II

PROJECTED FINANCIAL RESULTS

A. The Historical Period

Both the company and the Commission staff used the 12-month period ended February 28, 1969, as the historical year. upon which to base forecasts for the future annual period. The company reported a net operating loss for the period of $114,916. The Commission staff, after thorough audit, made adjustments which had the net effect of reducing operating costs by $92,441,27 so that the net operating loss for the

historical period stood at $25,950. As the adjustments by the staff were not challenged or rebutted, the figures presented by the staff in its Exhibit No. 3 will be accepted as the base for forecasting the operating results of the future annual period. Accordingly, we find that the operating results for the 12 months ended February 28, 1969, were:

2/

The major adjustments made by the staff were a $29,000 correction of depreciation expense and a $32,000 adjustment for three salaried personnel whose cost should have been allocated to non-transit operations.

In addition to this operating loss, of course, the company incurred interest expense of $1,286,987 in the historical period, making a total loss, from the owners standpoint, of $1,312,937.

The statement in Table I includes a credit of $194,516 for amortization of the acquisition adjustment account. Order No. 981 of this Commission, issued October 17, 1969, established a corrected schedule for the amortization of the acquisition adjustment retroactive to January 1, 1964; that order directed that a book entry be made correcting the status of the acquisition adjustment through December 31, 1968. It also directed the company to begin the new schedule of monthly amortization retroactive to January 1, 1969. Accordingly, the historical operating statement in Table I would more accurately reflect the company's operating results for regulatory purposes if the new amount for acquisition adjustment were shown.

The corrected figure would be $345,666. There is no need to utilize the corrected figure in reporting the historical results. In forecasting operating results for the future annual period, however, the new amortization figures for the future annual period will be computed directly on the basis of the methodology adopted in Order No. 981.

B. Revenues and Expenses At Present Fares

Our next task is to forecast the company's operating results in a future annual period if fares are maintained at their present levels. On this subject, there are issues in dispute between the company and the staff.

The company presented a projection for the 12 months ending June 30, 1970. It forecasted an increase of $3,108,000 in operating revenues and an increase of $3,628,000 in operating costs, resulting in a net operating loss for the period of $634,873, before interest charges.

The Commission staff presented its own projections, and its analysis indicated that there would be a net operating income of $332,027 in the same period. The issues thus raised must be disposed of by us and we turn first to the question of revenues.

1. Disputed Items of Revenue There was, first, disagreement as to the amount of passenger revenues which would be forthcoming in the future annual period. The company initially projected the number of one-way rides in the future annual period at 116,661,255. It reached this result by studying the number of rides in the various fare categories during the first quarter of the years 1965 through 1967 and establishing the relationship between the rides in the first quarter of the year and the total rides for the entire year. The ratio thus developed was applied to the actual first quarter rides for 1969 to produce an annualized figure. The Commission's engineering staff was of the opinion that ridership during the first quarter of 1969 was depressed, due to a number of general factors. The staff therefore adopted the same general procedure as that used by the company, except that they used as a base the actual rides for the second quarter of 1969 compared with second quarter ridership in the earlier years. This produced a projected number of one-way rides totaling 117,159,348. On rebuttal, the company witness recalculated his projection for the future annual period by utilizing the experience of the first six months of 1969 rather than the first quarter alone. This produced a revised figure of 116,924,259. Thus, as finally presented, the company projected 235,089 less riders than the staff.

We agree completely with the staff's attack on the company's original projection. Use of figures for one quarter, and particularly a quarter which tends to have low ridership, will produce a distorted result. However, as between the staff's analysis of the second quarter and the company's use on rebuttal of six month figures, we think the company's approach is preferable. It takes into account a longer period of time, thus providing a broader data base. We will, therefore, utilize the company's rebuttal projections in determining passenger revenues.

Company Exhibit No. 26, based upon the rebuttal estimate, projects passenger revenues at present fares to be $35,322,571. We also accept, as we logically must, the company's revised estimate of school fares, which produces a projected schoolfare subsidy of $1,507,060.

The only other disputed revenue item was the projection of charter revenues. The company initially projected revenues of $1,948,021, while the staff, analyzing the trend of past years, estimated that charter would produce $2,206,211. On rebuttal, the company witness detailed some specific guidelines which underlay his original estimate. He also revised his original estimate upward in order to give effect to increased rates which had recently been instituted by the company for its charter work. Thus, the company's final estimate of charter revenue was $2,000,932.3/ ́

This type of dispute is difficult to resolve. We are dealing essentially with opinions as to the course of future events. After careful consideration, we have decided to accept the company projection. It was made by the individual most directly involved in charter work and he based his result on direct knowledge of present ⚫ conditions and present future conditions in the charter market. has explained the basis for his reasoning and it is not without logic and reason. His forecasts have been accurate in the past.

He

The staff's methodology, based on trends, is a perfectly valid one and we might accept their approach in normal circumstances. However, the trends in the area of charter business were thrown off by the unfortunate events of 1968 and reliance on this data, even making allowance for these peculiarities, is tricky at best. We think that, in the present case, the wiser course is to use the company's somewhat more subjective but somewhat more directly derived figure.

3/ The actual amount in dispute is not the $205,279 difference between the company and staff estimates. The staff recognized that the increased charter revenues would produce increased expenses. The actual net difference is $62,000.

2. Disputed Items of Expense

We come now to the differences encountered between the company and the staff in the projection of operating revenue deductions. The company projected operating expenses of $36,249,117, while the staff concluded that they would total $35,683,056. When the twelve months ended February 28, 1969, are compared with future annual period projections, the company's figures project an increase in operating expenses of $3,689,019, while the staff forecast an increase of only $3,181,489. The major portion of the projected increase is related to labor and laborrelated items. The company projection places $3,428,685 in this category. This amount includes $2,843,941 in additional wage payments, some based on contractual wage adjustments through May 18, 1969, and some based on forecasted cost-of-living increases through June 28, 1970. This latter area, i.e., projected cost-of-living increases, was a subject of much discussion in this record. The company, in an effort to persuade us to modify our earlier stands on this subject, put into the record extensive evidence in support of its projections of cost-of-living increases beyond the date on which it filed its rate application, relying on the testimony of an independent economic analyst. The staff's projections were based on our previously expressed policy. Thus, Staff Exhibit Nos. 4 and 5 recognized all wage increases through June 29, 1969. Following the procedure we have established in past rate cases, the staff would also make an additional adjustment for the sixcent cost-of-living increase which went into effect on September 28, 1969.4 47 This is expected to cost the company an additional sum of $258,620 by June 30, 1970. Thus, the staff would allow a total increase of $3,440,109. There still remains a difference between the staff and the company in the amount of $169,960 for projected cost-of-living increases which, if the present labor contract were to continue, would take effect at the end of December 1969, March 1970, and June 1970.

We are squarely presented, therefore, with the need to determine whether to continue our past policy of recognizing only those cost-of-living increases which are required by conditions as of the date of our order. There can be no doubt that this policy has tended to underestimate the expenses which the company has actually incurred.

In recent times, and particularly during the last two years, the company has faced constant escalation of wages due to the costof-living clause. Therefore, we must consider very carefully the possibility that the additional cost-of-living wage adjustments forecast

4/ The company had forecast a seven-cent increase for September 28, 1969, and had made its projections accordingly. The company figures must be adjusted to correct this error.