growth in retained earnings at a rate which will permit the financing of new equipment.

We established in Table II that we must provide for operating revenue deductions other than income taxes totalling $37,951,924. Our analysis of the rate of return question has led to the conclusion that a return of $1,100,000 is justified. This leaves only the question of income taxes to be resolved before we can determine the company's total revenue requirements. The question of income taxes is one at which the company and the Commission staff are at odds. The company projected income tax payments on the full amount of the net income it will receive.

The staff, on Exhibit 5, Schedule 3, develops that for the period January 1 through July 31, 1968, the company will have available for the period beginning August 1, 1968, a net taxable loss carryover of $890,057. This carryover will offset any Federal Income Tax payable by the company up to the $890,057 carryover, and, as the Commission staff witness testified, is based on the practice of determining income taxes for regulatory purposes which will actually be incurred and paid by the company during the period in accordance with the flow-through concept; consequently, net operating losses incurred must be carried back or forward in accordance with the current Federal Income Tax law which provides for a three year carry back and five year carryover from the loss year. Schedule 3, Exhibit 5, shows that as of December 31, 1967, the company had adjusted taxable income of zero for calendar years 1965, 1966 and 1967 which precludes carry back of any operating losses incurred in 1968 or subsequent years. Thus, all losses commencing with 1968 must be carried forward.

cases, the resulting percentage return on equity has differed, being somewhat higher each time. This is because the retained earnings balance has been declining significantly for the last two years due to losses incurred by the company.

Inasmuch as losses have a cumulative carryover effect for tax purposes, in that a loss in one month is carried as an offset against the profits of the subsequent months, with income taxes being computed on the combined results of both months, the operating tax losses incurred by the company for the first seven months of 1968 will result in an offset to any profits subsequent to July 31, 1968. Since the future annual period commenced August 1, 1968, the tax loss of the seven months ended July 31, 1968, will be available to offset the equivalent amount of profits as they accrue from August 1, 1968, forward into the future annual period.

On this theory, if the company earned a return of approximately $2,100,000 during the future annual period, its income tax expense would be approximately $35,000, wholly for D. C. income tax since no Federal Income Tax would be payable.

Finally, on cross-examination of the staff witness, it was determined that the District of Columbia franchise tax rate increased from 5 percent to 6 percent on January 1, 1968. Staff, in its calculations of income taxes, used the old rate of 5 percent as did the company in its tax computations. On the pro forma operating statement for the future year at fares prescribed by the Commission the new franchise rate of 6 percent has been used to calculate D. C. income taxes.

We can conclude, therefore, that the company's revenue requirements including return on equity would total almost $40,100,000, broken down as follows:

When these figures are related to Table II, it appears that additional revenues of some $3,560,000 would have to be generated.

Our consideration of the issues had reached this juncture, and in fact gone beyond to the subject of an appropriate rate structure, when two major developments occurred which must obviously have a major impact upon our deliberations. We refer, first, to the issuance by the court of appeals of two significant decisions on review of prior Commission orders and, second, to the final passage by the Congress of a revised schoolfare subsidy bill. Each of these events has received our careful attention and we must now spell out their effect upon our disposition of the present proceeding.

IV

THE IMPACT OF THE COURT DECISIONS

The two court decisions in question, Williams v. WMATC, D.C. Cir. No. 20,200 (Oct. 8, 1968), and Payne, et al. v. WMATC, D.C. Cir. No. 20,714 (Oct. 8, 1968), are quite lengthy and need not be fully summarized here. Briefly, however, they deal with orders in three previous rate cases decided by this Commission-Orders 245 and 563 which disposed of the 1963 rate case; Order 564 which disposed of the 1965 rate case; and Orders 656 and 684 which disposed of the 1966 rate case.

The cases covered by those orders have not yet been officially remanded to us. In fact, D. C. Transit has sought a stay of the court's mandate while it seeks certiorari in the United States Supreme Court. However, we feel that the views expressed by the court should be taken into account in our decision here. One option open to us is to take no action in this case between now and December 13, 1968, the date by which we are required to act under Article XII, § 6(a)(2) of the Compact. The substantial losses being suffered by the company daily make that policy unwise. Another option would be to ignore the court opinions until

the cases are officially remanded to us and decide this case as though they had never been handed down. We regard the opinions as being entitled to more consideration than that. Finally, there is the option we choose to follow-to take interim action in this case while we await developments resulting from the court decisions. To understand our interim action, some review of the court opinions is necessary.

In one of the two decisions, handed down by the court sitting en banc, Commission Orders 245, 563 and 564 were set aside on various grounds and the cases in question are to be remanded to us for further action. Specifically, we were directed to supervise the establishment of a riders' fund on the basis of certain adjustments required by the court's decision.

A brief delineation of the issues dealt with by the court is necessary to an understanding of the problems we must now resolve before proceeding to decision in this case.

1. Rate of Return

The

The court set aside the Commission's determinations 29 of rate of return in both the 1963 and 1965 cases. company is required to place in a riders' fund any actual earnings in excess of the return conceded by protestants in those cases to be reasonable.

2. The Acquisition Adjustment Account

The court condoned the principle of changing the period over which the acquisition adjustment is to be amortized but directed that the amortization rate must maintain a reasonable relationship to accruals of depreciation of properties acquired from the predecessor company still remaining in service. Any previously allowed amortization we find to be excessive upon applying the court's standards must be placed in a riders' fund.

29

As discussed in more detail at p. 39, infra, our rate of return determination in the 1966 case was fully upheld by the court in its second decision.

3. Depreciation Reserve Deficiency

The court held that any deficiency found to exist in the depreciation reserve may be charged against the ratepayer only to the extent that the company has not already recouped the amounts involved in the form of earnings in excess of a fair return. To the extent that the deficiency is not so recouped it is proper to charge it fully and immediately against the riders' fund. Thus, the previous charge against the riders' fund for this purpose is proper to the extent the deficiency is unrecouped. Any amount improperly charged in the past, however, must be restored to the riders' fund.

4. Investment Tax Credit

We are directed to reconsider, apart from the fact that Congress enacted § 203(e) of the Internal Revenue Code, whether sound regulatory policy requires "flow through" treatment of the investment tax credit.

This brings us to the court's second decision, reviewing our Orders 656 and 684, in which we disposed of the 1966 rate case. Three principal issues were dealt with:

1. Interim Order

The court affirmed our power to enter an interim order granting rate increases sufficient at least to cover operating expenses and debt service while we give consideration to rate of return problems.

2. Rate of Return

The court affirmed our holding on rate of return, stating that "the Commission's findings and conclusions on the subject of rate of return are adequately supported by the evidence, and . . . the Commission has responsibly exercised its discretion in conformity with the standards enunciated in D. C. Transit System, Inc. v. WMATC." We had allowed a return of $1,900,000 being $1,311,000 for debt service and a 14% return on equity.