costs over and above the balance remaining in the track removal reserve and a minus adjustment of $34,499 for non-recurring and miscellaneous items, there was no dispute.

There are certain questions to be considered with respect to certain operating revenue deductions, other than operating expenses.

For reasons

The first is the forecast for depreciation. discussed at p. 20 infra, we have in fact decided to suspend the bus purchase requirement for the time being. The staff presented its opinion that, if the company is not going to be required to purchase 85 new buses each year, the depreciation accrual basis should be changed to 17 years rather than the present 14. Depreciation has nonetheless been projected on the regular standard straight-line basis, including the depreciation of buses acquired since 1956 on a 14-year write-off basis (subject to salvage value of 4% of original cost).

No specific testimony was placed in the record establishing 17 years as the proper basis. The staff's engineer did introduce some raw data (Exhibit 1, Appendix S) showing the age of retired buses. However, a review of the engineer's listing shows that, for 1969, all bus retirements were the old "White" buses, none of the later model General Motors make. Testimony from the company indicated that there was doubt as to the longevity of the later model buses now in use by the company. There has been no firm experience as to the actual effective service life of the later model buses.

We note that the average age of the bus fleet of D. C. Transit at February 28, 1969, per company Exhibit No. 5, is 8.31 years, with 74.3% of the fleet air-conditioned. Under the circumstances, the Commission does not see that it does violence to regulatory theory or to accounting theory to permit the continuation of a 14-year depreciation rate during a suspension of the purchase program. The interests of the ratepayer are protected by the fact that the Commission has placed the company on a unit-cost basis for depreciation, so that whenever the depreciation accrual on a specific bus reaches 96% of the original purchase price, further accruals of depreciation on that unit cease.

It should be clearly understood, of course, that suspension of the bus purchase requirement has enabled us to refrain from increasing depreciation expense by $203,417 in the future annual period. This is the amount of added depreciation expense which would result from the bus purchase.

Next, an adjustment must be made to the amortization of the acquisition adjustment account. The figures presented on the record utilized the figure of $194,516 for this item, pursuant to the amortization practice established by Order No. 564. However, in Order No. 981, we have modified this amortization method in accordance with the opinion of the Court of Appeals in Williams v. WMATC, D. C. Cir. Docket No. 20,200 et al., decided October 8, 1968,

Under the new amortization method, which is tied to accrual of depreciation on properties acquired by the company in 1956, the proper amortization amount for the future annual period is $173,339.

These, then, are the disputed items of revenues and expenses in the future annual period. Table II, below, reflects all of the adjustments mentioned above:

Thus, if Transit's fares are not raised, the company will experience a net operating loss during the future annual period of $176,197. After meeting interest charges of $1,196,926 / the total loss for the period will stand at $1,373,123.

A financial picture of this nature calls for action adjusting the fare structure to furnish the company with revenues sufficient

6/ Per Co. rebuttal, Exh. 35

to meet its operating expenses and provide a fair return. The next step in our deliberations is to consider the level of return which we should allow.1/

C. The Return To Be Allowed

In three recent orders relating to fare levels for Transit, we have discussed the principles to be applied in a determination of the return to be allowed. (Orders 684, 773 and 880.) As we noted in Order No. 880, the return must be one that will enable Transit "to cover interest on its debt, pay dividends sufficient to continue to attract investors, and retain a sufficient surplus to permit it to finance down payments on new equipment and generally to provide both the form and substance of financial strength and stability." D. C. Transit System, Inc. v. WMATC, 350 F2d 753 at 778 (D. C. Cir. 1965). In a determination of what amount of return will allow the company to achieve these general goals, we must consider such matters

.. as the capital programs in prospect, what such programs entail in terms of down-payments as well as financing, the cost of borrowing money, working capital needs, the desirable ratio of debt to equity, the incentives required by a stockholder to keep his money in the business and the dividends and growth rates requisite to supply these incentives, the opportunities in these respects provided in comparable businesses, and [the] related matters. . ." D. C. Transit System, Inc. v. WMATC; supra, 350 F2d at 779.

As it has in other recent rate cases, Transit presented the testimony of Mr. John F. Curtin on the subject of rate of return. Mr. Curtin is a member of the firm of Simpson and Curtin, a transportation consulting firm. The staff presented the testimony of Mr. Robert L. Banks and Mr. George B. Dutton, Jr., President and Senior Associate, respectively, of the firm of R. L. Banks and Associates, Inc., consulting transportation .economists.

1. Testimony of John F. Curtin Mr. Curtin's testimony followed the same pattern of his earlier presentations to the Commission and he used much of the same material he had presented on those earlier occasions.

He recommended a return of $2,700,000 to Transit. He stated that in arriving at that sum, he was guided by the concept that a fair rate of return requires consideration of the amount needed by Transit to safeguard its service, to attract capital and to provide sufficient income,

7/ Issues have been raised in this proceeding on the question whether we should provide any fare increase despite a showing of losses under the present fare structure. Those issues are dealt with in detail at pp. 24-32 infra. We continue with a standard analysis here for the sake of continuity.