In D.C. Transit System, Inc. v. Washington Metropolitan Area Transit Commission (Transit I),1 we reviewed the Commission's Order No. 245,2 promulgated after a public hearing in 1963, by which Transit was authorized to raise its token fare for passenger transportation within the District of Columbia and between the District and points in Maryland.3 We then resolved several subsidiary issues germinated by that order, but were unable to pass judgment as to the legal propriety of the fare increase. The order in that aspect was predicated upon the Commission's finding that a margin of return of $1,480,746, representing a 4.87% Rate of return on Transit's operating revenues, was just and reasonable.4 Upon examination of the record, however, we discovered that we had 'no intelligible basis for disposing of the competing claims before us that the return allowed by the Commission is, on the one hand, too high, and, on the other, too low.'5 Accordingly, we remanded the case to the Commission 'for further proceedings * * * to determine the margin of return over and above operating expenses that Transit should be allowed.'6

On September 17, 1965, shortly before our remanding order was certified to the Commission, Transit filed a new tariff making numerous fare changes for 1966,7 including elevations in the District cash fare from 25 to 30 cents, and in the District token fare from 21.25 to 25 cents.8 Exerting a power conferred by the Washington Metropolitan Area Transit Regulation Compact (Compact),9 the Commission promptly suspended the new tariff pending a determination as to its reasonableness, and thereafter conducted a public hearing on the proposals it contained.

On January 26, 1966, in purported response to our remand, and without prior notice or further hearing for the purpose, the Commission entered Order No. 563,10 in supplementation of Order No. 245, reaffirming the return for 1963 the latter had previously allowed.11 It simultaneously issued Order No. 564,12 in which it found that a margin of return for 1966 of about $2,000,000 above operating revenues, symbolizing a return rate of 6.03%, would be fair and reasonable,13 but that the existing fare scale would generate net earnings estimated at only $648,357.14 The Commission nonetheless felt that a fare increase, save in a minor respect not questioned here, was unnecessary because of the availability of $2,166,933 in a special reserve which had been created in consequence of our decision in Bebchick v. Public Utilities Commission.15 In lieu of an increase, the Commission permitted Transit to draw upon the reserve for approximately $1,350,000 to accommodate the anticipated deficit in its earnings.16

Timely petitions for rehearing,17 denied by the Commission, ripened for our present review18 various issues stemming from these orders.19 No. 20,200 brings contentions that Order No. 563 is invalid for lack of notice and hearing, and is erroneous on the merits. No. 20,201 presents importantly the claim that the margin of return awarded by Order No. 564 is unreasonable, and it, like No. 20,202, includes attacks upon other Commission findings and conclusions. We proceed now to a consideration of the problems thus engendered, in the sequence20 we deem best suited to exposition of the reasons for which we set each of the Commission's orders aside.

* 1963 MARGIN OF RETURN

Following our remand, the Commission promulgated in Order No. 563 its supplemental findings to Order No. 245, and 'affirmed' its earlier finding that a margin of return representing a rate of 4.87% On operating revenues 'was fair and reasonable.'21 Petitioners in No. 20,200 attack Order No. 563 on the ground that it does not comply with our instructions governing the Commission's task on remand.22 The disclosures made by the record, now to be delineated, lead us to agree.

We pointed out in Transit I that the return of 4.87% Possesses no inherent validity, and voiced our 'need to know more than we have been told about why the Commission thought this was the appropriate margin.'23 We observed that the margin of return properly allowable over legitimate operating expenses is 'the sum of money needed to attract the capital, both debt and equity, required to insure financial stability and the resulting capacity of the utility to render the service upon which the public depends.'24 And we stressed the necessity for

'inquiries and findings-- judgmental as the latter may often be because ratemakers must be prophets of the future as well as historians of the past-- into such things 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 which must be prayerfully explored by the conscientious regulator before he can begin to say why he fixed upon 4.87 rather than 6.5 or 3.2.'25

Despite these explicit guidelines, we search in vain the Commission's supplemental opinion for the vital findings, or for any manifestation that the Commission has made the inquiries referred to.

The bulk of Order No. 563 is devoted to a summary of the testimony of various witnesses given during the 1963 hearing. The summary covers such matters as Transit's rate base; the capital structures of Transit and other utilities; Transit's cost of capital and that of other utilities; the degree of risk borne by Transit shareholders, as compared with other regulated utilities; dividends and earnings of Transit and its parent,26 and those of other utilities; Transit's estimated debt expense for the future annual period; actual and authorized operating ratios of Transit and other utilities; and the average market prices of the stock of Transit's parent. Having thus reviewed the record in somewhat greater detail than in its original order, the Commission then simply reaffirmed its earlier conclusion on the rate of return in language strikingly reminiscent of that which when remanding we had characterized as 'stock generalizations which serve only to frustrate, rather than illuminate, judicial review:'27

'We have before us then an abundance of testimony relating to returns authorized and/or earned by transit companies, telephone companies, electric companies, and gas companies. This information allows us to examine earnings on investments carrying, to some degree, a comparable risk, and are of some value when considered in relation to this particular company. No single rate of return is universally applicable to all transit companies in the United States. A fair rate of return varies with the times and conditions of a particular company as these conditions and opportunities exist at the time of the weighing of the facts in the making of a determination. What constitutes a reasonable rate of return is a question of fact, the solution of which calls for the exercise of sound judgment and common sense by the Commission.

'We have weighed very carefully all testimony and exhibits in this proceeding, along with supplemental data where noted. We are of the opinion that fares producing an operating ratio in the range of 95 to 95.5 constituted a fair and proper return. The projected net operating income of $1,480,000 was the amount necessary to enable Transit to service its debt, pay reasonable dividends, retain a reasonable portion in its business, and to attract investments of private investors. It was, in addition, the amount necessary to maintain investor confidence and to protect the company from the risks peculiar to the transit industry and to Transit itself.'28

The Commission's opinion is almost wholly devoid of any indication of the method by which it calculated that a margin of return of $1,480,000 was fair and reasonable. The Commission did account for a portion of that sum by finding that a dividend payout of $500,000 would be reasonable-- apparently in response to our observation that 'Transit's annual dividend pay-out of about $500,000 appears to have been treated as if it were a cost of operation, like the annual expenditure for gas and oil, with no examination of, or conclusion about, its appropriateness.'29 Our concern, however, is hardly alleviated by the Commission's treatment of this point on remand:

'While there was no direct testimony as to the dollar amount required to be available for dividends, the record does show that $500,000 has been paid out annually over past years to the investors. In view of the fact that in the past three years the market price of the parent company has been relatively stable, it appears to us that the margin of profit allowed by the Commission was fair and reasonable to both the investor and the consumer.'30

The Commission's stock price stability theory cannot survive close scrutiny. A stable market price could indicate that a constant dividend yield has been consistently too high or too low, as well as that it has been fair and reasonable.31 Moreover, the theory finds little support in the record,32 and we have been referred to no authority buttressing the validity of this method of establishing the appropriateness of a dividend.33 Thus we are left, as before, without an acceptable rationale for a dividend payout of $500,000, but only the fact that over a period of years Transit has paid annual dividends in that sum.

The Commission's ratemaking responsibilities are by no means exhausted by any determination it may make as to a fair dividend.34 Even were we able to sustain the Commission in that regard, we would not be enabled thereby to affirm the Commission's allowance of a total return of $1,480,000. What is needed is a reasoned justification of the end result-- the entire excess of gross operating revenues allowed over operating expenses. Here, however, the Commission does not provide any suitable explanation of or support for its ultimate conclusion that a margin of return of $1,480,000 is fair and reasonable. Save for its verdict with respect to the dividend payout, the only concrete finding that the Commission made is that the authorized margin of return would be equivalent to a return on rate base of approximately 6 1/2%.35 We express no view on the reasonableness of such a return on rate base, nor on the accuracy of the Commission's statement that such a return is 'conservative.'36 We do stress, as we did in our former opinion, that testing the reasonableness of an operating ratio by reference to the return on rate base, while sometimes useful, 'can never be conclusive. The important thing is not that the result reached by the operating ratio method be compared with that which would have been reached under some other method, but that the operating ratio method be applied rationally and intelligibly in the first instance.'37 Absent a calculation of operating ratio responsive to the considerations enumerated in our opinion remanding the Commission's reference to return on rate base could not provide independent support for the result it reached.

On our prior review, we took note of the Supreme Court's statement in FPC v. Hope Natural Gas Co.38 that 'in balancing investor and consumer interests, it is essential to consider the capital costs of the enterprise.'39 We emphasized that the operating ratio method does not make an inquiry into capital costs irrelevant, and that indeed 'it was in part the failure of rates established by the rate base method to cover the capital costs of most motor carriers' that gave birth to the operating ratio method.40

During the course of the 1963 hearing, both Transit and the protestants41 submitted evidence relating to Transit's cost of capital. Transit's expert witness testified to a combined cost of debt and equity capital for Transit of 7.8%, derived from industry averages.42 He stated further that this figure could not itself be taken to represent a fair return, but would have to be adjusted upward, to about 10%, to allow for a reasonable addition to surplus.43 The 10%, he said, could be applied to the 'physical value of the plant that is devoted to public service' in order to determine a fair return.

Protestants' expert recommended that Transit be permitted to earn gross revenues sufficient to provide a return on its equity capital of 12% After allowing for operating expenses and interest on its debt. He reached this figure after study of the earnings-price ratios of Transit's corporate parent44 and 12 urban transit companies that he felt were 'most comparable' to Transit. Over the ten-year period from 1952 through 1961, he found, the average of the 12 companies was approximately 11%. This he increased to 12% To compensate for the increased risk borne by Transit's shareholders emanating from Transit's abnormally high debt-equity ratio.45 He stated that the 12% Could be applied to Transit's average book equity for 1963 in order to provide a fair return on equity.46 He then added the resulting figure to Transit's estimated debt expense for the test period, and arrived at a sum which he felt should be allowed as the margin of return over operating expenses.47

The Commission made no findings based on any of this evidence, and did not analyze the cost of capital testimony of Transit's expert witness. With respect to the testimony of protestants' expert, the Commission had only this to say:

'Moreover, we have considered but placed little emphasis on protestant's recommended rate of return utilizing the cost-of-capital method. It should be noted that more traditionally the computation of the cost of capital is done by determining the cost of debt and of equity and weighting the two for a composite rate. The protestants in this case disregarded this traditional method. We feel that the cost-of-capital method utilized is inappropriate in determining a proper rate of return for a transit company. Our view is reinforced when we consider the capital structure of this particular company. Other factors in addition to cost of capital should be considered in making the return allowance. These additional factors include the degree of risk involved, a comparison of earnings, the ability to attract capital, the economic conditions of both the market place and the community, the efficiency of management, and the contribution to surplus. We have seen that the recommendation of the protestant's expert witness is based not on a mathematical formula but a weighting of any judgmental factors. Thus, the 'judgment' factors tend to undermine the objectivity of the end results. This is especially true when the answers given by the witness on his cross-examination are compared with his direct testimony.'48

We are unable to understand the Commission's failure to make findings on the critical cost of capital factor. Nor are we persuaded by its stated reason for rejecting the approach taken by protestants' expert.

In the first place, that protestants' expert 'disregarded' the 'traditional method' and testified to a cost of equity capital, rather than an overall or combined cost of capital, does not appear to us to deprive his testimony of utility. The witness explained why he talked in terms of a cost of equity capital: 'I do not employ a composite rate of return, as I believe that my method of allowing the actual interest expenses, and a determination of the return on the actual equity investment is simpler and gives approximately the same result.' Had the Commission desired, the protestants' figure for cost of equity capital could have been transformed quite easily into a figure representing a combined cost of debt and equity capital.49 As we have noted, Transit's witness did testify to an overall cost of capital.50

We are also puzzled by the Commission's statement that 'the cost of capital method * * * is inappropriate in determining a proper rate of return for a transit company,' and we do not understand how this view is 'reinforced' by reference to 'the capital structure of this particular company.' Indeed, it is difficult to see how else the Commission could hope to determine 'the sum of money needed to attract the capital, both debt and equity, required to insure financial stability' than through an analysis of the sort proposed by the two expert witnesses.51 And though Transit's unusual capital structure may have a bearing on its costs of acquiring debt and equity capital,52 it is unclear why that factor precludes ascertainment and consideration of such costs at all.53

By including 'a comparison of earnings' in its list of 'additional factors' the Commission may have had reference to FPC v. Hope Natural Gas Co.,54 were the Supreme Court said that

'the return to the equity owner should be commensurate with returns on investments in other enterprises having corresponding risks. That return, moreover, should be sufficient to assure confidence in the financial integrity of the enterprise, so as to maintain its credit and to attract capital.'55

As various commentators have noted,56 implicit in this language are two methods for determining a fair rate of return. One, commonly referred to as the 'attraction of capital' standard, attempts to do so by looking to the capital costs of the enterprise as reflected in earningsprice ratios. The other, frequently denominated the 'comparable earnings' standard and suggested by the italicized portion of the language quoted, is based on a comparison of the return on equity of the subject company with the returns afforded by other companies. Thus, while we are unable to accept the Commission's reasons for rejecting the cost of capital evidence presented to it, we certainly do not intend to intimate any disagreement with the Commission's statement that 'a comparison of earnings' is an additional factor to be considered.57 On the contrary, we strongly admonish that a comparison of the returns being afforded Transit's shareholders with those of other companies of corresponding risk is necessary to a responsible determination of the proper margin of return which Transit should be allowed.58 Notwithstanding the Commission's allusion in this case to the comparable earnings standard,59 it is clear that it made no meaningful evaluation of the level of returns being afforded Transit shareholders.

In remanding, we noted that, at the time Transit began operations, the company's heavy debt capitalization60 'made inevitable large returns on equity to the extent that the relatively heavy interest requirements were safely covered and the gamble on traffic levels after the resumption of operations was won.'61 But we added that:

'The urgency of the problem of traffic uncertainty has, however, receded appreciably into the past. Although it continues to exist to some degree by reason of the seemingly inexhaustible enthusiasm of motorists and highway builders, on the one hand, and persistent speculation about rail rapid transit, on the other, we think the time has come for the Commission to make a careful review and analysis of the earnings experience of Transit from its inception, and of what that experience has meant to the equity owners, both by way of dividend payments and growth in book values through retained earnings. We do not see how current fare increases can properly be appraised apart from such a study, and the reflection of its results in the articulation of the Commission's decision as to the margin of revenues over expenses appropriate to today's needs, as distinct from the crisis conditions of nearly a decade ago.'62

The Commission responded to these comments by setting forth gross statistics on Transit's total and average-per-year retained earnings over a nine-year period, and the range of net operating income figures over that period. It observed that 'the rate of dividend growth has been zero since 1960,' noted 'little growth trend in the earnings per share,' and stated that 'the degree of stock price stability in the market place indicates to us that earnings in the past have not been excessive.'63 The Commission's approach thus appears to have been to justify current earnings and dividends by reference to those of the past, in clear contrast to our mandate that the Commission articulate its 'decision as to the margin of revenues over expenses appropriate to today's needs as distinct from the crisis conditions of nearly a decade ago.'64

There is much information in the records of both the 1963 and 1965 rate proceedings relative to Transit's return on equity, as well as the returns being earned by companies with which Transit might be compared,65 but the Commission made no findings based on any of this evidence. We respect the Commission's primary fact-finding responsibility, but we cannot ignore the substantial indications in the record that the Commission has permitted Transit to earn extraordinarily high returns on its investment. The protestants in the 1963 proceeding introduced evidence that Transit's average book equity for 196366 would be $4,206,990,67 and its debt expense for that period $602,089.68 On this basis the total return of $1,480,746 allowed by the Commission represents a return on equity of $878,657, or approximately 21%.69 Transit introduced data showing the average earnings on common stock equity of 15 transit companies for 1959-61 to be 8.7%,70 and the protestants showed average earnings on book equity of 12 transit companies for 1952-61 to be 7.5%.

Transit's evidence in the 1965 proceeding discloses the average return on book equity for 18 urban transit companies for the period 1960 to 1964 to have been approximately 4.5%, while Transit's average return on book equity for the same period was 23.3%. Protestants introduced exhibits revealing that, for the period 1959 to 1964, Transit's average return on book equity was 24.01% While the average for ten transit companies for that period was 9.45%.

One witness in the 1963 proceeding testified that Transit had experienced 'abnormally high earnings on the equity investment,' and calculated that over a six-year period Transit had accrued earnings in excess of 'fair annual earnings on book equity,' which he set at 14%, in the amount of $3,882,000. Another witness in the 1965 proceeding testified that

'when one looks at the figures (representing Transit's return on equity) * * * one wonders whether or not he is looking at the figures for a regulated utility. * * * There are many highly speculative industries which would like to be able to hold out such high returns to the equity investor.

I know of no other utility company that can show as high a return on equity, on average, as this one.'71

We do not decide, whether, based on this record, the Commission could have made a sustainable finding that the return allowed by Order No. 245 was 'commensurate with returns on investments in other enterprises having corresponding risks.'72 In view of the Commission's failure to make a finding one way or the other on that question, no such inquiry on our part is called for.73 We do think, however, that the Commission's failure to deal meaningfully with the evidence we have summarized is significant as a further indication that it has misconceived the nature of its responsibilities and the kind of inquiries and determinations that must be made in setting rates under the operating ratio method. In the absence of any inquiry into the appropriateness of the returns being afforded Transit shareholders in the light of returns being earned by other companies of comparable risk,74 the peculiar risks borne by Transit shareholders,75 and any other relevant factors, we are unable to conclude that the Commission has responsibly complied with its statutory mandate to prescribe just and reasonable fares.

In sum, we find in the Commission's supplemental opinion little in the way of 'particularized reference' to the matters discussed in our remand opinion, none of the essential findings called for, and no manifestation of inquiry into any of the considerations 'which must be prayerfully explored by the conscientious regulator before he can begin to say why he fixed upon 4.8 rather than 6.5 or 3.2.'76 Instead, it has clearly treated Transit's $500,000 dividend payout as a 'cost of operation' without any inquiry into its appropriateness. It has dismissed evidence as to Transit's cost of capital as 'inappropriate.' And it has made no meaningful evaluation of the returns being afforded Transit shareholders. We think it evident that, though purporting to equate a fair return with 'the amount necessary to enable Transit to service its debt, pay reasonable dividends, retain a reasonable portion in its business, and to attract investments of private investors,'77 the Commission has neglected to apply that principle in practice. Under these circumstances, the disposition we should make of the orders under review is a matter of some difficulty, to which we now turn our attention.

On our original review of this case in Transit I, we were unable to discern from the Commission's opinion the method by which it had computed the return to be allowed Transit. Because the Commission had 'described its deliberations and conclusions * * * (solely) in terms of stock generalizations which serve only to frustrate, rather than illuminate, judicial review,'78 we were left without 'an adequate basis for knowing why it did what it did.'79 But notwithstanding our uncertainty as to whether the Commission had actually made the inquiries and the concomitant decisions we held to be required by the statute,80 we were unwilling to conclude, merely from the absence of findings in its order, that the Commission had not performed its duties.81 Thus we did not disturb the effectiveness of the fare increase granted by Order No. 245, nor did we make provisions for restitution by Transit of increased fares collected pursuant to that order.82 Instead, we remanded to the Commission to enable it to clarify the grounds of its action or, if necessary, to formulate a new order.83

The case now before us, however, is quite different. The Commission, once again, does not advance a rational basis for its determination of rate of return-- despite the opportunity afforded it to do so, after we had enunciated the applicable principles and emphasized the need for findings.84 Moreover, it now appears affirmatively that at no time in this proceeding has the Commission made the investigations and the resolutions essential to a legitimate exercise of its authority to prescribe just and reasonable fares.85 Since we cannot escape the conclusion that the Commission's approval of the fare increase was based upon a mistaken view of its responsibilities in setting rates under the operating ratio method, we hold that Orders Nos. 245 and 563 must be set aside.86

The question nonetheless remains whether we should again remand to the Commission, to permit further consideration and a new order. For even where agency action must be set aside as invalid, but the agency is still legally free to pursue a valid course of action, a reviewing court will ordinarily remand to enable the agency to enter a new order after remedying the defects that vitiated the original action.87 A remand for this purpose, however, necessarily assumes continuing power in the agency to deal with the subject matter of the proceeding. Where, because of changed circumstances,88 or because of the decisional grounds nullifying the initial order,89 the agency does not possess that authority, a remand is manifestly unwarranted.

Orders Nos. 245 and 563 have been superseded by later fare orders entered by the Commission subsequent to our remand in Transit I.90 The propriety of another remand thus hangs on the Commission's power to devise a new order, nunc pro tunc, governing the years intervening between Order No. 245 and the entry of a subsequent order prescribing the 'lawful fare * * * to be in effect.'91 The Commission, however, possesses no authority to fix rates for the past. An order prescribing the lawful fares to be charged by a public utility, being essentially legislative in character, ordinarily speaks only for the future.92 And we find nothing in the statutory provisions governing the Commission's regulatory responsibilities93 that indicates an intent to depart from this 'customary pattern of fixing rates prospectively.'94 Hence, we conclude that the Commission lacks power to enter a new rate order in this proceeding, and that a remand for further consideration is not called for.95

With Orders Nos. 245 and 563 invalid and further remand now futile,96 it follows that Transit must be compelled to make appropriate restitution for the increased fares it collected.97 This conclusion is unaffected by the fact that we do not decide that the fares authorized are unjust or unreasonable as a matter of law. Our role as a reviewing court is not to make an independent determination as to whether fares fixed by the Commission are just and reasonable, but rather to insure that the Commission, in exercising its rate-making power, has acted rationally and lawfully. Our function is normally exhausted when we have determined that the Commission has respected procedural requirements, has made findings based on substantial evidence, and has applied the correct legal standards to its substantive deliberations.98 Our task is likewise at an end when we have ascertained that the Commission has not done so.99 In this case, given our conclusion that the Commission failed to apply appropriate criteria, and failed to make the inquiries prerequisite to valid exercise of its rate-setting authority, we could not permit Transit to retain the increased fares, since to do so would be to give legal effect to the Commission's invalid order.100 This is so notwithstanding that we have held neither that the Commission lacked power to order a fare increase, nor even that the fares authorized are, as a matter of law, unjust or unreasonable.101

Thus we are confronted with the necessity of formulating the criteria by which the amount of restitution is to be measured. Ordinarily, of course, the proper disposition on setting aside a rate increase unlawfully ordered by the Commission would be to compel the regulated company to restore the entire difference between the higher fares collected under the invalid order and the amount that it would have received from the fare schedule previously in effect.102 More fundamentally, however, our decision in this regard is to be governed by the equitable considerations which apply to suits for restitution generally.103 The basic question is whether 'the money was obtained in such circumstances that the possessor will give offense to equity and good conscience if permitted to retain it,' and is 'no longer whether the law would put him in possession of the money if the transaction were a new one.'104 Since restitution is not a matter of right, but is 'ex gratia, resting in the exercise of a sound discretion,'105 it lies within our authority to direct restitution in an amount less than the whole sum of the increased fares collected under the invalid order,106 or to deny it altogether, if compelling equitable considerations so dictate.107 The exercise of such an equitable discretion by this court is by no means an usurpation of the administrative powers of the Commission nor is it an arbitrary extension of judicial authority; it is 'mere inaction and passivity in line with the historic attitude of courts of equity for centuries.'108

Because we have found the Commission's action in approving the fare increase to have been invalid, and because we have no basis in later valid action of the Commission for inferring that the rates set by Order No. 245 were in fact, just and reasonable, despite the defects in the Commission's deliberations leading to their original approval,109 we could not, as we have said, give legal effect to those rates by withholding restitution altogether. At the same time, we are confronted by circumstances indicating a substantial probability that it would be inequitable to compel Transit to restore the entire amount it realized from the fare increase. More specifically, we see that by Order No. 245 the Commission found that the net income of $937,669 which Transit would earn under the then existing fare schedule would not constitute a 'fair and adequate return,'110 and nowhere in this proceeding has that finding been challenged. Indeed, the evidence presented by protestants at the 1963 hearing was to the effect that a return of $1,107,000 would be fair and reasonable.111 Additionally, we note that the net income which the Commission found Transit would earn in consequence of the preexisting fares would have represented a return on equity of less than 8%,112 while protestants' expert witness recommended a return on equity of 12%.113 And in a later rate proceeding, after determining Transit's cost of capital and taking into account the returns afforded by other companies of comparable risk, the Commission found to be fair and reasonable a return on equity of 14%,114 a determination today affirmed by this court as based on adequate findings and reasons supported by substantial evidence.115 We could not permit the Commission's latter conclusion to control the amount of restitution now to be ordered, since it was based on a record reflecting conditions in years later than the period relevant here,116 and it did not purport to be a determination of a fair return for the years with which we are concerned.117 On the other hand, it has obvious significance as a factor suggesting the inequity in ordering Transit to repay the entire amount of the fare increase.

In sum, we find substantial and unmistakable indications, in the record under review as well as in a subsequent determination of the Commission which we have affirmed, that it would be unfair to order Transit to restore the full amount it realized under the invalid fare increase. In so concluding, we have placed particular reliance upon the Commission's finding as to the amount of net income which would have been earned by Transit under the fare schedule in effect prior to Order No. 245. That finding was properly grounded, conformably with the Commission's role in fixing rates to operate in the future, upon estimates of expenses to be incurred and revenues to be received during the future test period. But we perceive no justification for permitting such a prediction to control the course we are to follow in equitably disposing of funds collected during years already past.118 'There are times, to be sure, when resort to prophecy becomes inevitable in default of methods more precise. At such times, 'an honest and intelligent forecast of probable future values made upon a view of all the relevant circumstances' is the only organon at hand. * * * But prophecy, however honest, is generally a poor substitute for experience.'119 We think these observations are applicable here, and we are unable to see how any proper resolution of the matter of restitution in the circumstances presented could ignore the reality of Transit's financial experience during the years in question.120

In laying down a standard by which to measure Transit's right to retain funds collected under the fare increase, we are aware that we are ill-equipped, even were we authorized to do so, to search the record and reach our independent conclusions as to what would have constituted reasonable fares for the period in question. Nevertheless, the duty to reach a just decision in this regard cannot be shirked, and our effort must be to find a solution which lies within our competence as a reviewing court, while at the same time responding in the fullest possible measure to the equitable considerations that must guide us.

The disposition we deem most consonant with this objective would compel Transit to restore the amount realized by the fare increase only to the extent that its actual return is not reduced to an amount which all parties have agreed would be unreasonably low. Thus Transit will be permitted to retain any portion of the higher fares necessary to preserve its actual earnings during the years in question121 at the level conceded by the protestants to represent a fair return. In so doing, we do not say that the Commission erred in failing to adopt the testimony of protestants' expert witness, nor that fares designed to produce the return proposed by the protestants would have been the only lawful fares, nor even that they would have been just and reasonable. We decide only that in the circumstances of this case it clearly does not offend 'equity and good conscience' to permit Transit to retain that part of the fare increase essential to avoidance of an undisputedly unfair return. One circumstance upon which we place considerable weight in reaching this conclusion is the availability of the Commission's 1967 decision permitting a return to the equity holder quite close to that recommended by the protestants in this proceeding.122 Though, for reasons already explained, we are unable to regard that determination as controlling with respect to the question before us, we think it is entitled to weight as 'the opinion of a body of experts upon matters within the range of their special knowledge and experience.'123 Being cognizant of the dangers in attributing finality to positions taken by the parties in a proceeding which so broadly affects the interests of the public as this one, we do not decide whether, in the absence of that later determination by the Commission, the course taken here would be open to us.

Petitioners in No. 20,201 complain of a fundamental change by the Commission in the method of its treatment of Transit's acquisition adjustment account, which has engaged our attention before.124 The event giving rise to this account was Transit's purchase in 1956 of properties from its predecessor, Capital Transit Company (Capital), at a price lower by $10,339,041 than the net original cost of those properties to Capital.125 Transit's allowances for depreciation thereon could, of course, have been related to its own acquisition cost; but this would have required the development of new depreciation rates computed on remaining life, and new depreciation bases derived in part from distribution of the purchase price among the items of property acquired. To save the labor incidental to that process, however, the Public Utilities Commission of the District of Columbia (PUC), the Commission's predecessor, ordered that two things be done. One was the establishment of the acquisition adjustment account to accommodate an amortization, over a ten-year period beginning August 15, 1956, of the $10,339,041 difference in acquisition cost to Capital and Transit, respectively.126 The other was a direction that depreciation be accrued on the basis of Capital's original cost and at the rates previously fixed for Capital, with ten annual offsetting credits to operating expenses of $1,033,904 derived from the amortization.127

PUC selected the ten-year period for amortization in order to link it to an annual accrual of $1,044,196 over the identical period to a reserve designed to absorb Transit's estimated future expenses for track removal and street repaving incidental to its franchise-required conversion from Capital's trolley-bus operation to Transit's eventual all-bus operation.128 With the amortization and the accrual in almost the same annual amount for exactly the same period, any material impact from either upon Transit's income posture would be avoided.129

In Order No. 245, however, the Commission suspended the annual accruals to the reserve as of January 1, 1963, concluding that its existing balance would cover all of Transit's removal and repaving expenses anticipated for the immediate future.130 The Commission stated that it would also reexamine the period for liquidation of the acquisition adjustment balance in light of PUC's decision to coincide its amortization with the period established for accruals to the reserve for removal and repaving.131 The Commission observed that 'the proper (original) solution (by PUC), completely equitable to both applicant and the ratepayers, would have required the total sum represented by the acquisition adjustment account to be distributed 'over all items of depreciable property' as recorded on the books as of August 15, 1956,'132 and it felt that such treatment 'would have been the only completely accurate and equitable method.'133 The Commission would, it said, 'relate the acquisition adjustment balance to the properties acquired on August 15, 1956, which are still in service and subject to depreciation at original cost'134 but, noting that additional evidence was needed for this purpose, it ordered that amortization of the acquisition adjustment account continue without change 'until adequate evidence supporting a different rate (of amortization) is presented to the commission.'135

In Transit I, we upheld the Commission's determination on this point.136 Shortly before we did so, however, the Commission, by Order No. 385, had proceeded to alter radically the scheme for amortization of the acquisition adjustment balance.137 Without taking further evidence, it decided that as of January 1, 1964, the period for amortization of the balance of $2,519,484138 would be extended to August 15, 1976, the duration of Transit's franchise.139 The Commission thus enlarged the remaining original period, which would have expired on August 15, 1966, for the write-off of this balance from approximately two and one-half years to about twelve and one-half years, and reduced the amount of the annual amortization from the previous $1,033,904 to the much lower figure of $199,561.140

In directing this change, the Commission did not relate the liquidation of the acquisition adjustment balance to any new schedule for depreciation of the involved properties, a procedure it had promised in Order No. 245 and one which we had regarded as 'most sensible.'141 Instead, it said that amortization of that balance within the remaining two and one-half years of the period originally prescribed might so reduce net operating profits after the terminal point on August 15, 1966 as to require another fare increase.142 Thus arising is the question whether the Commission was at liberty to alter the mode of amortization, with a view to pegging Transit's fares, without correlating in some reasonable fashion, the new method in time and amount to ongoing depreciation of the acquired properties, for the inflated book values of which the acquisition adjustment account was established as an offset.

As a preliminary matter, though, we face, but reject, a common protest by Transit and the Commission that petitioners are foreclosed from litigating that issue because they did not seek a review of Order No. 385, by which the change complained of was directed. The Commission promulgated Order No. 385 without a hearing of any sort, in spite of its claim, in defending its earlier Order No. 245 before us in Transit I, that it had to have more evidence before it could intelligently alter the amortization of the acquisition adjustment balance.143 And when the Commission adopted Order No. 385, it proceeded upon a completely new theory-- the need to stabilize Transit's fares. There was no opportunity for the protestants to combat the change, or the basis upon which it was made, before it became a reality.

Petitioners made a timely application to the Commission for reconsideration of Order No. 385. In denying it, the Commission proclaimed that the order was 'subject to complete analysis and review in any future rate proceeding.'144 This very clearly left the matter open to reexamination, and indeed the Commission reexamined it in Order No. 564, this time rejecting petitioners' objection on the merits.145 It is the determination made in the latter order, presently under review, that petitioners now attack, and this they may properly do.

Reverting to the merits of petitioners' contention, we find that the Commission's new plan for amortization of the acquisition adjustment balance largely sets for naught fundamental considerations the Commission was obliged to observe. One was the intended function of the amorization as the counterweight to excessive depreciation charges. While, on the assets Transit bought from Capital, Transit was annually taking the same depreciation Capital was allowed to take, the amount of the annual amortization was to balance out the difference between Transit's purchase price and their higher value on Capital's books.146 Quite obviously, Transit's annual depreciation expense would become inflated if the compensatory value of the amortization was reduced. And such a reduction was necessarily destined when the Commission ordered its drastic changes in the amortization term and the amount of the annual amortization.

This we see in vivid outline as we again consult the record before us. Of $46,534,172 in original cost of the depreciable properties Transit acquired from Capital in 1956, a total of $35,979,793, or 77.3% Had been retired from service by January 1, 1964, the effective date of the Commission's change.147 By Transit's projection, not significantly variant from the plan the Commission adopted in Order No. 385,148 61.1% Of the remaining $10,554,379 would be retired at the close of 1966, the future test period, and 89.3% Thereof at the end of 1970-- approximately the midpoint of the new amortization period.149 At the same time, the acquisition adjustment amortizations, which would occur annually in level amounts, would quite expectably maintain a steady course. The evergrowing divergence of property retirements from acquisition adjustment amortization150 is revealed in the following computation:151

The Commission's stated reason for modification of the acquisition adjustment amortization was the avoidance of a fare increase in 1966, when under the existing arrangement the amortization would come to an end.152 Nonetheless, it did not undertake to support, either by evidence or findings,153 its theory that this circumstance would create a probable need for such an increase, and on the record its view in that regard seems conjectural. This is especially so since at the time of the changeover there existed a court- ordered reserve of more than $2,000,000 to serve precisely the Commission's professed purpose.154 And we detect, as serious consequences of the Commission's modification of the acquisition adjustment amortization artificial reductions of Transit's net earnings for ensuing years which ostensibly would justify the very fare increase that the change was predicted to forestall.

For the calendar year 1964, Transit stated a return on equity of 10.56%, reflecting $511,115 in net income and $4,837,992 in equity. Without the change, Transit's net income would have been $760,232 greater,155 and the return on equity would have soared to more than 26%. Similarly, for the 12 months ending June 30, 1965-- the historical test period156 -- Transit reported net operating income of $1,024,855, representing a 3.23% Rate of return; but without the change the return on equity, with another $760,232 in additional income for that year,157 the rate of return would have been almost 75% Greater. Again, for 1966-- the future test period158 -- Transit's net earnings were estimated at only $648,357,159 but with the change its projected depreciation expense was $475,145 higher than otherwise it would have been.160

Judicial decisions have long censured depreciation plans breeding excessive charges which in turn exaggerate the costs of serving the public.161 We ourselves have held, in a conceptually indistinguishable situation, 'that the substantial inflation of operating costs due to excessive depreciation * * * is unlawful.'162 The Commission's handling of Transit's acquisition adjustment account does violence to the wholesome principle those cases espouse.

Moreover, the costs of the service a regulated utility provides should, as far as possible, be borne by those who are served as they are being served. The disproportion between the amortization of the acquisition adjustment balance and remaining depreciable life of the acquired properties charges present riders with substantial depreciation expense properly assignable only to those who will ride in the future. If Transit's customers are to pay for the rides they themselves take, operating expenses must be projected within a range that is reasonable in the historical as well as the mathematical sense.

We do not suggest that Transit should be required to make up at one fell swoop the differences reflected by possible percentage variations between the amount of depreciation accruing on the acquired properties before January 1, 1964, the Commission's changeover date, and the portion of the acquisition adjustment balance written off before that date.163 Prior to that time, the period for amortization of that balance was related, not firmly to depreciable life of the properties Transit got from Capital, but rather, as we have said,164 to the ten-year period for accruals to the reserve for track removal and street repaving; and this arrangement has never been challenged. The resolution of any problem in that connection is in the first instance, of course, a matter for the Commission. Now, however, the track removal and repaving accruals have been halted, at least temporarily, and the Commission has decided that it will put the amortization of the remaining acquisition adjustment balance on a different footing. We hold that, in doing so, it must maintain, subsequent to the change-over date, a reasonable relationship between the amortization and accruals of depreciation of the properties remaining in service.

In 1964, the Commission found a large deficiency, existing as of August 15, 1963, in Transit's reserve for depreciation on operating properties.165 It then required the depreciation reserve to be adjusted upward to its proper level and as an offset, the amount of the deficiency to be placed in a suspense account.166 In Order No. 564, the Commission decided to close out the deficiency balance of $1,099,627 in the latter account.167 The blueprint it followed in doing so, however, gave rise to the cluster of problems we reach next.

Of the deficiency balance, $806,168 was the aggregate of underaccruals of depreciation on properties then still in service. The Commission directed that this amount be taken out of the suspense account and placed above the line168 in Transit's depreciation expense account for 1966169 and treating that much of the deficiency as a decrement Transit might legitimately recover from its farepayers, the Commission granted Transit 'restoration' by authorizing the removal of $806,168 from the court-ordered reserve170 that we have mentioned171 and will shortly consider in greater detail.172

The remaining $293,459 of the deficiency balance represented underaccruals on properties which, after the deficiency was ascertained, were transferred to nonoperating status. Holding that Transit could not collect that portion of the deficiency from its farepayers, the Commission decreed that it be transferred from the suspense account to the depreciation expense account as a below-the-line173 entry.174

Petitioners in No. 20,201 argue that the $806,168 should not have been charged off in a single year, and should not have been deducted from the court-ordered reserve. They point to the fact that some of the properties as to which this part of the deficiency arose have service lives exceeding 30 years, and urge that any recoupment be effected through annual deductions from operating income over the remaining life of Transit's franchise.

The problem, as we analyze it, breaks down into three facets, each of which we will discuss. The first concerns the handling of this item in the projection of Transit's operating costs preliminarily to establishment of a margin of return. The second is the question whether Transit may reclaim this portion of the under-accrued depreciation for its investors. If so, the third is whether its deduction from the court-ordered reserve, in lieu of some other type of adjustment, is in order.

The Commission viewed the $806,168 as a loss to Transit's investors for which they had not been compensated, and felt that 'the techniques of preferring to accomplish (reimbursement) by a charge against a court-ordered reserve in lieu of charging a particular period's profit and loss account, is merely a matter of semantics.'175 By its appraisal, 'whether the deficiency * * * is written off directly on the operating statement of a particular period or periods, or whether it flows first through the court-ordered reserve, the impact on the rate-paying public is still the same.'176

We are not able to concur in the Commission's reasoning. As we interpret the record, the above-the-line debit of the $806,168 to Transit's depreciation expense account added just that much in pre-1966 depreciation expense to Transit's operating costs for 1966. The calendar year 1966, it will be recalled, was the future annual period for which Transit's operating expenses were estimated,177 and we understand that the Commission's estimates incorporated this adjustment.178 If this is so, the projection of depreciation expense was inflated to the extent of $806,168 by a past, nonrecurring item. This, in turn, would necessarily misshape the margin of return that Transit was ultimately allowed.

We have, in another context, delineated the principle that, to avoid this very kind of distortion, deductions for depreciation must be maintained in reasonable relationship with the service period of the property depreciated.179 To reach the closest possible accord with that principle, depreciation deficiencies, once ascertained, must ordinarily be amortized over such remaining life as the properties involved may happen to have.180 We speak now of the treatment of the $806,168 for ratemaking purposes, and not of its possible defrayal by Transit's riders. In the understanding that the Commission included that part of the depreciation deficiency in its computation of Transit's expenses for the future test period, we say that its action in doing so was erroneous.

Petitioners do not contend that a depreciation deficiency cannot normally be levied against ratepayers, but encompassed, we thing, within their objection to deduction of the $806,168 from the court-ordered reserve is the query whether Transit's farepayers now have such an obligation.181 It was 'clear to the Commission that this deficiency in depreciation charges should equitably be made up by charges to the ratepayer,'182 but to us that is not nearly so evident. We would agree that if Transit's investors have not recouped the portion of their investment reflected by the deficiency, the Commission, weighing the equities, might in some reasonable manner impose some or all of the burden upon the riders.183 We encounter difficulty, however, because although the Commission undertook to determine whether the burden should 'equitably' fall upon investors or farepayers, it nowhere appears to have ascertained whether Transit's investors have already been reimbursed for the diminished value of their investment.

We faced a cognate problem in Washington Gas Light Company v. Baker,184 where PUC, in fixing the utility's rate base, deducted an allocable portion of its book reserve for depreciation rather than straight-line depreciation accruals. PUC acted upon the conclusion that the utility's revenues had been reduced because the annual charges for depreciation during most of the life of the property were too low, and that 'it would be inequitable for investors to bear the burden a second time by, for example, charging the undepreciated amount to earned surplus.'185 We pointed out that

'Despite this premise, the record contains no evidence as to whether earnings during the life of this property sufficiently exceeded the fair rate of return to compensate investors for the inadequate depreciation charges. We recognize that the legality of past rates may not be challenged, and that past excessive earnings belong to the Company just as past losses must be borne by it. That is not to say, however, that when the Commission purports to act on the equities of the situation, and awards higher rates because of past inequities to investors, it must not support the factual premise upon which it builds by evidence in the record. 'Elaborate calculations which are at war with realities are of no avail."186

The same considerations are involved here. The Commission made no finding as to whether Transit's investors have received remuneration for the depreciation undercharges from actual earnings over and above fair return while the properties were in service.187 Nor has our attention been directed to any evidence upon which a considered judgment in that regard could be attained.188 We cannot approve as equitable an arrangement based upon a determination that does not reflect a consideration of factors crucial to an informed decision as to where the equities really lie. Our remand of Order No. 564 will provide an opportunity for the Commission to explore the matter, make findings, and reach a just conclusion responsive to the guidelines we have discussed.189

Should the Commission find that Transit's investors remain unreimbursed for the underaccrued depreciation, it would again face the question whether repayment could be accomplished by resort to the court-ordered reserve-- a course petitioners vigorously oppose. We reiterate, however, that the $806,168 represented depreciation accruing during an era gone by, and that to no extent was it an advance charge for depreciation to arise only in the future. And we rule that the court-ordered reserve is a legitimate source for full and immediate rectification of any unreimbursed deficiency that might be found.

In our 1963 Bebchick decision,190 we held that a fare increase PUC had granted Transit was unwarranted, and this made necessary a disposition of the excess in fares that Transit had collected while the increase was in effect. It was 'not feasible,' we said, 'to require refunds to be made to individuals who paid the increase,'191 but 'nevertheless, the amount realized by Transit from the increase must be utilized for the benefit of the class who paid it, that is, those who use Transit.'192 To accomplish this, we continued Transit must establish a fund, or set up an account or reserve, in an amount equal to the increase.193 We specified that 'the utilization and disposition of the fund, or the special account or reserve, as the case may be, shall be left to the discretion of the Commission having regulatory authority with respect to Transit, provided such discretion is exercised consistently with the purpose of benefiting Transit users in any rate proceedings pending or hereafter instituted.'194 Thus the special reserve, to which the Commission within these limitations was at liberty to resort, soon thereafter came into being.195

The deficiency in Transit's depreciation reserve developed because too little depreciation had been charged to farepayers in 1963 and prior years.196 The Commission, in correcting the deficiency of $806,168 from the court-ordered reserve, endeavored to place the charge, as nearly as could be, where it should always have been. As the Commission said, 'the logic of charging this deficiency off against the court-ordered reserve lies in the fact that just as the credits in the court-ordered reserve represent a build-up over a period of years prior to the current year, so does the depreciation reserve deficiency represent a build-up in past years' depreciation charges to be made up in current or future periods.'197

In sum, the court-ordered reserve is the equivalent of fare overpayments, and the deficiency is the amount of depreciation undercharges, both occurring in the past. The Commission's conclusion, in essence, was that the past depreciation undercharges might be offset by the past fare overcharges.198 The objectives the reserve was designed to achieve, we think, are well served by its use to make Transit whole for any unredeemed diminution in value of its properties devoted to past public use, in lieu of the imposition of that burden on future farepayers. We would regard such a procedure as a proper exercise of the Commission's regulatory discretion,199 provided only that Transit's investors have not already received adequate recompense.

As we have observed,200 the Commission directed that $293,459 of the total depreciation deficiency be charged below the line to Transit's depreciation account for nonoperating properties, thereby foreclosing its recapture from the farepayers. Transit concedes that this was proper as to $40,771, which relates to properties never placed in public use,201 but contests the disposition of the remaining $252,688, asserting that the latter was a recoverable depreciation deficiency on operating properties.

The $252,688 is unreimbursed depreciation accumulating on a garage and on an office building while in public service during the period in which the general depreciation underaccrual occurred. After the deficiency was discovered by the Commission in 1964 and its amount was ascertained, the garage in its entirety and the office building to the extent of 80% Were transferred to nonoperating status and removed from public use.

The sole reason the Commission advanced for the adjudication complained of was that because these properties were no longer in public service at the time the Commission decided to close out the depreciation suspense account, they should assume their aliquot share of the deficiency.202 This conclusion, we hold, is erroneous as a matter of law. Indisputably, $252,688 of the deficiency was attributable to the garage and the office building at a time when they were fully operative and wholly devoted to public service. Like unrecovered depreciation accruing on other properties while so engaged,203 Transit was entitled to reimbursement of the $252,688 from its farepayers. There is no disabling connection between a deficiency in past years' depreciation and the fact that the property giving rise to it is subsequently withdrawn from public use. The charge for depreciation is generated while the property is consigned to the public weal, and is not eroded by what is done with it thereafter.

The Commission must therefore give the deficiency of $252,688 the same treatment that the $806,168 will be accorded. This means that the Commission, after thorough investigation, will first determine the extent, if any, to which Transit's investors may have already been repaid by excesses of past actual earnings over a fair margin of return while the properties in question were in service.204 The Commission will then proceed to a disposition consonant with justice to all concerned.

Transit has benefited considerably from the investment credit, since 1962 permitted against federal income taxes,205 including a credit estimated at $685,608 for the test year 1966.206 The Commission did not, either for that year or for any prior period, utilize the credit to reduce its ratemaking projections of Transit's total tax expense. Petitioners in No. 20,201 complain that, as a result, these savings have never been passed on to Transit's riders, and that this in effect has required the riders to pay for taxes greater than those Transit has actually incurred. Transit should be required, these petitioners urge, to transmit the credit to its customers through the medium of lower fares.

Order No. 564 tells us that the Commission's treatment of Transit's investment credits is an effort 'to comply with the intent of Congress as expressed in Section 203(e) of the 1964 (Internal) Revenue Act.'207 That section restates the congressional purpose, in making the credit available, 'to provide an incentive for modernization and growth of private industry (including that portion thereof which is regulated).'208 It further provides, germanely to the issue here, that 'Congress does not intend that any agency or instrumentality of the United States having jurisdiction with respect to a taxpayer shall, without the consent of the taxpayer, use' the credit 'to reduce such taxpayer's Federal income taxes for the purpose of establishing the cost of service of the taxpayer or to accomplish a similar result by any other method.'209 We have already had occasion to analyze the requirement Section 203(e) imposes, and to apply it with full force to a federal regulatory agency.210

The Commission's discussion of the problem leaves us uncertain as to whether it considers itself controlled by Section 203(e), or as to whether the Commission adheres to it as a matter of administrative policy. The section in terms applies only to an 'agency or instrumentality of the United States,'211 which the Commission clearly is not. It is the creature of the Compact212 made by the District of Columbia and the states of Virginia and Maryland, to which Congress of constitutional necessity consented,213 consolidating the Washington metropolitan area for unitary regulation of mass transit service. Congress contemplated that the Commission would be 'the common agency of the signatories,'214 and the Compact designates the Commission 'an instrumentality of' the three contracting powers,215 a character inevitable from numerous provisions it contains.216 The Commission was in error if it felt that it was inexorably bound by the injunction Section 203(e) imposes.217

But the issue does not vanish here, for the Commission's authority to administratively adopt the canon expressed in Section 203(e) is something else again. 'A regulatory agency,' we have said, 'may, should, and in some instances must, give consideration to objectives expressed by Congress in other legislation, assuming they can be related to the objectives of the statute administered by the agency.'218 It may, in an appropriate exercise of the authority delegated to it, select adjudicative guidelines from policy incorporated into statutes not legally binding upon it.219

It does not, however, appear that the Commission, in adhering to Section 203(e), engaged in a decisional act. Administrative discretion implies concentration upon a problem in its distinctive context, while legislation must necessarily address the problem more broadly. What in overall result may be wholesome as a legislative rule having general operation may be unfeasible as a judgmental exercise in a particular case. The Commission's consideration of Transit's investment credits embraced only a reference to the statute, with which it coupled 'an effort to comply with the intent of Congress as expressed in' the statute,220 without any indication that it was making either a conscious choice or an individualized application of the statutory rule as a rule of its own. Moreover, it seems to have made no appraisal as to the desirability of applying the Section 203(e) requirement in the situation before it, or effort to balance an inducement to Transit to invest against the possibility of lower rates to the traveling public.

In sum, there are no signs of the particularized inquiries or the reasoned conclusions which make for an exercise of discretion. On the contrary, the Commission states that its disposition of the matter 'is in accordance with commission action in rate cases which were processed through this commission since the 1964 (Internal) Revenue Act was passed,'221 and that 'the commission finds no reason at this juncture to change its policy with respect to treatment of the investment tax credit.'222 This plainly connotes an undeviating course pursued with reference to every carrier in every Commission proceeding, irrespective of its individual and perhaps unique characteristics.

This case is essentially not unlike FCC v. RCA Communications, Inc.,223 where the commission involved, because of the 'national policy in favor of competition,'224 authorized an applicant to furnish radiotelegraph service to two foreign countries in duplication of a similar service already afforded by another company. The Court pointed out that 'the Commission has not in this case clearly indicated even that its own experience, entirely apart from the tangible demonstration of benefit for which (the other company) contends, leads it to conclude that competition is here desirable. It seems to have relied almost entirely on its interpretation of national policy.'225 The Court said that 'had the Commission clearly indicated that it relied on its own evaluation of the needs of the industry rather than on what it deemed a national policy, its order would have a different foundation'226 but, it added, 'to say that national policy without more suffices for authorization of a competing carrier wherever competition is reasonably feasible would authorize the Commission to abdicate what would seem to us one of the primary duties imposed on it by Congress.'227 In the Court's view, it was 'not inadmissible for the Commission, when it makes manifest that in so doing it is conscientiously exercising the discretion given it by Congress, to reach a conclusion whereby authorizations would be granted wherever competition is reasonably feasible.'228 But the Commission's grant, it was held, was infirm because 'the conclusion was not based on the Commission's own judgment but rather on the unjustified assumption that it was Congress' judgment that such authorizations are desirable.'229

We think substantially similar considerations obtain in this case, and conclude that we should remand to the Commission for inquiry and deliberation suitable to proper treatment of Transit's investment credits. Legislative policy reflected in tax statutes of general application may have a legitimate role in rate regulation, and tax objectives may be honored in a degree appropriate within the principles mandated by the specific regulatory statute drawn into the litigation.230 This is particularly so when, as here, it is evident that without regulatory consequences the tax program may encounter frustration.231

The congressional goal in making the investment credit available is crystal clear. The committee reports on the 1962 legislation-- which gave birth to this credit-- stated in unison that the aim was to stimulate investment by reducing the net cost of acquiring depreciable assets.232 'Realistic depreciation alone, however,' the Senate Committee on Finance explained, 'is not enough to provide the essential economic growth. In addition, a specific incentive must be provided if a higher rate of growth is to be achieved.'233 And while, save as a reflector of legislative policy, Section 203(e) does not itself concern the Commission, the fact remains that Transit, in common with other taxpayers, was made a beneficiary of the investment credit by the 1962 provisions. Neither in purpose nor in substance were the latter affected in their bearing upon nonfederally regulated utilities by the circumstance that the Section 203(e) compulsions were limited to federal regulatory agencies.

On the other side of the ledger is the admonition that 'when the out-of-pocket tax cost of the regulated (taxpayer) is reduced, there is an immediate confrontation with the ratemaking principle that limits costs of service to expenses actually incurred.'234 Deviations from that guideline can be tolerated only when solidly justified upon 'a delicate balancing by the Commission of the interests of the company, its shareholders, the consumer and the public.'235 In our view, congressional objectives underlying both the tax and the regulatory laws here involved would be subserved by Transit's retention of so much, but no more, of its investment credits as would provide sufficient incentive for outlays in depreciable properties on a scale and at a pace beneficial to the traveling public.236 This will, of course, involve a careful assessment of the extent, if any, to which Transit, as a regulated carrier, needs the inspiration the investment credit is designed to furnish and, if so, the treatment essential to meeting that need.237 The precise point at which relevant tax policy and ratemaking principles may become reconciled is primarily a matter of administrative expertise and judgment, subject to judicial appraisal by the standards traditionally governing review of administrative action.238 But any play the Commission might give to Section 203(e) requirements can be indulged solely in consequence of an exercise of its own judgment,239 soundly conceived and exercised with appropriate regard for the responsibilities entrusted to it, and our approval will be summoned only by a rational accommodation of the investment credit within the Commission's positive duty to maintain the reasonableness of Transit's fares.

DEFERRED TAX CHARGES ON TRACK REMOVAL AND STREET REPAVING COSTS

From August, 1956, through the calendar year 1962, as we have mentioned in another context,240 Transit accrued $1,044,196 annually to its reserve for track removal and street repaving, but during the same period spent substantially less for these purposes.241 In the computation of its District of Columbia income taxes,242 Transit was allowed deductions, not for amounts accrued, but only for removal and repaving costs actually incurred during the tax year.243 The ratemaking treatment warranted in this situation thus became a problem confronting Transit's regulatory agencies.

In 1959, PUC ordered the resulting increases in Transit's income taxes to be charged to the reserve for removal and repaving, attributing this technique to a net-of-taxes theory.244 The underlying idea was that there would be charges to the reserve, instead of to income tax expense, for the higher taxes in the earlier years when accruals exceeded expenses; and that these charges would be offset, in the later years when taxes would decrease as actual expenses surpassed accruals, with credits to the reserve matched and corresponding debits to income tax expenses. Thus, said PUC, 'the customers will not be currently charged with the total estimated cost of track removal and repaving without the offsetting benefit of the related reduction in income taxes.'245 By mid-1965, in consequence of this process, the reserve had been reduced by $222,072 in accumulated tax charges.246

In the meanwhile, after the Commission suspended accruals to the reserve in 1963,247 Transit's track removal and street repaving expenses became substantial. By Order No. 564, the Commission directed Transit to remove the $222,072 from the reserve by a credit in that amount to the reserve and a contra-debit to a new account denominated 'Deferred Tax Charges-- Track Removal Costs.'248 The Commission stated that this adjustment 'was made to conform with the 'net of taxes' treatment instituted by' PUC,249 explaining that 'if the charges to the (reserve) account were generated on a 'net of taxes' basis, and continued thus over a 7-year period as long as debt adjustments were required, consistency demands that, now that the time has arrived for the credit entries, the procedure set up by the PUC be continued to its logical conclusion.'250 The Commission then made provision for a new charge, as an operating expense for 1963 and the first eight months of 1964, of 5% Of Transit's net cost of track removal and repaving.251 The Commission also made known its plan to 'continue the entire 'net of taxes' treatment of track removal expenditures until the entire amount of $222,072.22 is offset.'252

Transit's prime objection to this procedure stems from apprehensions that it will reduce its recovery of the increased income taxes it was required to pay to the District. After the Commission stopped accruals to the reserve for track removal and repaving, Transit's annual expenditures for track removal and repaving rose to a point higher than its annual District taxable income.253 Since the District makes no provision for carrying tax losses forward, Transit urges that it will be permanently deprived of at least some of the tax decreases in later years that, on a net-of-taxes basis, would ordinarily have approximated the earlier tax elevations. Transit also argues that by directing the 5% Charge as an annual operating expense, the Commission has departed from the net-of-taxes approach in seeking to make Transit whole.

We find Transit's fears to be unfounded, and its criticisms of the Commission's program unavailing. The Commission fully recognized that the increased income taxes Transit has been required to pay to the District, as well as all its expenses for track removal and street repaving,254 are ultimately to be charged to its fare-payers. The Commission's order, as elucidated by an elaborate interpretive representation,255 in practical effect simply defers the charges for taxes to such times as expenditures are made from the reserve. The burden of the charges will eventually fall upon the farepayers, and Transit's reimbursement therefor will sooner or later become complete. We need not ponder whether, consistently with law and with sound ratemaking and accounting principles, the Commission might have dealt with the problem differently.256 Nor need we join in the debate between Transit and the Commission as to whether its treatment accords with the original net-of-taxes theory, to which the Commission in any event was not legally wedded.257 It was clearly within the Commission's authority and discretion to relate Transit's recovery of the tax increases to its actual expenditures from the reserve,258 and we decline to upset on grounds of unreasonableness the method by which it does so.

Transit projected the expenses259 associated with the operation of its buses by adding to its actual operational costs of $4,249,452 during the historical test period ending June 30, 1965, the increases, computed on a system-wide basis,260 which it anticipated for 1966, the future test period. The Commission, however, adopted the estimate of its staff, which was lower by $426,538.261 This difference was attributable to a decrease in expenses which the staff expected as a result of Transit's programmed replacement of 100 old buses with new buses in June, 1965, and a turnover of another 100 buses in June, 1966.

The Commission's staff accepted, as the cornerstone of its projection, Transit's historical cost figure of $4,249,452. It began its calculation of adjustments for the future by estimating the number of miles buses in each of various groups262 would travel during 1966, and multiplying those miles by a per-mile cost of operation for that group. It then worked into its computation the 200 new buses, assigning to each a maintenance cost factor, throughout 1966, of six cents per mile of operation, exclusive of increased labor costs for 1966; and eliminated the 200 oldest buses in Transit's fleet, which were much more expensive to maintain.263 This substitutional technique won the approval of the Commission, which deemed it 'the most important adjustment' that Transit should have made.264

This observation, to say the least, is not fully accurate. Transit's appraisal of future expenses, as we have pointed out,265 incorporated bodily its expenditures for bus maintenance during the historical test year expiring in June 30, 1965. Since the beginning of 1962, when Transit became fully converted to an all-bus system, it has acquired an average of about 115 new buses each year, and has removed from service an equivalent number of its older buses; and from 1958 until 1962, it had similarly replaced 75 to 100 buses per year. Thus Transit's actual maintenance expense for the historical test year, which the Commission's staff accepted and utilized,266 included and gave full credit to the savings realized from the exchange during that year of approximately the same number of new buses which would displace old buses during 1966, the future test year. From aught that appears, the staff's appraisal in some measure-- perhaps in large part-- duplicated this reduction,267 and concomitantly lowered the amount purporting to reflect Transit's overall bus maintenance expense for the future.

But this is not all. The evidence vindicates Transit's thesis that operational expenses become larger as a bus grows older, and obviously a new bus placed in service in mid-1965 or mid-1966 will be months older at the end of 1966.268 Since the staff's rating for the maintenance of the 200 new buses was an unchanging factor of six cents per mile throughout 1966, the increased cost of operation that accompanies aging was not given its just due.269

Moreover, the staff's estimate of six cents, the record reveals, was derived from Transit's operation of 20 brandnew buses over a period during 1965 of less than a month.270 A cost history of the operation of so few new buses for so short a time affords a dubious statistical base for projecting the maintenance expense for as many as 200 buses in periods ranging from six to 18 months.271 Moreover, the staff's six-cents factor was overwhelmingly contradicted by Transit's experience data fixing a significantly higher figure.272

Still another problem springs from the manner in which the Commission's staff, preliminary to application of its per-mile cost factor, undertook to ascertain the mileage which the new buses would travel in place of the old. Transit was unable to respond initially to the Commission's request for information as to how the new buses would be allotted to scheduled operations because those determinations had not at the time been made. The staff then proceeded to allocate mileages to the new vehicle according to its own views as to the various routes on which Transit could best use them. The record discloses, however, that in the process the staff overlooked requirements which precluded many of the assignments it made.273 And Transit made a convincing demonstration that, with valid assignments, an application of even the staff's disputed cost-per-mile estimates would have resulted in 1966 maintenance expenses considerably greater than those predicted by the staff.274

The Commission itself concluded that 'the staff estimate appears low, due, at least, to bus-assignment difficulty'275 but, because of alleged deficiencies in Transit's computation,276 'accept(ed) as reasonable the estimated maintenance costs projected by the staff.'277 It was not, however, enough to validate the staff's 'low' opinion, which the Commission incongruously embraced 'as reasonable,' simply to refer to claimed shortcomings in Transit's evaluation, which the Commission rejected. Rather, it was incumbent upon the Commission, if dissatisfied with both, to require whatever more it deemed essential to the performance of its duty to forecast Transit's bus maintenance expense with all the precision reasonably obtainable.278

We must sustain the Commission's findings when they materialize as rational deductions grounded on substantial evidence in the record considered as a whole.279 But here the miscalculations to which we have adverted robbed the staff's estimate of the degree of reliability that separates admissible opinion from ineligible conjecture. We hold that the Commission erred in accepting that estimate as the basis for its finding as to Transit's expenses of bus maintenance during the future annual period.

In Order No. 564, the Commission found 'that a margin of return above operating expenses in the amount of about $2 million is fair and reasonable for 1966,'280 the future annual period. Estimating that under existing fares Transit's net earnings would be only $648,357, but that the court-ordered reserve could provide the difference, it denied a fare increase and ordered that approximately $1,350,000 be paid to Transit from the reserve.281 Petitioners in No. 20,201 challenge the adequacy of the Commission's findings as to margin of return and the related transfer of funds. We hold that the Commission's findings do not justify the return the Commission allowed or support the withdrawal from the court-ordered reserve.

From the Commission's discussion we glean the formula by which it set the margin of return at $2,000,000. Additionally to Transit's estimated debt expense of $960,000, it allowed '$400,000 to $500,000' as an annual dividend282 and '$550,000 to $650,000' as a 'cushion.'283 The Commission's projection of Transit's debt service has not been challenged, and it has substantial support in the record,284 so we have no difficulty with the treatment of that item. But we cannot accept the Commission's methodology as to the two remaining components of the margin of return it awarded.

As we said in Transit I, a 'just and reasonable' rate is one that enables the utility, among other things, to 'pay dividends sufficient to continue to attract investors.'285 But there we criticized the Commission's apparent treatment of an annual dividend payout of $500,000 as a 'cost of operation, * * * with no examination of, or conclusion about, its appropriateness.'286 And elsewhere in this opinion we have noted that the mere fact that annual dividends in a particular amount have been paid in times gone by is in no sense a proper basis for permitting dividend payouts to continue at the same level in future years.287

As its sole reason for including in the margin of return '$400,000 to $500,000' for dividends, the Commission stated that 'Transit has paid an annual dividend of $500,000 since 1960 and the testimony tends to show that the market place assumed the continuation of such dividend.'288 To the extent that the Commission's judgment as to a suitable dividend rests upon Transit's traditional dividend payout policy, it continues the approach we disapproved in Transit I289 and which earlier in this opinion we held to be arbitrary.290 However, the Commission's addition-- that 'the market place now assumes the continuation of such dividend'-- poses the question whether that statement is tantamount to a sustainable finding that dividends lower than those paid historically would not be sufficient 'to continue to attract investors.'

The assertion that the market place 'assumes' continuity in the amount of Transit's dividends could mean that absent the customary yield prudent investors would cease viewing Transit's stock291 as a desirable investment, in comparison with other opportunities of similar risk, and thus that Transit would no longer be able to secure the equity capital it needs to assure its continued vitality.292 If that were the case, the Commission would have ample justification for concluding that a return less than that required to maintain dividends at former levels would be unreasonably low. On the other hand, the observation that the market place 'assumes' the continuation of a $500,000 dividend payout, could be understood as signifying only that a lower dividend yield might affect, to some degree, the market price of Transit's stock. And to say that the market price of the stock might drop to a price somewhat lower than it was in prior years is not at all to say that the company's ability to attract the equity capital it needs would be jeopardized.293

A method for determining a fair return or a reasonable dividend yield which looks solely to a pegging of the market price of the company's stock at past levels is manifestly unacceptable.294 Past returns may have been unreasonably high, resulting in an inflated market price for the stock; if so, the public interest would not permit, much less require, maintenance of the status quo.295 And even if past returns were warranted in the light of then existing risks and uncertainties, changed conditions may demand a lower return for the future, even if that results in the market's revaluation of Transit's stock.296 In short, the Commission's duty is to authorize a return which is sufficient, but not greater than necessary,297 to preserve the financial integrity of the enterprise, and which is fair and reasonable in the light of current conditions, as distinct from those that may have existed in times past.298

In support of its statement that the market place 'assumes' continuation of past dividends, the Commission apparently relied on the testimony of Transit's expert witness that

'if the annual payout (of $500,000) was not continued, the adverse effect on the market value of the stock of the parent would be considerable, and the financial stability of Transit would deteriorate in the eyes of the financial community.'299

But this assertion, standing alone, does not provide adequate support for a finding that Transit's traditional annual dividend payout must persist in order to 'continue to attract investors'-- even assuming that such a finding was made.300 For, as we have said, whether or not a lower dividend would reflect adversely on Transit in the eyes of the financial community and thus affect the market price of its stock, it does not follow inexorably that Transit would thereby be precluded from securing needed equity capital. Whether the latter consequence would flow from a lower dividend yield is something the Commission could not know without at least ascertaining Transit's financial requirements, assessing the current risks that attend its operation, and examining 'earnings on investments carrying comparable risks.'301

As in the 1963 proceeding, both Transit and the protestants presented evidence relating to Transit's earnings-price ratios, and those of other companies; Transit's return on equity, and the returns afforded by natural gas and electric utilities, as well as other urban transit companies; and dividend-price and dividend payout ratios for Transit and other utilities. The Commission's opinion virtually ignores this information.

The Commission did observe that the protestants' 'cost-of-capital method of determining a fair rate of return for Transit in this proceeding is not wholly applicable to the transit industry generally and to Transit in particular.'302 What the Commission meant by this is not clear. We can only infer that it had in mind considerations similar to those which led it to reject as 'inappropriate' the cost of capital evidence adduced by the protestants in the 1963 proceeding, and we need not repeat our discussion of those reasons here.303 It suffices to again point out that if a 'cost of capital approach' is to be dismissed as 'inappropriate' or spurned as 'not wholly applicable,' it is incumbent upon the Commission to say why and to set forth for the record, through analysis and findings, the alternative method it employed to determine fair return.

The Commission made no evaluation of Transit's annual dividend payout or its overall return in the light of dividends and returns of companies of comparable risk.304 Indeed, the only concrete finding based upon any of the evidence to which we have referred was that the $2,000,000 margin of return it authorized would produce a return on rate base of 7.4% Which, it said, was 'low.'305 In view of the Commission's failure to take into account the evidence we have summarized, and to weigh the considerations essential to a proper determination of a fair return, we cannot credit its finding as to a reasonable dividend yield, resting as it does solely upon past payouts and unsupported inferences as to the market behavior of Transit stock.

The 'cushion'

We also hold that the Commission has failed to justify its inclusion of '$550,000 to $650,000' as a 'cushion' in the margin of return it allowed. The 'cushion', the Commission stated, was the amount 'required to enable Transit to maintain a sufficient surplus to cover contingencies and to assure the financial stability of Transit.'306 The Commission explained the need for the 'cushion' as follows:

'Admittedly, the commission has been conservative in its estimates for future revenues and expenses. In fact, the difference between the net operating income projections of the commission and Transit amounts to more than $800,000. The commission feels that in prescribing rates under the operating ratio method it should be careful not to overestimate revenues or expenses since the rate of return is directly geared to these items. If we, even inadvertently, should include margins of error, in the estimated operating revenues or expenses, we would be allowing a return on such errors. The great possibility of error in estimates and projections, a very real contingency, thus is better given weight here in the margin of return allowed than above the line where the effect would be compounded.'307

The process of fixing rates prospectively necessarily imposes on a rate-making authority the difficult task of estimating the utility's cost, in future years, of providing service to the public. Even the most intelligent estimate of future expenses, because it is an estimate, does not dispel completely the possibility of some inaccuracy.308 Notwithstanding the uncertainty that attends all prophesy, a regulatory agency is duty bound to make its forecasts as accurate as it possibly can, and a reviewing court is entitled to assume that it has done so.309 Nevertheless, without reference to any criteria whatsoever, the Commission here concluded that a 'cushion' of from $550,000 to $650,000 was needed to offset the supposed unreliability of its estimates.

The Commission stated that 'in prescribing rates under the operating ratio method it should be careful not to overestimate revenues or expenses since the rate of return is directly geared to these items. If we, even inadvertently, should include margins of error, in the estimated operating revenues or expenses, we would be allowing a return on such errors.'310 But there is no indication in this case that any undue possibility of error existed. Indeed, the Commission's estimate of revenue differed from Transit's by only $173,000311 on projected revenues of some $33,000,000. Moreover, Transit's calculations did not take into account significant revenue increases in the second half of 1965,312 and the Commission projected a smaller increase in passenger volume than Transit had assumed.313 Thus it would seem that the revenue estimates, if at all unreliable, tended to favor Transit.314

The Commission's concern over the possibilities of additional costs is equally undocumented. All of the contingencies it identified as potentially enlarging expenses appear to be remote or speculative, and merely variations on the theme that its estimates might be erroneous. For example, even though it made no provision for additional track removal expenditures, the Commission stated that 'the possibility exists that Transit might incur considerable expenses over and above the amount which remains in the track removal reserve in 1966. There is also the risk that the track removal program could be accelerated during the future period.'315 Similarly, the Commission said that there 'is a possibility that the company will incur additional labor costs for the last two months of the year,'316 without, however, undertaking to gauge the likelihood that its estimates of future labor expenses might be too low, or to quantify the additional cost of an erroneous projection.

Resort to a 'cushion' cannot relieve the Commission of its duty to explore, and make findings on the probabilities of future occurrence of particular expenses. And the line between those costs that can and those that cannot be projected for ratemaking purposes must at all times be scrupulously observed. Expenses too remote or speculative to be forecast with any reasonable degree of certainty, and those that are extraordinary and not likely to recur in normal periods,317 should be disallowed. The Commission cannot 'cushion * * * (the) company in advance against unforeseen events' which do not constitute 'ordinary and necessary' expenses.318

The Commission, of course, was at liberty to allow a return which would enable not only the payment of an appropriate dividend, but also an addition to surplus of amounts necessary to insure financial stability and to provide to the equity holder a return which in the aggregate is fair and reasonable.319 The error here is that, instead of making allowance for identified capital needs, and for an overall return 'commensurate with returns on investments in other enterprises having corresponding risks,'320 the Commission viewed the 'cushion' simply as a means of offsetting possible errors in its expense predictions.321 A fair rate of return, properly determined, already includes compensation for the risk that uncrystallized contingencies may later reduce actual earnings.322 But without comparative data, any determination of added risk in isolation is completely arbitrary.323

In view of the fundamental inadequacy of the method by which the Commission determined the margin of return allowed Transit, we hold that its action in ordering $1,350,000 to be transferred from the court-ordered reserve was unlawful and must be set aside. Since Order No. 564, like Orders Nos. 245 and 563, has been superseded as a result of the Commission's subsequent approval of new fare schedules,324 we will not remand the case for a new determination as to the margin of return.325 However, as was our experience in connection with Orders Nos. 245 and 563,326 we encounter substantial indications in the record that it would be inequitable to compel Transit to restore the entire amount it obtained from the reserve.327

In Order No. 564, the Commission found that the fares prescribed therein would produce net income of only $648,357 in the absence of any transfer of funds from the court-ordered reserve.328 This amount was substantially less than the $1,550,000 proposed by the protestants329 as a fair return.330 Moreover, though the protestants recommended a return on equity of from 12% To 13%,331 and though we have affirmed the Commission's 1967 decision permitting a return on equity of 14%,332 the $648,000 would have been insufficient even to cover Transit's estimated debt expense of $960,000333 for the future annual period.

Since it was uncontested that Transit was entitled to a return of at least $1,550,000,334 and since that sum represents a return to the equity holder nearly identical to that approved by the Commission only one year later, we conclude that Transit should not be directed to make full restitution, if to do so would reduce its return below that level. Accordingly, Transit will be permitted to retain any portion of the funds transferred to it from the court-ordered reserve which is necessary to preserve its actual earnings during the period covered by Order No. 564 at the level conceded by the protestants to represent a fair return.335

We here recapitulate, for the convenience of the parties and the Commission, the major dispositions required by the holdings delineated in this opinion.

Orders Nos. 245 and 563 are set aside. Transit is directed to make restitution for all amounts collected as a consequence of the fare increase initially authorized by Order No. 245, during the period that order was effective, except that it may retain any portion of the excess fares necessary to preserve its earnings at the level conceded by the protestants to represent a fair return.336 Restitution in the appropriate amount is to be effected by placing funds in or making non-cash credits to the court-ordered reserve.337 The parties are requested to seek agreement as to the precise amount of restitution and the details for its accomplishment. Should the parties formulate a plan, they shall make application to the Commission for its approval, and in that event, or if no agreement is reached, the Commission shall supervise the execution of our mandate.338

The issue concerning the acquisition adjustment account is remanded to the Commission for a redetermination of the schedule for amortization of the balance thereof on the changeover date, and a relating of that schedule to the remaining lives of the properties in service on the changeover date. Any amounts heretofore charged against the account in excess of the amounts found to be proper shall be deposited in the court-ordered reserve.

The issue concerning the deficiency in the depreciation reserve is likewise remanded to the Commission for findings as to the extent, if any, to which Transit's investors have already been reimbursed for the diminution in value of their investment in operating properties devoted to public use over and above accruals to the reserve. The Commission may permit Transit to retain any portion of the total amount of underaccruals for which its investors have not been compensated in the form of past earnings in excess of fair returns. Any amounts permitted by Order No. 564 to be withdrawn from the court-ordered reserve for which Transit's investors have already been so compensated shall be restored to the reserve.

The Commission on remand is further directed to make findings and conclusions as to the treatment proper for Transit's investment tax credits, and the amounts, if any, by which Transit's federal income tax expense should be reduced as a consequence of any such credits. To the extent the Commission may find that Transit was permitted to accrue excessive income tax expenses for 1966, the amount thereof should be placed in the court-ordered reserve.

The Commission's authorization of a margin of return of approximately $2,000,000 is set aside, as is its action, in consequence thereof, permitting $1,350,000 to be transferred to Transit from the court-ordered reserve. The funds so transferred shall be restored to the reserve, except that Transit may retain any portion thereof necessary to preserve its net income at the level recommended by the protestants as a fair return.339 As in the case of Orders Nos. 245 and 563, the parties are requested to seek agreement and apply to the Commission for its approval, and the Commission shall supervise the execution of our mandate.

Although we have also held that the Commission erred in its estimate of Transit's bus maintenance expenses for 1966, we make no separate provision to offset, by any amounts improperly disallowed, the sum which Transit is compelled to restore to the court-ordered reserve. For our disposition of the matter of restitution allows Transit a return computed on the basis of its actual experience during the period in question, and thus necessarily compensates it for all out-of-pocket expenses legitimately incurred.

So ordered.

DANAHER, Circuit Judge, concurs in the result in Nos. 20,200; 20,201; and 20,202; and in the opinion in No. 20,202 insofar as affirmance is directed.

J. SKELLY WRIGHT, Circuit Judge, (concurring in part and dissenting in part):

I concur in Judge Robinson's excellent opinion except for the following reservations with respect to Part IV relating to the handling by the Commission of the investment tax credit.

I agree with the majority's statement that the Commission 'was in error if it felt that it was inexorably bound' by Section 203(e) of the 1964 Internal Revenue Act to give the carrier, as distinguished from bus riders, the benefit of the investment tax credit since that section 'applies only to an 'agency or instrumentality of the United States,' which the Commission clearly is not.' However, the majority then states that 'the issue does not vanish here, for the Commission's authority to administratively adopt the canon expressed in Section 203(e) is something else again.' The majority quotes language from City of Chicago v. F.P.C., 128 U.S.App.D.C. 107, 113, 385 F.2d 629, 635 (1967), to the effect that '(a) regulatory agency may, should, and in some instances must, give consideration to objectives expressed by Congress in other legislation * * *,' and the remainder of Part IV implies that the giving of such consideration is appropriate here and that the Commission is to be faulted only because it blindly adopted the policy of Section 203(e) instead of exercising in a meaningful way the 'discretion' it possessed to do so or not.

My disagreement with this part of the opinion stems from my belief that, since Section 203(e) is not applicable, the Commission cannot give any consideration to the policy embodied therein. In other words, the Commission has no 'discretion' to deny the farepayers the benefits of the investment tax credit savings. I rely specifically on the language quoted by the majority from F.P.C. v. United Gas Pipe Line Co., 386 U.S. 237, 244, 87 S. Ct. 1003, 1008, 18 L. Ed. 2d 18 (1967): 'When the out-of-pocket tax cost of the regulated (taxpayer) is reduced, there is an immediate confrontation with the ratemaking principle that limits cost of service to expenses actually incurred.' As this statement recognizes, basic to all ratemaking is fixing rates in terms of actual costs and that, of course, includes the actual cost of federal income taxes as well. To hold that the Commission has the discretion to fix the rates on the basis of total federal income tax liability without subtracting the amount of the tax credit which Transit is entitled to, and in fact takes, flies in the face of this principle.

I do not think that anything in our en banc decision in Panhandle Eastern Pipe Line Co. v. F.P.C., 115 U.S.App.D.C. 8, 316 F.2d 659 (1963), precludes our holding in this case that the Commission does not have the discretion to set a rate which is not based on a total flow-through. Certainly the spirit of Panhandle is that tax benefits should flow through and, although we there affirmed the Commission's discretion not to give the consumers the total benefit of the revenues generated by Panhandle's use of Section 167's authorization of accelerated depreciation, I think that part of the decision turned on the fact that accelerated depreciation is merely a tax deferral and not a tax saving like investment tax credit. We stated in Panhandle:

'* * * The liberalized method provides higher depreciation deductions and therefore lower taxes during the early part of the life of a given property, and lower deductions and higher taxes in the later years of the life of the property. The total depreciation deductions available to a company over the entire life of a facility are the same using either method. * * *'

115 U.S.App.D.C. at 10, 316 F.2d at 660. In this case giving Transit the benefit of Section 203(e) would result in a rate predicated in part on hypothetical costs not expended-- on taxes never to be paid. This, in my judgment, would be contrary to the fundamental principle of ratemaking.