This petition subjects to review Order No. 773 of the Washington Metropolitan Area Transit Commission1 in an aspect untouched by today's Powell decision.2 Petitioners assert, as their major contention, that the Commission should have taken into account, in the fare-setting process leading to that order, the amount by which properties which Transit had transferred from operating to nonoperating status had appreciated in value while in service. We conclude, in the circumstances peculiar to Transit as a public utility, that the Commission erred in refusing to treat the excess of market value over book value of the properties when transferred as an offset to higher fares.3 To that extent we hold Order No. 773 invalid and direct the remedial steps to be taken. In the other respect in which the order is complained of, we affirm the Commission.4I

The evolution of Order No. 773 is summarized in our Powell opinion.5 We need add only the events of record which bear particularly on the transferred assets.6 All are parcels of real estate which in times past were employed by Transit in mass transportation operations, but which, after later losing their usefulness for that purpose, were withdrawn from service. These withdrawals are reflected by entries on Transit's books recording the removals-in utility jargon, from "above the line" to "below the line"-and denoting Transit's continuing interest in the properties as investments. In some instances, Transit retains direct ownership; in others, Transit has conveyed to a wholly-owned subsidiary, and in still others it has made an outright sale. It appears without controversy that the market value of the unsold properties at the time of transfer below the line has invariably exceeded their value as tabulated on Transit's books.7

During the course of the proceeding before the Commission, petitioners endeavored to probe into Transit's below-the-line real estate, Transit's interrelationships with its subsidiaries, and the market value of withdrawn realty held by either. Transit resisted those efforts, maintaining that the properties belonged exclusively to its investors,8 and that information concerning them was irrelevant to the fare investigation in which the Commission was engaged.9 The Commission, subscribing to Transit's basic premise, ruled that petitioners' inquiries had but limited pertinence to the proceeding.10 It directed that some of the sought-after information be made available to petitioners, but refused to require disclosure of any market-value data on the properties.11

Not surprisingly, then, Order No. 773 reflects no consideration whatever by the Commission of rises in the value of the transferred assets during the course of structuring the increased fares which that order awarded. Petitioners filed a timely petition for reconsideration12 containing, inter alia, what may fairly be characterized as a request that the Commission devise ways and means of giving Transit's farepayers appropriate credit for the appreciation in value of the properties while in service. By Order No. 781, the Commission denied the petition,13 and by order No. 781a stated its reasons for doing so.14 The Commission's statement, like Order No. 773 itself, is devoid of anything which we can identify as a response to petitioners' entreaty. And so it is that the theory underlying their plea is presented here,15 now to support the charge that the Commission was grievously in error.16

We have painstakingly examined this serious charge in all of its many ramifications, and in this opinion we set forth the results of our investigation. We begin in Part II with an exploration into the adjudicative history, administrative and judicial, of allocations of capital gains on operating utility assets. After that, in Part III, we scrutinize the interest of investors in value-appreciations on such assets, with reference to treatments of that interest in rate- and depreciation-base formulations and, more particularly, in Transit's ratemaking litigation. Next, in Part IV, we identify the doctrinal considerations guiding allocations of capital gains on in-service utility property and apply them to this case. Then concluding that Order No. 773 is invalid and must be set aside, we specify in Part V. the basis for and mechanics of remediation.

ADJUDICATIVE HISTORY OF ALLOCATION OF CAPITAL GAINS ON OPERATING UTILITY ASSETS

Seldom have regulatory agencies or courts been called upon to allocate, as between investors and consumers, gains on utility assets while in operating status.17 Nonetheless, for the assistance and indispensable background they may afford to resolution of the controversy at hand, we must pause to examine this group of cases. In the realization that problems of allocation may well differ according to whether the asset is depreciable18 or nondepreciable, we look first to the decisions treating allocation issues in relation to depreciable properties.

Outside the District of Columbia, we find relatively little authority precisely in point. In 1959, the question was presented to the Appellate Division of the New Jersey Superior Court19 after a utility providing water service made a profitable sale of a portion of its distribution system, consisting of cast-iron mains and fire hydrants.20 In subsequent rate proceedings, the New Jersey Board of Public Utility Commissioners deducted the profit from the utility's earned surplus and credited it to its depreciation reserve, in comformity with the board-adopted uniform system of accounts for water companies. From 1931, when the sale was made, to 1958, when the rate case was instituted, the utility had not complained of this treatment. Ascribing controlling weight to the commissioners' long standing construction of their own regulation-the accounting system prescribed-the court found no error in the challenged adjustment.21

In the same year, a similar question arose in a rate proceeding before the Minnesota Railroad and Warehouse Commission.22 During its historical test period, a transit company sold obsolete buses and treated the proceeds as nonoperating income. This was held to be improper.23 "The Uniform System of Accounts prescribed by this Commission," said the agency, "requires that such salvage24 'shall be credited to the depreciation reserve account."'25 In its words, the agency accordingly "added this income from sale of obsolete buses to operating income in determining actual operating results. . . ."26 "[A]ny further income from sale of obsolete buses or equipment," the agency added, "will be treated . . . as a reduction in depreciation expense and thus, as an increase in operating income."27

A few years later, the Wyoming Public Service Commission faced essentially the same problem in a variant context.28 A utility engaged in selling natural gas purchased mineral interests in lands, including a gas-producing well. The utility thus became entitled to a depletion allowance on the purchased assets.29 After taking some gas from the purchased properties for its southern division customers, the utility sold them at a profit. Regulatory approval of the sale had been accompanied by a direction to treat the profit as utility income. In a later rate proceeding, the Commission reiterated its position that the profit "must be treated as nonoperating utility income."30 The theory underlying the order approving the sale, the Commission said, was that "the profit to be made by the company upon the sale thereof should be used to reduce its . . . natural gas rates, rather than increase them."31 "As we view the transaction," the Commission explained, "the company will simply make the substantial profit from the sale of utility properties dedicated to its southern division operations, which, in our opinion, should inure to the benefit of the ratepayers in that division."32

Such are the decisions outside this jurisdiction. In each, the entire gain from disposition of depreciable assets was passed on to the utility's consumers, to the exclusion of its investors. While it is true that two of the decisions were influenced by agency-adopted accounting practices, it must be remembered that such practices are but reflections in accounting technique of what is generally considered wholesome in substantive principle. And the principle to be gleaned, both from the practices and the decisions themselves, is that consumers have the superior claim on capital gains achieved when depreciable utility properties are removed from service. We do not suggest that so small a number of cases establish a rule of general and controlling applicability in the ratemaking field. But it can hardly be denied that these decisions are precedents of value in similar litigation.

-District Cases

Within, much as without, the District of Columbia the problems of allocating value-appreciation of depreciable inservice utility property have but infrequently arisen before either regulatory agencies or courts. And the litigation locally, such as it has been, has invariably involved Transit and, by the same token, the peculiarities inherent in its situation. That is to say not only that the reasoning followed elsewhere obtains as to Transit, but also that additional reasons leading to similar results flow from Transit's uniqueness, in comparison with other utilities, with respect to properties transferred below the line. Not surprisingly, then, the claim of Transit's farepayers on capital gains accruing to such properties while above the line has achieved considerable fruition.

The leading case, and one which merits careful analysis, is D.C. Transit System, Inc. (Order No. 4577).33 There the Commission's predecessor, the District of Columbia Public Utilities Commission (PUC),34 addressed the question of allocating the profits on a sale of Transit's Fourth Street Shops and Southern Carhouse to the District of Columbia Redevelopment Land Agency. Of the total sale price of $3,320,000, Transit proposed to credit all of the net profit of $2,181,363.08 to earned surplus, and thereby to pass it on to its investors.35 This, PUC held, it could not be permitted to do.

As PUC determined, $1,039,657.72 of the sale price was attributable to land,36 $1,915,034.81 to depreciable improvements on the land,37 and the remainder to items not of present concern.38 PUC noted that strict adherence to the uniform system of accounts employed by it would require that the total amount received on disposition of depreciable assets-here $1,915,034.81-be credited to the depreciation reserve as salvage.39 Since to have done that would, by PUC's calculations, have built the reserve to a point greatly in excess of the sum needed to retire all unrecovered original cost of the improvements,40 PUC felt that a departure from normal accounting procedures was warranted.41

In regard to the extent of the departure, PUC noted that Transit's operating franchise demanded of it a sevenyear program of gradual conversion from a streetcar-bus to an all-bus operation,42 and PUC was "unable to disassociate the instant transaction from the imminent retirement of all rail property under the mandate contained in the Franchise."43 Nor could PUC "ignore the probability that full provision for depreciation will not have been provided when the rail facilities are abandoned and retired by reason of conversion."44 Observing that Transit had consistently asserted, and PUC's staff had indicated agreement, that any retirement loss in this connection was recoverable by charges against the farepayers,45 PUC emphasized that "if the customers are to be required to bear the burden of extraordinary retirement losses incident to the whole conversion program, it appears equitable that they should share, at least to some extent, in extraordinary retirement gains of the nature here under consideration."46

PUC concluded, then, that of the total net profit of $1,450,872.03 realized on the sale of the improvements,47 $613,661.28 should inure to Transit's consumers and $837,210.75 to its investors.48 "This approach," it said, "takes into consideration the right of the company to recover from its customers through depreciation the loss of service value over the life of the property as measured by the original cost of the property less net salvage realized upon retirement."49 That treatment, in PUC's view, "provides an equitable solution to a difficult problem maintaining, as far as possible, what seems to be fair balance between the interests of the public and those of the company's investors."50

PUC's allocation of the profit on the improvements on the Fourth Street Shops and Southern Carhouse subsequently came under direct judicial review at Transit's instance, and we held that PUC's treatment was not arbitrary or unreasonable.51 That allocation also entered into this court's consideration of another problem several years later. In D.C. Transit System, Inc. v. Washington Metropolitan Area Transit Commission,52 an expense allowance to Transit for unrecovered costs of abandoned rail facilities was contested on grounds which included reference to that sale. The argument was that the sale was occasioned by the conversion program required by Transit's franchise,53 and that for that reason the profits made on the sale should be regarded as recoupment of obsolescence.54 In rejecting the argument, we noted that

PUC did not omit to give the riding public some considerable share in the benefits of this sale. . . . [T]he profit on the depreciable property which went into surplus was $837,000. At the time of the sale, Transit carried this property on its books at an historical cost of $1,077,824, with an accrued depreciation reserve of $613,661. Thus only $464,613 was reto effect complete liquidation of this investment. The PUC, however, ordered a total of $1,077,824 be credited to the depreciation reserve, representing not only the $464,163 but an additional amount of $613,661 exactly duplicating the reserve already accrued. It was this action that we think was explained by the PUC's comment that equitable consideration suggested the riders should share in the profits from the sale. Under all these circumstances, therefore, we do not interfere with the Commission's discretion in deciding not to off-set the profits from the Fourth Street Shop sale against the [expense allowance for unrecouped investment in abandoned rail facilities].55

That, as PUC held in Order No. 4577,56 Transit's farepayers have a legitimate interest in capital gains on operating depreciable assets has never been doubted by its successor, the respondent Commission. In D.C. Transit System, Inc. (Order No. 245),57 the Commission recognized that "ratepayers may have a claim to depreciable property at least to the extent of the depreciation reserves."58 8] It added "that 'gains' may be experienced on disposal of depreciable items, and these are indeed used as offsets to depreciation, under the heading of 'salvage"'.59 Later, in D.C. Transit System, Inc. (Order No. 563),60 the Commission, in finding no connection between Transit's track removal and repaving program and its sale of its Georgia and Eastern Terminal,61 concluded that "the ratepayer is not entitled to share in any portion of the proceeds of that sale, unless there was a profit on the depreciable portion of the asset sold,"62 and found that "[t]here was none in this case."63 And even after issuance of the order under review, the Commission has declared that "[t]here is no question that, when depreciable operating property is sold and a gain is realized, the gain should be used to reduce the depreciation expenses which ratepayers have paid but which the company, because of the gain, does not actually incur."64

In the District, then, the law on the topic immediately under discussion is already somewhat developed. Capital gains realized on disposition of depreciatble assets while in service65 do not automatically flow to Transit's investors,66 although extraordinary circumstances may enable them to share.67 On the contrary, Transit's farepayers have a protectible interest in such gains which extends at the very least, to the amount of depreciation which has been charged to farepayers and may well extend far beyond.68

The question whether a gain on disposition of nondepreciable assets inures to investors as capital surplus, or to consumers as a reduction in cost of service, has been litigated even less frequently than has the question in relation to depreciable assets. A survey of the few cases in point outside the District of Columbia reveals, somewhat paradoxically, a central strand of harmony amid diverse results. The decisions within the District-all administrative-have reached a uniform result, but without critical analysis either of the problem or the precedents.

-Out-of-District Cases

In New York Water Service Corporation v. Public Service Commission,69 a utility sold, at a handsome profit, land which had outworn its usefulness as a storage reservoir. Its regulatory agency held that for ratemaking purposes the net profit reaped on the sale should be passed on to its customers.70 On judicial review, that adjudication was sustained.71 The court explained:

The uniform system of accounts approved by the Commission applicable to water companies in dealing with land used for utility purposes allows land sold at a loss to be debited to the depreciation reserve and thus increase the rate base. If land is sold at a profit, it is required that the profit be added to, i. e., "credited to", the dpreciation reserve, so that there is a corresponding reduction of the rate base and resulting return. The utility is thus protected from a loss in the sale of the land in its operations; it seems reasonable it should pass on a profit to the consumer.72

As the opinion on review makes plain, the guiding principle was that the gain belonged to those-investors or consumers-who previously bore the risk of loss from possible decline in market value.

In City of Lexington v. Lexington Water Company,73 the pertinent facts were similar. The utility had acquired land which for many years it used to collect water for reservoirs, but when the reservoirs became inadequate the land was retired from service and removed from the utility's rate base. Somewhat later, the land was sold,74 and the utility distributed the very considerable profit realized thereon to its investors as dividends.75 When the utility subsequently sought a rate increase, its regulatory agency ruled that its consumers were entitled to the gain.76 The agency, articulating essentially the same rationale espoused in New York Water Service Corporation, elucidated:

The question arises, should this gain, made on property devoted to the public service over the years, be used to reduce the cost of service to the customers or should it be treated as a capital surplus item, and be allowed to be paid out to the stockholders . . .? Having considered the evidence and arguments relating to this matter, we are of the opinion that it should be used to reduce the cost of service to the consumer.

The subject property was not purchased by the utility as a land speculation but it was acquired for providing utility service to the public over the years and was subject to acquisition by condemnation.77 Inasmuch as utility property necessary for rendering service to the public is not subject to sale at the option of the utility, but must be continued in service as long as needed to provide that service, any loss in service value of such property would properly be considered a cost of providing service and, in the case of depreciable property, is recovered through depreciation. . . . For nondepreciable property, where the change in service value cannot be determined until actual disposition of the property, amortization of an allowable loss or gain would be the proper procedure. . . . If it is proper to recover losses of nonderpreciable property through amortization, then conversely it should be proper to amortize gains on such property.78

On review, however, it was held that the agency's ruling was erroneous. The court distinguished New York Water Service Corporation79 on the ground of a difference in the accounting methods respectively employed by New York and Kentucky regulatory authorities.80 The Kentucky agency had adopted a system of accounts providing for the charging of losses and for the crediting of profits on land sales, not to customers, but rather to the utility's surplus account.81 On that premise, the court apparently believed that the risk of capital gain or loss had actually been borne entirely by the utility's investors. On so much of the case, the court would seemingly have sustained the agency had the risk been on the utility's consumers.82

In the only other reported decision we have found, the problem was presented only obliquely. In Columbus Gas & Fuel Company v. Public Utilities Commission,83 the utility claimed that its annual depreciation allowance for depreciable property other than well-structures and equipment was inadequate because some items, consisting in land and rights of way, had been omitted from the computation.84 The Court denied the claim but in doing so indicated that under different conditions the claim might well have been valid.85 In relevant part the Court said:

Certainly lands and rights of way may not be characterized as wasting assets in the absence of explanation that would stamp that quality upon them. In saying this we do not forget that an abandonment of the business might bring about a sharp reduction in the value of the plant, aside from wellstructures and equipment. There is nothing to show, however, that any such abandonment is planned or even reasonably probable. On the contrary, the course of business makes it clear that, when the fields in use shall be exhausted, the business will extend to others, and this for an indefinite future, or certainly a future not susceptible of accurate estimation.86

As the Court indicated, a loss on the investment in nondepreciable elements of the utility's plant resulting from an unavoidable abandonment of its business would have been recognized if it had occurred, and that loss would then have been chargeable to its consumers.87 One might easily reason from this premise that an appreciation in value of the nondepreciable elements would likewise become cognizable, and properly would redound to the benefit of the consumers.

In sum, the decisions outside the District have not viewed capital gains on in-service nondepreciable utility assets as inevitably belonging to investors to the exclusion of consumers. Rather, in each of the cases-although they are few-the allocation has depended upon location of the risk of loss. These holdings, then, may be accepted as applications of the broader principle that the benefit of a capital gain follows the risk of capital loss.88 So read, they have our approbation.

-District Cases

The allocation properly to be made of in-service appreciations in value of Transit's nondepreciable assets is an open question in this jurisdiction. Although both the Commission and PUC, its predecessor in transit regulation, have occasionally spoken to the subject, this court has never before been called upon to face the issue. Our analysis of the administrative decisions-which have uniformly viewed such gains as belonging to Transit's investors-discloses that they leave a great deal to be desired.

In early 1959, as we have related, Transit received $3,320,000 from the sale of its Fourth Street Shops and Southern Carhouse to the District of Columbia Redevelopment Land Agency.89 Of a total net profit on the transaction of $2,181,363.08,90 $950,568.55 was attributable to land.91 In D.C. Transit System, Inc. (Order No. 4577),92 PUC resolved a dispute between Transit and PUC's staff as to the accounting treatment to be accorded the capital gain on the Depreciable subject matter of the sale. At the outset, however, PUC declared that it could "dispose of one item not in controversy."93 It did, thusly:

The staff and the company are in agreement that under public utility accounting, the difference between the original cost of land and the selling price is recognized as profit. The net profit of $950,568.55 on the sale of the land (net proceeds of $1,039,657.72 less original cost of $89,089.17) is, therefore, a proper credit to earned surplus.94

We readily understand that the $950,568.55, as PUC held, was net profit traceable to sale of the land. We are not nearly so clear, however, as to why PUC was confident that it was "therefore a proper credit to earned surplus." In other words, PUC does not tell us why it felt that the profit automatically belonged to investors. It may be that since the treatment to be given it was "not in controversy,"95 PUC deemed it a simple, indubitable accounting problem. In any event, we are left with our doubts.

Order No. 4577 was later to come under judicial review by this court, but not in the aspect just discussed. By suit brought in the District Court for the District of Columbia, Transit attacked PUC's disposition of the profits allocable to the depreciable portion of the property sold.96 Losing in that effort, Transit applied to this court, which affirmed.97 Our action, of course, did not encompass PUC's ruling as to the gain realized on the land, for that ruling, favorable to Transit, was not brought before us. Still later, in D. C. Transit System, Inc. v. Washington Metropolitan Area Transit Commission,98 the sale of the same property was given attention by this court but, again, only in reference to the administrative disposition of the profits on the depreciable part.99

In D.C. Transit System, Inc. (Order No. 245),100 the only other relevant decision in this jurisdiction, it was argued to the respondent Commission, without avail, that Transit's losses on the premature retirement of rail facilities101 - which the Commission has passed on to Transit's farepayers102-might be offset by gains which Transit realized upon the sale of certain real estate.103 The properties sold were, again Transit's Fourth Street Shops and Southern Carhouse104 and its Georgia and Eastern Terminal.105 From aught that appears, nothing more than allocation of the net profit attributable to the depreciable portion of these properties was placed in issue before the Commission, and surely the decision on our review was that narrowly limited.106 The Commission had, nevertheless, ventured a statement on the question as to which we are now analyzing the precedents. The Commission believed that "[i]t is a cardinal principle of regulatory law that a utility is not entitled to recover through depreciation charges or other accounting devices its investment in land."107 "This principle," the Commission continued, "stems from the fact that in some instances the value of land appreciates and in other instances depreciates."108 So, the Commission said "[w]hile the ratepayers have a claim to depreciable property, at least to the extent of the depreciation reserves, no such claim can be directed to land."109

We are unable to follow this course of reasoning. With a paucity of holdings, administrative or judicial, on the point, we have not detected a hard-and-fast rule one way or the other.110 Nor can we understand how the economic fact that land values may trend upward or downward can support the position on appreciation which the Commission assumed. The value of depreciable property, including depreciable improvements on land, also rises and falls with changing market conditions, and yet it is clear that consumers may contend for any capital gain achieved while it was used in service to the public.111 What seeps through the Commission's discussion, however, is the conviction that the Commission has yet to consider factors which, at least in Transit's instance, bear importantly on the problem.

INTEREST OF INVESTORS IN VALUE-APPRECIATION IN OPERATING UTILITY ASSETS

We perceive no impediment, constitutional or otherwise, to recognition of a ratemaking principle enabling ratepayers to benefit from appreciations in value of utility properties accruing while in service. We believe the doctrinal consideration upon which pronouncements to the contrary112 have primarily rested has lost all present-day vitality. Underlying these pronouncements is a basic legal and economic thesis-sometimes articulated, sometimes implicit-that utility assets, though dedicated to the public service, remain exclusively the property of the utility's investors, and that growth in value is an inseparable and inviolate incident of that property interest.113 The precept of private ownership historically pervading our jurisprudence led naturally to such a thesis, and early decisions in the ratemaking field lent some support to it; if still viable, it strengthens the investor's claim. We think, however, after careful exploration, that the foundations for that approach, and the conclusion it seemed to indicate, have long since eroded away.

Judicial indulgence in the concept that appreciation in value of utility property is an increment automatically attaching to its ownership reached its high water mark during the "fair value" era of rate-based formulations of returns to utilities.114 In its 1898 decision in Smyth v. Ames,115 the Supreme Court held "that the basis of all calculations as to the reasonableness of rates to be charged by a corporation maintaining a highway under legislative sanctions must be the fair value of the property being used by it for the convenience of the public."116 "[I]n order to ascertain that value," the Court said, "the original cost of construction, the amount expended in permanent improvements, . . . the present as compared with the original cost of construction, . . . are all matters for consideration, and are to be given such weight as may be just and right in each case."117 And "[w]hat the company is entitled to ask," the Court continued, "is a fair return upon the value of land which it employs for the public convenience."118

Despite the Court's specification in Smyth v. Ames of original cost as well as reproduction cost as a factor to be considered in determining rate base value, the Court's decided preference during almost the next half-century was a reproduction cost formula.119 This meant, of course, that in times of rising prices, the use of reproduction cost to the exclusion of original cost advantaged the utility's investors and disadvantaged its consumers. In 1908, in Willcox v. Consolidated Gas Company,120 the Court remarked that "[i]f the property which legally enters into consideration of the question of rates, has increased in value since it was acquired, the company is entitled to the benefit of such increase."121 Five years later, in the Minnesota Rate Cases,122 the Court observed that the utility's "property is held in private ownership, and it is that property, and not the original cost of it, of which the owner may not be deprived without due process of law."123 And as late as 1926, in Board of Public Utility Commissioners v. New York Telephone Company,124 the Court stated that "[c]ustomers pay for service, not for the property used to render it . . . [b]y paying bills for service they do not acquire any interest, legal or equitable, in the property used for the convenience or in the funds of the company."125 Expressions of this sort encourage the idea that investors were entitled to all the benefits of value-growth of utility assets, of which the base for their rate of return was only one.

The fair value theory, however, was not to survive as the inexorable standard for setting rate base. Perhaps the turning point in conceptualization of the rights of investors viz-a-viz consumers in utility property occurred in 1923. In that year, Justice Brandeis, in his celebrated separate opinion in Southwestern Bell Telephone Company,126 rejected the fair value approach to ratemaking and advanced a new basic concept:

The thing devoted by the investor to the public use is not specific property, tangible or intangible, but capital embarked in the enterprise. Upon the capital so invested the federal Constitution guarantees to the utility the opportunity to earn a fair return.127

Justice Brandeis' formula for ascertaining rate base-the amount of capital prudently invested-was not to become the prevailing rule.128 But what has since prevailed is the central idea that the investor's legally protected interest resides in the capital he invests in the utility rather than in the items of property which that capital purchases for provision of utility service. In 1933, the Court sustained a rate base valuation from which reproduction cost had been excluded,129 and five years later the Court upheld another valuation founded upon historical cost alone.130 In 1942, in Federal Power Commission v. Natural Gas Pipeline Company,131 the Court more formally abandoned reproduction cost when it ruled that "[t]he Constitution does not bind rate-making bodies to the service of any single formula or combination of formulas."132 Finally, in 1944, in Federal Power Commission v. Hope Natural Gas Company,133 the Court rejected the Fourth Circuit's conclusion that the utility's rate base should reflect the "present fair value" of its property.134 "'[F]air value,"' it said, "is the end product of the process of ratemaking not the starting point as the Circuit Court of Appeals held."135 "Under [a] statutory standard of 'just and reasonable,"'136 it added, "it is the result reached not the method employed which is controlling. . . . It is not theory but the impact of the rate order that counts."137 This approach to rate base formulation is the prevailing doctrine today.138

The teaching of the modern cases in this area is plain. If investors in a public utility possessed an indefeasible right to the appreciation in value of the utility's operating assets, the base on which their rate of return is computed -the aggregate of the assets themselves -could be set only at the true value of the assets at the moment of setting. Fairness would suggest that result and due process would seem to compel it.139 But it is now clear that the utility is not entitled of right to have its rate base established at the value which the assets would command on the current market, although that market value exceeds original cost. This can mean only that the investors' legally protected interest in such assets does not inexorably extend to the increment in value.

The rise and fall of fair value as the exclusive method of measuring utility rate base has been paralleled by judicial treatment of the interrelated problem of basis for depreciation of utility assets. An integral part of the process of establishing a rate base for purposes of rate of return is ascertainment of the amount to be deducted from rate base-and, of course, allowed as an operating expense-for depreciation140 of the utility's in-service property.141 And if appreciation in the value of utility property is to invariably inure to the benefit of investors, it would logically follow that allowances for depreciation must be computed on present value rather than acquisition cost or some other basis.

That was the view to which the Supreme Court originally subscribed. In 1909, in Knoxville v. Knoxville Water Company,142 the Court decided that the utility "is entitled to see that from earnings the value of the property invested is kept unimpaired, so that at the end of any given term of years the original investment remains as it was at the beginning."143 "It is," the Court said, "not only the right of a company to make such a provision but it is its duty to its bond and stockholders, and, in the case of a public service corporation, at least, its plain duty to the public."144 Two decades later, the Court, in United Railways and Electric Company v. West,145 upheld a ruling that annual depreciation allowances were to be calculated on the basis of present value rather than cost.146 Repeating the theme of Knoxville Water Company, a majority of the Court147 referred to its then "settled rule" that rate base was to be established at present value,148 and argued that "it would be wholly illogical to adopt a different rule for depreciation."149

Fair value, as the basis for depreciation, however, was later to go the way of fair value as the measure of rate base.150 By 1934, in Lindheimer v. Illinois Bell Telephone Company,151 the Court upheld the propriety of computing annual depreciation on original cost.152 The Court pointed out that "if the amounts charged to operating expenses and credited to the account for depreciation reserve are excessive, to that extent subscribers for the telephone service are required to provide, in effect, capital contributions, not to make good losses incurred by the utility in the service rendered and thus to keep its investment unimpaired, but to secure additional plant and equipment upon which the utility expects a return."153 And by 1942, in Federal Power Commission v. Natural Gas Pipeline Company,154 the Court has sustained an amortization basis for depletable utility property calculated on capital investment rather than reproduction cost.155 There the Court stated:

When the property is devoted to a business which can exist only for a limited term, any scheme of amortization which will restore the capital investment at the end of the term involves no deprivation of property. Even though the reproduction cost of the property during the period may be more than its actual cost, this theoretical accretion to value represents no profit to the owner, since the property dedicated to the business, save for its salvage, is destined for the scrapheap when the business ends. The Constitution does not require that the owner who embarks in a wasting-asset business of limited life shall receive at the end more than he has put into it.156

Finally, in Federal Power Commission v. Hope Natural Gas Company,157 in 1944, the Court upheld depreciation and depletion allowances based on cost,158 overruling United Railways and Electric Company v. West in the process.159 "By such a procedure," said the Court, "the utility is made whole and the integrity of its investment maintained. No more is required."160

Here again we draw a lesson from the jural history of ratemaking. Investors are entitled to recovery the utility's outlay in the assets employed in provision of the utility's public service.161 If the investors' protected interest in those assets encompassed increases in their market value, it would necessarily follow that the recoupment must embrace the increases as well as the amount laid out for their acquisition. But it is now clear that the amount of eventual recovery-the depreciation base -may permissibly be limited to the amount of the original outlay. This is but another way of saying that the investors do not possess a vested right in value-appreciations accruing to inservice utility assets.

The considerations just explored take on added weight in Transit's case, for fair value has never been assigned a role in determinations as to its rate or depreciation bases. That it was not an ingredient of either was settled rather early in Transit's regulatory history. In the days prior to utilization of the operating ratio method in computations of its margins of return,162 the Commission's predecessor, PUC, established and maintained Transit's rate base without consideration of the then present value of its in-service properties.163 In those days, PUC also employed original cost as the formula for setting Transit's depreciation base,164 and the Commission in its turn, has done the same.165 Neither for purposes of its rate base nor its basis for depreciation, then, has appreciation in the market value of its assets been deemed a benefit to which Transit's investors might justly lay claim.

But that was not because the effort was not made. In a fare-increase proceeding inaugurated in 1960, Transit sought to persuade PUC to adopt a depreciation base combining replacement cost for some properties with market value for others.166 PUC, however, declined to do so.167 Instead, PUC pointed out that it has "long held that original cost is the only sound basis for measuring depreciation as it is in accord with the fundamental purpose of depreciation accounting, namely, to recover the cost of investment rather than to provide for the cost of replacement."168 "The use of replacement cost as a base for the calculation of depreciation allowances," in PUC's view, "has many serious faults,"169 not the least of which is the distinct possibility that Transit's farepayers would thereby be made involuntary contributors to its capital. PUC explained:

[I]f prices are rising the use of the replacement cost base would compel consumers to provide additional capital for the utility, at least to the extent that replacement costs were greater than the costs of the depreciating equipment. [Transit's witness] admitted that under his theory consumers would be in the position of involuntary investors though with no right to a return on their investment; and what is even worse, they would thereafter be required to provide a fair return and depreciation allowance on capital which they themselves had contributed. Obviously, consumers' obligations end when they have paid the cost of service including the cost of the depreciable assets used and exhausted in rendering that service. The original cost base is just and equitable for both investors and consumers. Consumers pay the cost of service including the cost of capital. To ask the consumers to pay more than the cost is to make them contribute to the capital of the enterprise.170

We cannot, then, accept the thesis that appreciations in value of Transit's properties while in operating status automatically flow to Transit's investors as inseparable incidents of ownership. To be sure, investors are entitled to have rates fixed with a view to a fair return on their investment,171 and to have depreciation allowances set in contemplation of eventual recoupment of their investment in toto.172 But modern ratemaking doctrine militates against the proposition that value-appreciation alone can legitimately increase either the return173 or the recoupment.174 Indeed in Transit's case it never has,175 and that would have been legally impossible if the investors' protected interest in Transit's assets extended to advances in market value as well as to the original investment in them. The fact is that Transit's investors have been so limited in both respects, and that serves adequately to refute any notion that they necessarily possess a claim on such advances.176

BASIS FOR ALLOCATION OF CAPITAL GAINS ON OPERATING UTILITY ASSETS

Investors, we have concluded, are not automatically entitled to gains in value of operating utility properties simply as an incident of the ownership conferred by their investments. And it goes without saying that consumers do not succeed to such gains simply because they are users of the service furnished by the utility. Neither capital investment nor service consumption contributes in any special way to value-growth in utility assets. Rather, the values with which we are concerned have grown simply because of a rising market.

Investors and consumers thus start off on an equal footing, and the disposition of the growth must depend on other factors. We thus reach the dual critical inquiry: identification of the principles which must guide the allocation, as between investor and consumer groups, of appreciation in value of utility assets while in operating status; and application of those principles to Transit's situation.

The ratemaking process involves fundamentally "a balancing of the investor and the consumer interests."177 The investor's interest lies in the integrity of his investment and a fair opportunity for a reasonable return thereon.178 The consumer's interest lies in governmental protection against unreasonable charges for the monopolistic service to which he subscribes.179 In terms of property value appreciations, the balance is best struck at the point at which the interests of both groups receive maximum accommodation. We think two accepted principles which have served comparably to effect satisfactory adjustments in other aspects of ratemaking can do equal service here.

One is the principle that the right to capital gains on utility assets is tied to the risk of capital losses. The other is the principle that he who bears the financial burden of particular utility activity should also reap the benefit resulting therefrom. The justice inherent in these principles is self-evident, and each already occupies a niche in the law of ratemaking;180 and their application, sometimes overlapping, to the problem at hand weighs the scale heavily in favor of consumers. For practice in the utility field has long imposed upon consumers substantial risks of loss and financial burden associated with the assets employed in the utility's business. We will pause to examine the practices, and then their effect in conjunction with the principles mentioned.

-Right to Gain Follows Risk of Loss

A factor strongly influencing the rate of return to which the utility investor becomes entitled is the magnitude of the risk which his investment encounters.181 High risks justify larger returns,182 while low risks more nearly guarantee the investment, and so may warrant smaller returns.183 Similarly, an investor can hardly muster any equitable support for a claim to appreciation in asset value where he has been shielded against the risk of loss on his investment, or has already been rewarded for taking on that risk.

The proposition that capital gain rightly inures to the benefit of him who bore the risk of capital loss has been accepted in ratemaking law. Thus, as we have seen, investors have been denied capital gains realized on disposition of utility assets where they have not borne the risk of loss associated with the holding of such assets.184 And we have consistently held that investors cannot recover for under-depreciated assets where they have in some form been compensated either for the deficiency or for assuming the risk that a deficiency might occur.185 On the other hand, grave risks associated with utility assets are commonly thrust upon consumers. Many are susceptible to loss or damage from acts of nature and man, and risks of such casualties are usually passed on to consumers.186 The risk of loss from premature retirement of assets because of obsolescence, as a general rule, also falls on consumers.187 Moreover, in at least one jurisdiction, the possibility that a utility asset will diminish in market value while in service is a hazard which the consumer rather than the investor must face.188 And, unlike casualty losses, those resulting from obsolescence and declining markets may occur with respect to nondepreciable as well as depreciable assets.189 Some cases have already awarded value appreciations to consumers in such situations.190

In our view, the doctrine that capital gain accompanies the risk of capital loss is sound. The following example illustrates how this principle applies to land, which, while it may have lost its usefulness in a utility's operations, has nonetheless appreciated in value while in operating status. Let us suppose that fifteen years ago the company purchased a piece of property on which to construct a building to be used as its central offices. Under established principles of regulatory law, the loss from normal wear and tear on the building-a depreciable asset-would be recouped from its ratepayers by the investors, who are entitled to have their investment in an operating asset protected.191 What would happen if, because of a change in the character of the neighborhood or because of a need for increased office space, the building were no longer suitable for the utility's operations? If the building had to be sold at a loss, clearly the ratepayers, under the precepts articulated above, would bear the burden of covering that loss.192 On the other hand, if a profit were made on the sale of the building, the gain would go to the ratepayers, at least to the extent necessary to recoup their payments for depreciation.193

As for the land on which the building is located, it is true that land does not depreciate from ordinary wear and tear the way a building does. But it is also true that the land in our example has become unsuitable-in business parlance obsolete-for continued use in the company's operations. If it, like the building, must be retired from service and sold at a loss, who bears the onus of making up that loss? Since the investors may insist upon preservation of any investment they make in an asset to be used in the utility's operations, it is the ratepayers' burden to compensate them for the loss on their investment in the land.194 Accordingly, if the land no longer useful in utility operations is sold at a profit, those who shouldered the risk of loss are entitled to benefit from the gain.195

The principle that capital gain follows risk of loss, useful as it may be, is not without its limitations. There may be situations where the assignment of risk of loss on a particular asset is not readily ascertainable, or where for some other reason the terminology "capital gains and losses" is inappropriate or inapposite.196 In such a case the second doctrinal consideration we have mentioned-the precept that those who bear the financial burden of particular utility activity should also reap the benefit resulting therefrom-comes into play.

-Economic Benefit Follows Economic Burden

Ratepayers bear the expense of depreciation, including obsolescence and depletion,197 on operating utility assets through expense allowances to the utilities they patronize.198 It is well settled that utility investors are entitled to recoup from consumers the full amount of their investment in depreciable assets devoted to public service.199 This entitlement extends, not only to reductions in investment attributable to physical wear and tear (ordinary depreciation)200 but also to those occasioned by functional deterioration (obsolescence)201 and by exchaustion (depletion).202 Recoupment of investment, particularly where the reduction is gradual, is usually accomplished by annual or other periodic allowances, commonly referred to as depreciation expenses.203 Recoupment may, however, be effected by a single charge, or by amortization of the investment loss against the ratepayers, as is more frequently done in instances of obsolescence and resulting abandonment of still, serviceable assets.204 In all cases, the expense levied against ratepayers is the difference between the original cost of the asset and its salvage value,205 estimated or actual.206

Computations of the cost of ordinary depreciation-normal physical deterioration-are made on the basis of estimates of service life and salvage value, and charges therefore are usually spread over the service period.207 Depletion allowances are similarly based on estimates of productive life, and usually are similarly spread.208 Even obsolescence may sometimes be foreseen and calculated in much the same manner.209 It is evident that if all predictions are accurate and the asset remains in service for precisely the period anticipated, the process will eventually yield to investors the exact amount of their investment, and will ultimately cost consumers the same amount. Consumers will thus absorb the investment loss and investors will be made whole.

But calculations, even of the highest predictive quality, sometimes go awry. Service life, productive life or salvage value may turn out to be more or less than originally estimated.210 Obsolescence may be slower or faster than expected in the beginning,211 or may arrive suddenly,212 and damage to or destruction of the asset may occur just as suddenly.213 In most instances, however, the consumers' financial obligation remains intact, the investors' right to recoupment remains unimpaired, and appropriate adjustments must be made.214 This is so although in terms of original expectations, the loss of serviceability is premature.215 Consumers bear the risk of that loss216 unless investors have been compensated for assuming it;217 if, as is more usual, investors have not, return of their investment is fully assured.218

In this milieu, the distribution of the risks and burdens on utility assets is apparent. Consumers must ordinarily bear the expense of normal maintenance219 and, according to some decisions, of deferred maintenance as well.220 Beyond that, consumers must usually absorb the investment losses wrought by normal wear and tear on depreciable assets,221 and by exhaustion of depletable assets.222 Even when an asset is underdepreciated at the time it is retired from service, consumers must reimburse the investors therefor.223 And when utility property becomes unsuitable by reason of obsolescence before investors have fully recouped their investment in it, the loss is passed on to consumers.224

In situations where consumers have shouldered these burdens on an asset which produces a gain, the equities clearly preponderate in their favor. This has been recognized in cases holding that rents received by a utility from the leasing of operating properties must be included in the utility's operating income.225 More directly in point, the cases, as we have seen, generally agree that consumers have the superior claim to capital gains achieved on depreciable assets while in operation226 and this, we believe, is as it should be. Investors who are afforded the opportunity of a fair return on a secure investment in utility assets are hardly in position to complain that they do not receive their just due from the traveling public. On the other hand, it is eminently just that consumers, whose payments for service reimburse investors for the ravages of wear and waste occurring in service, should benefit in instances where gain eventuates-to the full extent of the gain.227

We direct our attention now to the situation presented at bar with a view to resolving the conflicting claims of Transit's investors and farepayers to the capital gains in issue. At the outset, we lay aside the rule that capital gain accompanies risk of capital loss. As we point out today in Democratic Central Committee v. Washington Metropolitan Area Transit Commission,228 and as the Commission itself admits,229 there has never been any risk of financial loss, actual or foreseeable, on the parcels of land which concern us here. Despite an ever-present risk of obsolescence of land for utility purposes, land values since acquisition of the properties by Transit have climbed steadily in the Nation's Capital, and throughout Transit's regulatory history could only have been expected to do so. So, while the risk of obsolescence is insoluble, the risk of any consequent financial loss has been foreclosed by the rising real estate market. It would be little more than an exercise in abstract logic to invoke the principle of gain-follows-loss where the financial risk is wholly illusory. Consequently, we confine ourselves to the second doctrinal consideration discussed-that benefit follows burden-in determining where the equities lie here. The exploration we find we must make is ramified, necessitating examination of the history of the acquisition of the questioned assets, the allocation of burdens and the accrual of advantages associated with the holding of those assets, and thereafter a balancing of the respective interests competing for the gains at stake. We undertake these tasks and, discharging them, we conclude that Transit's farepayers must prevail.

-Acquisition History And Allocation of Burdens

In 1956, Transit was awarded its franchise to operate a mass transportatio system within the Washington metropolitan area.230 The franchise was conditioned upon transit's acquisition of the assets of Capital Transit Company (Capital),231 which for many years had served the area through a system in which both streetcars and buses were employed. Transit purchased Capital's assets and on August 15, 1956, commenced its own operation. The parcels of realty upon which this litigation centers were a part of Transit's acquisition from Capital.232

At the time of Transit's takeover, Capital's assets were valued on its books at approximately $23.8 million.233 Transit's purchase price was about $13.5 million,234 of which only $500,000 represented an actual cash investment.235 The balance ultimately came partly from Capital's cash on hand and partly from the sale of certain of Capital's properties, but mostly from farebox revenues after Transit went into business.236

Transit's franchise imposed the requirement that Capital's streetcar-bus system be gradually converted into an all-bus system throughout the metropolitan area.237 This program necessitated the removal of the abandoned streetcar tracks and the regrading and repaving of the abandoned track areas,238 at an estimated cost of $10,441,958.239 To accommodate that cost, PUC established a reserve for track removal and repaving,240 and directed the accrual of $1,044,196 thereto annually for ten years.241 And at an early stage in Transit's regulatory history, the question arose as to whether those accruals should be made by Transit's investors through capital contributions or from Transit's consumers in the form of higher fares.

This was an expense with two aspects, and the nature of each militated, in terms of ratemaking law, against the ratepayers. The first was the loss incidental to abandonment of the rail facilities which had passed from Capital to Transit. As we have pointed out, it has ofttimes been held that permanent losses on premature property retirements are to be amortized as operating expenses for future consumers to absorb.242 In similar fashion, PUC, Transit's then regulatory agency, treated the undepreciated cost of the tracks and streetcars acquired by Transit as a part of the depreciation expense recoverable from its farepayers.243 This item of cost was anticipated to aggregate more than $5 million.244 The second aspect of the expense was the cost of removing the tracks, and regarding and repaving the street areas from which they were removed. That cost, too, PUC ruled, was to be paid by the farepayers.245 The estimate of this item of cost was, as we have stated, in excess of $10 million.246

PUC's treatment of the latter item did not, however, go unchallenged. In Bebchick v. Public Utilities Commission,247 consumers contended that the expense of track removal and street repaving was a burden which Transit's investors had assumed by the terms of the franchise248 and so was not properly an operating cost. They asserted, in their words, that "it is unreasonable and unlawful to require the farepayers to make contributions of capital to Transit by the device of an allowance for track removal and repaving."249 To buttress this point, they adverted to Transit's purchase of Capital's assets at more than $10 million less than their book value, and argued that that came about in consequence of Transit's assumed track removal and repaving obligation. The argument failed, however, and the point respecting track removal and repaving costs was lost, when this court concluded that the benefit of the reduced purchase price was being passed on to Transit's consumers.250

A full understanding of the basis of so much of our holding in Bebchick requires some elaboration of the technique PUC utilized in dealing with the $10 million difference between Capital's book value and Transit's purchase price of the acquired assets. The portion of the purchase price assignable to road and equipment, including the parcels of realty under scrutiny now,251 was $10,339,041 less than the depreciated original cost of assets in those categories as carried on Transit's books.252 As we were later to explain,

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, [PUC] . . . ordered that two things be done. One was the establishment of [an] acquisition adjustment account to accommodate an amortization, over a ten-year period beginning August 15, 1956, of the $10,339,041 difference in acquisition costs to Capital and Transit, respectively. 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.253

The objectives of this accounting arrangement thus appear sharply. With the addition to Transit's purchase price of annual offsetting credits to operating expenses, Transit's investors would ultimately pay Capital's book value of road and equipment in full. And farepayers, in consequence of the offsetting credits, would ultimately contribute $10 million less to Transit's operational costs. The investors would, of course, benefit from depreciation at Capital's depreciation rates; theoretically, post-acquisition depreciation by this method would work out to the same amounts as if new depreciation bases had been established at Transit's acquisition costs. So, in Bebchick, after examining PUC's explanation of the foregoing,254 we concluded that "[i]n this manner the Commission gave consideration to the reduced purchase price paid by Transit."255 "The farepayers," we explained, "will receive benefit in the form of reduced depreciation in the total amount of $10,399,041 to be written off annually in the amount of $1,033,904."256

-Accrual of Advantages

As we have stated, the properties upon which our present inquiry focuses were all acquired by Transit from Capital in 1956. They came to Transit as a single package-all of the assets Capital then owned; Transit got the assets, not by buying them as such, but rather by buying all of Capital's outstanding capital stock.257 And in the great majority of instances, the purchased real estate which is no longer devoted to public use was removed from service because of the conversion from a trolley-bus to an all-bus system of transportation. These were parcels on which were located carbarns, repair shops and other buildings used and useful when the streetcars were still running;258 because these properties were unsuited to Transit's all-bus operation, the conversion rendered them surplus to Transit's needs. And, lest we forget, the financial burden of the conversion was, in its entirety, placed upon those who rode Transit's vehicles.259

From the foregoing discussion, the realities of the situation become plain enough. Transit got from Capital an on-going transportation system, including improved land, which the latter had acquired years before on obviously lower real estate markets. The price Transit paid Capital was calculated, not on fair market value of the acquired assets, but on a fixed per-share valuation of Capital's stock, which worked out to much less than even the value of the assets as depreciated on Capital's books.260 We know that the price of Capital's road and equipment was some $10 million less than book value,261 and we cannot approximate how much less than fair market value at the time of acquisition the total price for all assets may have been.262 There is nothing to justify an assumption that the price allocable to the parcels of realty here involved was anywhere near their true market value.263

In addition to what ostensibly was an acquisition of the properties at an excellent bargain,264 Transit secured other valuable advantages-all at the expense of its traveling public. Within four years after commencing operations, Transit, largely as a result of legislative policy declared in its franchise,265 began obtaining fare increases on the basis of its gross operating revenues rather than on the system rate base which had been employed for Capital.266 Thus Transit could carry on its transportation business with a minimum of invested capital, and that it has done as long as it has been a public utility.267 With the franchise-conferred monopoly268 of the lion's share of mass transportation in the Washington metropolitan area,269 Transit was enabled not only to function with a capital outlay of but $500,000 plus reinvested gains and earnings from operations,270 but also to distribute $4,390,000 in dividends-an actual paidout return of 830 percent on original equity-during the first decade of its existence.271

To the foregoing circumstances must be added others-hardly less important, and equally contributors to a potential windfall. After Transit's acquisition from Capital, the properties now questioned remained in operating status for various periods, and indeed two apparently always so remained.272 In that status they have possessed incidents and immunities they could not summon below the line. They have commanded preferred real estate tax treatment.273 They were, as above-the-line assets, a part of Transit's rate base during the years prior to adoption of the operating ratio method of establishing its margins of return.274 Even under the latter method, in vogue since 1960,275 the properties have counted in the computation of Transit's equity, a factor in turn influencing Transit's rate of return from transportation operations.276 And they have continued to appreciate in value on the steadily rising local real estate market, which unhesitatingly we notice judicially, while enjoying these advantages as operating properties.

Surely the greatest advantage to Transit's investors-and one more specifically referable to the problem at hand-was derived from the scrapping of Capital's street railways in favor of a motorized transportation system. The changeover, as we have said, was mandated by Transit's franchise,277 and the treatment accorded the changeover program worked strongly in Transit's favor. Assessment of the incidental loss of more than $5 million on Transit's riders278 resulted in rapid recoupment of investors' equity in the abandoned rail facilities by amortization through Transit's fareboxes. The expense of track removal and repaving to date-some $10 million more-was likewise assessed against the farepayers.279 Thus the conversion to Transit's all-bus operation has been speedily accomplished, and wholly without expense to Transit. And the crowning consideration is the incontrovertible fact that the conversion, at full cost to the farepayers, was the sine qua non to release of valuable real properties from operating roles in the transportation scheme for uses in non-transportation ventures.280

Both the Commission and this court have recognized the efficacy of this relationship of Transit's large-scale retirement of real estate from operating status to the track removal and repaving program and the financial burdens it imposed on Transit's farepayers. In 1959, when in D.C. Transit System, Inc. (Order No. 4577)281 Transit's sale of its Fourth Street Shops and Southern Carhouse282 was examined, and a decision was made as to the allocation between Transit's consumers and its investors of the net profits attributable to the physical improvements on those properties, PUC declared:

In light of the franchise of the company requiring a gradual program of conversion from railway to bus operations over a 7-year period from January 24, 1956, we are unable to disassociate the instant transaction from the imminent retirement of all rail property under the mandate contained in the franchise. We cannot ignore the probability that full provision for depreciation will not have been provided when the rail facilities are abandoned and retired by reason of conversion. The company has consistently taken the position that any retirement loss in this connection should be recovered by charges against the customers, and the staff has heretofore indicated its agreement.283 However, if the customers are to be required to bear the burden of extraordinary retirement losses incident to the whole conversion program, it appears equitable that they should share, at least to some extent, in extraordinary retirement gains of the nature here under consideration.284

The extent of the sharing, PUC made clear, was to be ascertained by "a fair balance between the interests of the public and those of the company's investors;"285 and on judicial review of Order No. 4577, we affirmed.286

Six years later, in D.C. Transit System, Inc. v. Washington Metropolitan Area Transit Commission,287 this court sitting en banc, was called upon to scrutinize the transaction in a different context. An objection to allowance of a depreciation charge for abandoned rail facilities was predicated in part on the claim that the sales were occasioned by the conversion program, and that, in consequence, the profits realized should be deemed a recoupment of obsolescence.288 Transit asserted, inter alia, that the sales were unrelated to the program, and although we acknowledged "some force to Transit's contention,"289 we neither reexamined nor disapproved the Commission's resolution on that score.290 But our opinion made manifest our view that if, as the Commission thought, there was a connection between the sales and the conversion program, farepayers' sharing in the proceeds was consonant with the equities of the situation.291

This became the plainer when we moved to a consideration of a second transaction urged in support of disallowance of the depreciation charge.292 That transaction was Transit's sale of its Georgia and Eastern Terminal in 1962, in which it allegedly reaped a substantial profit on the depreciable portion of the realty.293 The parties had made no effort to establish the reasons for the sale, apparently because it had occurred after the close of the audit period on which the Commission's projections were based.294 Transit argued, however, that the only evidence of record demonstrated the disassociation of the sale and the conversion program, basing that position on testimony that before the sale the terminal "was used for bus operations also."295 We pointed out that that testimony "suggests that it may have been used in Transit's rail operations as well,"296 and that "it may or may not be true that the sale was in some way related to Transit's conversion to an all-bus system."297 "If it was," we continued, "the Commission should address itself to the question, as did the PUC in the case of the Fourth Street Shops,"298 of whether the riders should be afforded some participation in the benefits of the sale."299 And we admonished that "[f]ollowing our remand, . . . the Commission should determine whether the sale of the terminal was occasioned, in whole or in part, by the abandonment of rail operations, and, if it was, whether and to what extent the farepayers should share in the proceeds."300

It cannot be gainsaid, then, that several important propositions are firmly imbedded in our jurisprudence. Transit's investors cannot automatically garner the profits achieved on dispositions of depreciable real estate which in some way have been affected by the conversion program. Relevant inquiries are whether the disposition "was occasioned, in whole or in part, by" the conversion program301 or "was in some way related to" it.302 If so, Transit's farepayers are entitled to a fair share of such profits. The extent to which they are to share depends upon "a fair balance between the interests of the public and those of the company's investors."303

-The Commission's Claimed Accounting Practice

We are advertent to the consideration that the propositions just discussed have developed in litigation directly referable to allocations of profits gained on disposition of depreciable utility assets. We think, however, that no difference in principle can be justified solely on the ground that the asset in question, or some part thereof, happens to be nondepreciable. Both PUC and the Commission have made such a distinction on the stated theory that capital gains from nondepreciable property invariably belong to investors.304 Counsel for the Commission contends additionally that we should defer to a uniform accounting rule to that effect which the Commission is said to have pursued. For two reasons, we reject these positions.

In the first place, neither the Commission nor its counsel has pointed to any agency-promulgated accounting rule operative as to the value-appreciations on the lands in question. The Compact empowered the Commission to prescribe uniform systems of accounts for carriers functioning under its jurisdiction, but required that its authority to do so be exercised "by regulation."305 No such regulation of the Commission or its predecessor agency relevant to the problem at hand has ever been identified either in the Commission's opinions or its counsel's argument.306 The opinions contain only the gratuitous pronouncements on the subject to which we have alluded,307 and the argument is similarly unrevealing.

In 1966, the Commission did adopt an accounting regulation dealing with allocations of value-appreciations of depreciable properties.308 Since then, the Commission has made explicit reference to that regulation in its decision-making and in its argument here.309 It is difficult to believe that if indeed the Commission had a counterpart applicable to the nondepreciable properties under scrutiny, it would leave us in the dark about it. We may assume that, as a matter of unwritten policy, the Commission has indulged accounting techniques conformable with its mistaken notion of a settled principle on the subject,310 but that is a far cry from the deliberate, reasoned rulemaking which the Compact obviously contemplates.311 In sum, neither PUC nor the Commission has ever spoken of an extant accounting regulation treating gains on the nondepreciable assets in issue, and it is well settled that counsel's own post hoc rationalizations are not an acceptable substitute.312

Moreover, even if we could agree that the Commission, by virtue of its brief comments in Orders Nos. 245 and 563 and those of PUC in Order No. 4577,313 had ordained that on Transit's books the appreciation on in-service non-depreciable assets should be credited to investors, the mere adoption of such an accounting practice would not terminate our inquiry. Accounting procedures are not self-justifying; like other regulatory action of the Commission, they must reflect a rational allocation of economic rights and responsibilities between a utility's investors and consumers.314 The simple fact that an agency treats an item a certain way for purposes of its uniform system of accounts does not mark the end of judicial scrutiny; on the contrary, a reviewing court must assure itself that the accounting practice prescribed is consistent with underlying substantive principles of public utility law.315 To permit an accounting device to dictate the rule of law is to allow the tail to wag the dog. To judicially accept an accounting method without inquiry as to its reasonableness is to pervert the law. And to yield, on judicial review, unquestioning obeisance to administrative authority over utility accounting is to abdicate the responsibility to review.

In the final analysis, administrative regulation by prescription of accounting methods stands on no higher ground than regulation by adjudication where substantial interests of investors and consumers are at stake. Accounting directives, no less than other exertions of administrative power, must survive the test of rationality.316 And the validity of the administrative exercise must be judged solely on the grounds upon which the agency based it.317 Our examination of the grounds which the Commission, when it acted, proffered in support of the accounting practice under scrutiny has left us wholly unsatisfied as to its rationality. We have adverted to the two premises upon which the Commission has rested its distinctive treatment of gains on nondepreciable property.318 We have also noted that by our appraisal those premises are fatally defective.319 It necessarily follows that we must now reject the claim that the Commission has effectively decreed the disposition of value-appreciations on nondepreciable utility assets by an appropriate exercise of its authority over utility accounting.

-The Balance Here

The allocation between investors and consumers of capital gains on in-service utility assets, we have declared, rests essentially on equitable considerations.320 The allocative process, we have said, necessitates a delicate balancing of the interests of investors and consumers in light of the governing equitable principles.321 The constant effort must be a distribution of the gains as fairness and justice may require. In particular instances, however, the direction in which the equities lie is so vividly marked by the circumstances of the case that the allocation properly to be made emerges plainly. We think such an instance is presented here.

The relevant principles can be stated simply. Consumers become entitled to capital gains on operating utility assets when they have discharged the burden of preserving the financial integrity of the stake which investors have in such assets.322 Their entitlement is established, too, when it is manifest that investors have benefitted measurably from special treatment accorded those assets in the past.323 And in appraising the equities, neither administrative nor judicial tribunals are at liberty to ignore economic reality. The stark reality here is that Transit's farepayers have long been saddled with the burdens incidental to the properties in issue while they remained in operating status. Theirs were the expenses of ordinary maintenance324 and depreciation,325 and the risks of loss from casualty326 and obsolescence,327 associated with those properties. These they shouldered over the years not only for Transit but also for Capital, Transit's predecessor. Theirs also were the losses wrought by the conversion program, which directly made transfers of some assets, nondepreciable as well as depreciable, from above to below the line possible.328 And Transit's investors have profited, not only from these arrangements of burdens, but also from favorable treatment of the operating assets in other ways.329 By our assessment, these circumstances tip the scale in favor of Transit's farepayers, so much so as to earn for them the gains beyond the shadow of a doubt.

This court has never adopted the Commission's position that capital gains on nondepreciable assets inure to investors only.330 We decline to adopt that position now. Our historical analysis of the interests of investors in value-appreciations of operating utility assets demonstrates beyond a doubt that the burden of safeguarding the utility's investment in all of its assets-depreciable and nondepreciable-is legally assigned in its entirety to consumers.331 As we have further pointed out, even were the risk on the lands involved here theoretically one which had been carried by the investors, that risk becomes mythical when viewed in light of the high unlikelihood that the value of the lands would decline.332 Furthermore, measuring the equities of the situation by relevant doctrinal considerations, it is plain that Transit's busriders have shouldered a very significant financial onus with respect to those lands, and that Transit's investors have benefitted uniquely in their ownership of them,333 and that a reasonable and fair allocation of their appreciation in market value accords that gain to the farepayers.334 Unlike situations wherein the basis for profitsharing by farepayers may consist solely in the loss-risk factors associated with depreciable property335 and the burden of contributions to depreciation reserves336-considerations largely or entirely absent in instances of nondepreciable property-farepayers' equities founded upon their assumption of the remaining economic responsibilities337-including those occasioned by a costly conversion program338-and upon investors' enjoyment of especially-conferred advantages not generally available to others,339 are precisely the same whether the source of the gain is depreciable or nondepreciable property. We hold that a farepayers' claim so predicated must be recognized and effectuated whether the property be of the one character or the other.

With respect to the properties not directly related to Transit's conversion to an all-bus transportation system, the equities also weigh in the riders' favor. Transit acquired all of its landholdings at a tremendous bargain when it assumed Capital's franchise,340 and enjoyed valuable special benefits for them in the years which followed.341 In none of these benefits did the farepayers share, although they had been charged with major economic responsibilities stemming from Transit's takeover of its predecessor's operations.342 Given these circumstances, we would be loath to say that the riders are not equitably entitled to the value appreciations on these properties as well. We hold that the farepayers were entitled to all appreciations in the value of the assets in issue, depreciable and nondepreciable,343 accruing during their tenure as operating properties.V

The foregoing considerations lead us to the conclusion that Order No. 773 is invalid and must be set aside.344 Thus we reach, as the final chapter of this review, the disposition required by the circumstances that the fares fixed by that order have been charged and paid since it went into effect. To this matter we now proceed.

The initial question is whether the fashioning of relief from the predicament we face lies properly within the judicial sphere or, instead, the administrative. It is clear to us beyond peradventure that this court and the Commission should share the burden in this case.

A judicial determination that a Commission fare order was invalid has normally called for remediation in a dual aspect. First because the invalid order could not be indulged continued operation, a resetting of fares was ordinarily needed for the future.345 When there was such a need, it is evident that it had to be met by the Commission. We possess no ratemaking powers as such; our authority is confined within the traditional bounds of judicial review. "Our function" in relation to pure ratemaking "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."346 "Our task," we have said, "is likewise at an end when we have ascertained that the Commission has not done so."347 On the other hand, "even where agency action must be set aside as invalid, but the agency is still legally free to pursue a valid course of action,"348-not the present situation349 -"a reviewing court will ordinarily remand to enable the agency to enter a new order after remedying the defects that vitiated the original action."350

The second, but quite different, aspect of the relief required where a court has declared a Commission fare order to be invalid, is remediation of the consequences wrought by the order while it was actually operative. This is a problem which can neither be addressed nor solved by another order merely purporting to fix rates. "The Commission," we have declared, "possesses no authority to fix rates for the past."351 As we have pointed out, "[a]n order prescribing the lawful fares to be charged by a public utility, being essentially legislative in character, ordinarily speaks only for the future."352 We have heretofore admonished that "we find nothing in the statutory provisions governing the Commission's regulatory responsibilities that indicates an intent to depart from [the] 'customary pattern of fixing rates prospectively."'353 Moreover, Order No. 773 has been superseded by later fare orders354 and, because Transit's transportation operations have since Order No. 773 been publicly assumed, there is no possibility of any additional ratemaking by the Commission.355 Rectification of the illegal consequences of an unlawful rate order must then consist in something other than retroactive ratemaking.356

The remedy, rather, is restitution. That was made plain by the decision of this court en banc in Williams v. Washington Metropolitan Area Transit Commission.357 There we found that two orders of the Commission fixing fares for Transit were invalid, and that remand to the Commission for reconsideration of those orders would be futile.358 "[I]t follows," we held, "that Transit must be compelled to make appropriate restitution for the increased fares it collected" under those orders.359 We drew support for that conclusion from the "'principle, long established and of general application, that a party against whom an erroneous judgment or decree has been carried into effect is entitled, in the event of a reversal, to be restored by his adversary to that which he has lost thereby."'360 "This principle," we explained, "is no less applicable to erroneous orders of an administrative agency than to those of a court."361 Here, no less than in Williams, "given our conclusion" that in formulating Order No. 773 "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."362

Thus the division of labor to which we have adverted363 becomes apparent. While promulgation of fares is administrative business,364 the fashioning of restitutional remedies is a judicial function.365 We are thus brought to a consideration of the criteria by application of which the amount of restitution in this case must ultimately be determined.

Restitution is essentially an equitable remedy.366 As we said in Williams, "our decision in this regard is to be governed by the equitable considerations which apply to suits for restitution generally."367 So, "[t]he basic question" in quests for restitution "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."'368 To be sure, "[o]rdinarily . . . 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,"369 and we have had previous occasion to do just that.370 "[R]estitution," however, "is not a matter of right, but is 'ex gratia, resting in the exercise of a sound discretion;"'371 it "is granted to the extent and only to the extent that justice between the parties requires."372 It accordingly "lies within our authority to direct restitution in an amount less than the whole sum of the increased fares collected under the invalid order, or to deny it altogether, if compelling equitable considerations so dictate."373

We think the proper measure of restitution in this case lies somewhere between these two extremes. Here, as in Williams, "we have found the Commission's action in approving the fare increase to have been invalid, and . . . we have no basis in later valid action of the Commission for inferring that the rates set by [that order] were in fact, just and reasonable. . . ."374 Here, no more than there, do we find warrant to "give legal effect to those rates by withholding restitution altogether."375 At the same time, as in Williams, "we see no obstacle to our permitting the Company to retain some, though not all, of the proceeds of a fare increase if there is reliable evidence suggesting that it would be inequitable to compel restitution in a greater amount."376

As already indicated, the restitutional task at hand, as a judicial function,377 has become the responsibility of this court.378 We inherit that responsibility as an inseparable incident of our duty to review Commission action when it is properly challenged,379 and to specify appropriate remediation when the action reviewed is found to be erroneous.380 In discharging the obligation thus entrusted to us, we must draw upon the resources at our command.381 As we observed in Williams, "[i]n 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."382 But "[n]evertheless, 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."383

We believe that the best approach to adjustment, in the restitutional sense, of the competing interests of Transit's investors and farepayers in this litigation is a combined effort of the Commission and this court.384 The administrative expertise of the Commission is in any event a potentially valuable aid to solution of the restitutional problem, and is the more so in light of the Commission's familiarity with many of its facets. "Judicial and administrative agencies," we recall, "'are to be deemed collaborative instrumentalities of justice."'385 We are also reminded that "[c]ourts have frequently called upon administrative bodies . . . for assistance in connection with the issues falling within the area of administrative competence."386 In recent years, we have had occasion to enlist the Commission's assistance in working out the elements of restitution made necessary by another order invalidly raising Transit's fares.387 In the case at bar, we do so once again, and we take this opportunity to outline the techniques the Commission may utilize in providing that assistance.

First, the amount of restitution must be ascertained. This determination will require identification of all properties which Transit shifted from above to below the line prior to issuance of Order No. 773. Once identified the market value of the properties at the time of their transfer to nonoperating status will have to be established. The dollar amount of restitution can then be arrived at by subtracting the book value of the properties from the market value at the time of the transfer. This figure will represent the appreciation in value of the assets, which should have been credited to the riders when the fares prescribed by Order No. 773 were set.

It can be readily seen that this method of determining the amount of restitution will in no way reduce Transit's return during the period the order was in effect to a confiscatory level. As we have pointed out, the only vitiating defect in Order No. 773 was the Commission's failure to allocate to the riders the gain in value of the properties with which we are concerned;388 in all other respects the fares set by that order must be accepted as just and reasonable. Thus, restitution of the gain to the riders has the automatic effect of reducing the fares collected during the operative period of Order No. 773 to the level of reasonable return to which Transit was entitled.

There remains only the problem of how the amount of restitution, once determined, is to be applied to benefit the farepaying public. As we have observed, regulatory agencies may only fix rates for the future.389 Moreover, public takeover of Transit's franchise has occurred,390 and, as a result the Commission will no longer be setting fares for Transit.391 Thus the rate mechanism cannot be the instrumentality for channeling relief to the busriders, but there are many ways in which the sum owing in restitution could be utilized profitably for the bus-riding public. The choice will become the task of this court after the remand is completed, and we invite the Commission to delve into it on the remand. In light of the fact that the operation of Transit's bus lines is now the responsibility of the Washington Metropolitan Area Transit Authority.392 by terms of the National Capital Area Transit Act of 1972,393 it would be prudent for the Commission, in framing recommendations as to the precise restitutional relief to be accorded, to consult the Authority and to consider such proposals as it might be inclined to advance.

In so resolving this case, we have remained heedful of the recent passage of the legislation last mentioned, and the resulting public ownership and operation of Transit's transportation system in the Washington metropolitan area.394 The takeover of Transit's system in no way affects the disposition upon which we have settled. As we have held, correlative rights and obligations between Transit and its consumers spring from the invalidity of Order No. 773.395 Those rights and obligations are as litigable as any others, and their enforceability against Transit survives the metamorphis of its transportation system from private to public ownership. While Transit's operating franchise ended immediately upon public acquisition of its facilities,396 its corporate existence outlives that event,397 and so also do its unassumed liabilities.398 And while the Commission can no longer set fares for transit service,399 its jurisdiction to finish existing litigation-otherwise than by ratemaking-remains intact.400 Our disposition neither requires nor tolerates further rate-making respecting the matters at issue,401 but only restitutional activities occasioned by invalid ratemaking in the past.402 Our disposition, too, leaves interested parties free to litigate to a complete and final conclusion the rights and obligations we have identified.

Order No. 773 is set aside. The record is remanded to the Commission for further proceedings consistent with this opinion. Our jurisdiction over the case is retained in full.403

So ordered.

COMMISSION'S STATEMENT AS TO HISTORY OF REAL PROPERTIES

PURCHASED AUGUST 15, 1956, BY D.C. TRANSIT SYSTEM,

1. M. Street Shops, 3222 M Street, N.W. (now known as M Street Estates, Inc.). This property was used as a general streetcar repair shop until June 30, 1963, when it was placed in a non-operating (below-the-line) status. From that time until May 31, 1964, it was used for storage of obsolete equipment. On May 31, 1964, title to the property was transferred to M Street Estates, Inc., which is wholly-owned by D. C. Transit of D.C. Since its incorporation, $1,106,210 has been spent on converting it into rental space for the General Service Administration. For the year 1969, M Street Estates had a net income of $74,519.64 and its retained earnings were $348,831.95 at December 31, 1969.

2. Grace Street Shop (now known as Grace Street Estates). The property housed the way department storeroom, an electrical repair shop and a garage for trucks until September 30, 1963, when it was placed in a nonoperating (below-the-line) status. From that time until April 30, 1970, it was empty and unused. On April 30, 1970, title to the property was transferred to Grace Street Estates, a wholly-owned subsidiary of D. C. Transit System, Inc., of D.C.

3. General Office Building, 3600 M Street, N.W. (now known as 3600, Inc.). This property housed D. C. Transit's officers at the time D. C. Transit came into existence, but later was partially rented to outsiders. After being placed in a non-operating (below-the-line) status on January 1, 1964, the building was rented mainly to outsiders but continued to house a portion of the D. C. Transit officers, around 20% of the building space for a while, and then to 15%. On December 31, 1967, title to the property was transferred to 3600 Inc., a whollyowned subsidiary of D. C. Transit System, Inc. of D.C. Since being incorporated, the sum of $115,968 has been invested in office renovations and it is now being rented 100% to outside parties. In the year 1969, 3600 Inc., had net income of $8,486.29. Its retained earnings stood at $58,511.32 on December 31, 1969.

4. Central Garage on Georgia Avenue, N.W. (now known as Georiga Avenue Estates). This building was used as a bus garage until it was placed in a non-operating (below-the-line) status on September 30, 1958. After being placed below-the-line, it was leased to the Post Office Department. On May 31, 1964, title to the property was transferred to Georgia Avenue Estates, Inc., a whollyowned subsidiary of D. C. Transit System, Inc., of D.C. Since then some $19,657 has been spent on building improvements while at the same time the Post Office Department has continued to be its tenant. The net income of Georgia Avenue Estates for 1969 was $29,547.36. Its retained earnings stood at $118,049.85 on December 31, 1969.

5. Northeastern (Eckington) Carhouse (now known as Fourth Street Estates). This property was used as a carhouse until streetcar service was discontinued in that area of the city on September 7, 1958. After that, the building remained empty and unused until May 31, 1959 at which time it was placed in a non-operating (below-the-line) status. As non-operating property, it was rented to outsiders. On May 31, 1964, title to the property was transferred to Fourth Street Estates, Inc., a wholly-owned subsidiary of D. C. Transit System, Inc., of D. C. Subsequently, the sum of $472,628 was spent on building improvements. It is currently being leased as a warehouse to outside parties. In the year 1969, Fourth Street Estates realized net income of $15,804.66 and at year end (1969) its retained earnings stood at $22,030.92.

6. Navy Yard Carhouse (now known as L Street Estates). This property was used as a carhouse until the last street cars were discontinued on January 28, 1962. Obsolete equipment was then stored there. On June 30, 1963, the property was placed below-the-line (in non-operating status). It continued as a storehouse for obsolete equipment until the date of its incorporation, May 31, 1964. On that date title to the property was transferred to L Street Estates, Inc., a wholly-owned subsidiary of D. C. Transit System, Inc., of D.C. $392,384 has been spent on converting the carhouse to warehouse and office space for outside rental since its incorporation. 1969 net profits realized by L Street Estates were $62,391.74. Its retained earnings at December 31, 1969 were $274,281.18.

7. Georgia and Eastern Avenue Terminal. This property was used jointly as a rail terminal and bus terminal. Its use as a rail terminal was discontinued on January 3, 1960 and its use as a bus terminal ended on September 11, 1960. It remained unused thereafter. On October 31, 1960, it was placed in non-operating (below-the-line) status and subsequently sold, on December 21, 1962, to Joseph Ginsberg.

8. Southern (7th Street) Carhouse. This southeast property was used as a carhouse until it was sold on January 16, 1959 to the D. C. Redevelopment Land Agency.

9. Fourth Street Shops. This southwest property was used for general streetcar and bus repairs until it was sold together with the Southern Carhouse on Jaunary 16, 1959 to the D. C. Redevelopment Land Agency.

10. Trinidad Garage. This property was used as a bus garage until September 10, 1966. It was vacant thereafter until May 8, 1970, when sold to the D. C. Redevelopment Land Agency.

11. Eastern Garage. This property was used as a carhouse until December 31, 1961. It then became a bus garage and was used for that purpose until September 10, 1966, when it was vacated. It has been empty ever since although still classified as operating property on the company books.

12. Brookland Garage. This property was a bus garage until September 10, 1966. Since that date retired buses have been stored there. It remains in operating status on the books to this date.

MacKINNON, Circuit Judge, concurring in part and dissenting in part:

The foregoing opinion addresses the question of whether the difference in fair market value over book value of certain parcels of real property including both depreciable (buildings and equipment) and nondepreciable (land) segments, which had appreciated in value during their inservice life, should inure to the benefit of the farepayers or to the benefit of the investors of Transit in the ratemaking decision, when transferred from operating ("above the line") to non-operating investment status ("below the line"). The question arises on review of Order No. 773 in which the WMATC ("Commission") ordered a fare increase without consideration of the transfer of these appreciated properties. The majority concludes that this constituted error and accordingly sets aside the order.

The initial question of whether such transfers from operating to non-operating status give rise to any cognizable gain in the ratemaking decision is resolved in the companion opinion-Bebchick v. WMATC, No. 23,720, at Part III, 158 U.S.App.D.C. ---, 485 F.2d 868 (hereinafter Bebchick). The conclusion reached therein is that the transfer of the properties from above to below the line resulted in ratemaking consequences identical to those of an outright sale of the same assets. While in a different context and for different purposes such treatment would raise serious questions, I accept it for our present purposes.

In considering the competing claims of Transit's investors and consumers for the benefits derived from these transfers, the majority concludes that the farepayers have the superior claim in all instances. It is my view, with respect to the depreciable properties, that the majority is on solid ground in awarding the gain to the farepayers, at least to the extent of the depreciation reserves that are maintained in respect of the property.1 While I have some question as to the farepayers' inexorable right to amounts over and above the depreciable cost of the asset,2 I concur in awarding them the total appreciated gains under the circumstances present here.3

But the issues surrounding the appreciated value of the nondepreciable assets (the land itself), raise different and more difficult questions.

While the majority admits that a risk of loss analysis is inapplicable here due to the inevitable appreciation of urban land values, it blithely concludes without close analysis that the rules which place the risk of loss on farepayers as to depreciable property are equally applicable to nondepreciable assets. I would like to disassociate myself from such dangerous dicta and will attempt to point out the flaws in the majority's reasoning. There is a rational basis upon which to distinguish between depreciable and nondepreciable assets in this context and the Commission's application of an accounting practice which reflects this should be upheld.

Aside from the risk of capital loss, the other principal reason the majority advances for its conclusion with respect to the land is a basic feeling that the equities of the situation, in light of the history and circumstances of Transit and its acquisition of the properties in question, require any "loose gains" coming into the company to be credited to the consumers. This the majority frames in terms of the rule "benefit follows burden,"4 but admits that this consists in "determining where the equities lie." Supra at 811.

Most vital of these equities in the majority opinion is the fact that the land was intimately related to the conversion program from a street railway to an all-bus operation, and, since the extraordinary conversion costs were borne by the farepayers, any extraordinary gain resulting therefrom should benefit the farepayers and go toward alleviating their conversion burdens.5 Since the conversion program was a sine qua non of the resultant gains, the majority observes, an overriding equitable consideration arises with respect to these conversion-related properties. While this has a surface attraction, there are some problems with its application here and with its interrelation with the other relevant policies.6 Yet, even assuming arguendo that the majority is completely correct in its determination that equities surrounding the conversion can constitute a dispositive equitable factor, it does not extend, of course, to those properties not in any way related to the conversion program. It is with respect to those properties, the non-related, non-depreciable assets, that the greatest difficulty arises in adopting the position of the majority. Here the legal grounds for awarding the gains to the farepayers become most attenuated.

The underlying basis for the majority's equitable approach is that in light of the demise of the "fair value" theory of ratemaking7 investors are not considered to have any protectable constitutional interest in the actual assets of a publicly regulated utility but rather are entitled only to a fair return on their initial investment.8 Therefore, arguably the logical extension of this is that any gains on disposal of appreciated properties are to be apportioned as between the farepayers and the investors solely on an equitable basis in light of all the relevant facts and circumstances. Although the question is not without difficulty, it is my view that this approach is incorrect as applied in the majority opinion. This constitutional policy sets only the outer dimensions of permissible ratemaking and is not a license for us to overturn Commission actions in conformance with accepted accounting procedures whenever we feel the equities tend to support a contrary result. It is thus my conclusion that the policy of judicial deference to agency actions requires that we uphold this order in respect to the land as not arbitrary and capricious insofar as it distinguishes between depreciable and nondepreciable assets.

Much of the rationale behind the majority's view that the consumers would be liable for any capital loss on the land and therefore be entitled to any gains is derived by analogy to its analysis of the depreciable assets.

There is a respectable amount of authority both inside and outside this jurisdiction which supports the majority's disposition of the depreciable assets. The basic notion is that since the farepayers must make good the shareholders' investment on depreciable properties through the depreciation reserve, and bear the risk of loss through obsolescence in that they must make up for the underdepreciated cost of any prematurely retired asset, if the asset should be sold for a profit they equitably should benefit at least to that extent. If it is sold for less than book value they must make up the difference between that amount and the accumulated depreciation to date. Therefore, the reasoning goes, if it is sold at a profit it is only equitable that he who bears the risk of loss should similarly reap the gain.

The fundamental premise of this principle is that the farepayers do in fact bear the risk of loss of obsolescence. In Washington Gas Light Co. v. Baker, 88 U.S.App.D.C. 115, 188 F.2d 11 (1950), cert. denied, 340 U.S. 952, 71 S. Ct. 571, 95 L. Ed. 686 (1951), this court adopted this view and held, with respect to depreciable properties, that the farepayers may be charged with the unrecovered cost9 if the investors have not been compensated in some other way.10 A similar result was reached by Justice Murphy of the Minnesota Supreme Court in Minneapolis Street Ry. v. Minneapolis, 251 Minn. 43, 86 N.W.2d 657 (1957) which held, citing Baker with approval, that the obsolescence loss occasioned by abandoned streetcar facilities must be borne by the farepayers.11

When the retirement of the assets has resulted in a gain, a number of courts outside this jurisdiction have credited the gain to the depreciation reserve to offset the farepayers' burden of making good the investors' unrecovered costs,12 and more importantly, there is ample authority within this jurisdiction for such treatment. In D. C. Transit System, Inc. (Order No. 4577) 30 P.U.R.3d 405 (D.C.Pub.Utils.Comm'n 1959), the PUC noted that under its Uniform System of Accounts a net profit on the sale of depreciable improvements should ordinarily be credited to the depreciation reserve as salvage (and thus benefit the farepayers).13 In D. C. Transit System, Inc. (Order No. 245), 48 P.U.R.3d 385 (WMATC 1963), "the Commission recognizes that 'gains' may be experienced on disposal of depreciable items and these are indeed used as offsets to depreciation under the heading of 'salvage."' 48 P.U.R.3d at 403-404. Similarly, in D. C. Transit System, Inc. v. WMATC, 121 U.S.App.D.C. 375, 350 F.2d 753 (en banc, 1965), this court decided that the Commission's decision to benefit the farepayers with the gains from disposal of depreciable properties to the extent of the depreciation taken and beyond was reasonable in light of the peculiar equitable circumstances in that the farepayers were required to bear the enormous conversion costs that occasioned the gains realized.14 The Commission has recently stated that "there is no question that, when depreciable operating property is sold and a gain is realized, the gain should be used to reduce the depreciation expenses which ratepayers have paid but which the company, because of the gain, does not actually incur." D. C. Transit Sys., Inc. (Order No. 1090), 85 P.U.R.3d 508, 513 (WMATC 1970).

Thus with regard to depreciable properties the approach adopted by the majority is well-supported and equitable but this does not justify a procrustean attempt to force nondepreciable assets into the same mold.

a. Precedents

Within the District, a number of administrative decisions have uniformly held to the contrary of the analysis adopted by the majority. This is admitted by the majority15 but it is claimed that the administrative approach was adopted without critical analysis. Outside the District, there is a paucity of cases and the few that are cited cannot directly support the action taken here.16 The majority observes the dearth of decided cases and seems to take this as a "license" to deal with the question as if writing on a clean slate. It would appear, however, that the lack of cases on point is probably more indicative of the fact that no one previously has ever imagined of or argued for such a novel approach with respect to nondepreciable assets.

Within the District, the issue has been mentioned in administrative opinions but we have never directly considered it.17 Under both the PUC and WMATC, profits on sales of land have been treated as "a proper credit to earned surplus" and thus as benefiting the investors. D.C. Transit Sys., Inc., (Order No. 4577), 30 P.U.R.3d 405, 409 (D.C.Pub.Utils, Comm'n 1959); D.C. Transit Sys., Inc. (Order No. 563) 63 P.U.R.3d 32, 34 (WMATC 1966). More directly on point is D.C. Transit Sys., Inc., (Order No. 245) 48 P.U.R.3d 385 (WMATC 1963) in which an argument very similar to the approach adopted by the majority here was advanced to the Commission and rejected by it. In that case it was argued that gains realized on the sales of certain pieces of land might be used to offset some of the losses on the premature retirement of rail facilities borne by the farepayers. In clearly holding to the contrary the Commission stated:

While the ratepayers may have a claim to the depreciable property, at least to the extent of the depreciation reserved, no such claim can be directed to land.

48 P.U.R.3d at 399 (emphasis added).18 And further:

If land becomes of no further use and is disposed of at a profit, the investor is entitled to the profit; or, if at a loss, the investor must suffer the loss.

Outside this jurisdiction, I agree with the majority20 that the cases can be read only to stand for the proposition that the benefit of capital gains accompanies the risk of loss. In New York Water Service Corp. v. Public Service Comm'n, 12 A.D.2d 122, 208 N.Y.S.2d 857 (1960) affirming New York Water Service Corp., 7 P.U.R.3d 32 (N.Y.Pub. Serv.Comm'n 1955), the court upheld a determination by a regulatory commission which passed on to the consumers a profit reaped on the sale of land. The controlling reason was that under the system of accounting adopted by that agency, any loss on a sale of land was required to be debited to the depreciation reserve and thus charged to the consumers. "The utility is thus protected from a loss in the sale of land in its operations; it seems reasonable it should pass on a profit to the consumer." 208 N.Y.S.2d at 863-864. Thereafter in Lexington Water Co., 72 P.U.R.3d 253 (Ky.Pub.Serv.Comm'n 1968), the same rule was applied by the Kentucky regulatory commission, citing N.Y. Water Service. "If it is proper to recover losses of non-depreciable property through amortization, then conversely it should be proper to amortize gain on such property." 72 P.U.R.3d at 259-60. Yet this decision was reversed by the reviewing court on the grounds that N.Y. Water Service was decided as it was only because of its unique accounting procedures-procedures absent in the Kentucky case.21 The court believed that the risk of gain or loss had in fact been borne by the investors. Lexington v. Lexington Water Co., 458 S.W.2d 778 (Ky.1970). This case can, then, be cited in direct opposition to the approach adopted by the majority:22

Profit made from the sale of non-depreciable land no longer used in serving customers is not an ingredient to be considered in fixing rates. The customers had no interest in the profit realized on the sale-it belonged to the stockholder.

Id. at 780. the majority also cites Columbus Gas & Fuel Co. v. Public Utils. Comm'n, 292 U.S. 398, 54 S. Ct. 763, 78 L. Ed. 1327 (1934) as indicating that sudden losses in market value of land may conceivably be borne by consumers. However, the Supreme Court denied the claim because no such risk of value diminution from abandonment was imminent. Yet it appears that the Court would have allowed a system which treated land as a "depreciable" asset for all purposes (see note 25, infra) in which case the risk of loss would in fact be on the farepayers.

Therefore, while it is clear that the majority is correct in reading these cases as standing for "the broader principle that the benefit of a capital gain follows the risk of capital loss."23 it clearly fails to recognize the importance of the applicable system of accounting and the Commission's practice and pronouncements in determining where in fact these risks do lie.

b. Who in fact bears the risk of loss?

(1) The Commission's pronouncements

It is clear that under the Commission's Uniform System of Accounts, land is treated as a nondepreciable asset and any gain or loss is a risk not of the farepayers, but of the investors.24 Certainly the Commission could have adopted a different system placing the risk of loss on the farepayers if it had so desired.25 Yet the Commission has repeatedly said it is the investor's risk of loss. D.C. Transit Sys., Inc., (Order No. 245) 48 P.U.R.3d 385, 399, 400 (WMATC 1963); D.C. Transit Sys., Inc. (Order No. 4577) 30 P.U.R.3d 405, 409 (D.C.Pub.Utils.Comm'n 1959); D.C. Transit Sys., Inc. (Order No. 563), 63 P.U.R.3d 32, 34 (WMATC 1966); see also Respondent's brief at 9-10 and the Commission's brief in Bebchick at 32.

It is reasonable to adopt such an accounting method and as such it is beyond our power to overturn it, especially in light of consistent Commission adherence thereto. The Commission (as is usual with most regulatory agencies) has express statutory authority to establish uniform accounting rules26 and such rules are controlling unless clearly arbitrary and capricious. D.C. Transit Sys., Inc. v. P.U.C., 110 U.S.App.D.C. 241, 292 F.2d 734 (1961). Public utility regulation cases are replete with recitations of the principle that deference is to be accorded an agency's accounting treatment of various transactions unless clearly unreasonable. See, e. g., American Telephone & Telegraph v. United States, 299 U.S. 232, 236-237, 57 S. Ct. 170, 81 L. Ed. 142 (1936); Northwestern Electric Co. v. FPC, 321 U.S. 119, 124, 64 S. Ct. 451, 88 L. Ed. 596 (1944); Arkansas Power & Light Co. v. FPC, 87 U.S.App.D.C. 385, 185 F.2d 751 (1950); see also infra at 844-845. Accounting rules themselves reflect basic policy judgments carefully arrived at and should not be hastily overturned.

The reasonableness of a system of accounting which treats land as nondepreciable seems manifest. Land does not wear out in the conventional sense of buildings and equipment. Neither it is a wasting asset such as resources subject to depletion allowances. Moreover while there obviously may be exceptions, as a general rule it is extremely unlikely that the fair market value of land in metropolitan areas would decrease below cost over a period of time.27 This general stability of land values insures the integrity of the shareholders original investment in the vast majority of situations and it is just for that very reason that it is a widespread practice among regulatory agencies to treat land as nondepreciable. Under these circumstances it seems that the Commission's decision to treat land as a nondepreciable asset and to credit or debit any gain or loss on disposition to the earned surplus account is eminently reasonable and should be sustained. It certainly is a settled principle that land is nondepreciable and to call this is a "mistaken notion"28 is wholly unjustified. It is familiar law that great deference is to be accorded consistently applied administrative decisions and interpretations of its own rules and regulations and here, as the majority admits,29 the administrative decisions have uniformly treated gain or loss on land as a concern solely of the utility's investors.

(2) Criticism of the majority's conclusion in this regard

How then does the majority arrive at the conclusion that the risk of loss on land dispositions is borne by the farepayers? The answer is not completely clear,30 but essentially the majority concludes that, in spite of what the Commission has done in the past and says it will do in the future, if faced with a concrete situation in which land becomes obsolete for the company's purposes and the market value drops below cost, it sold at a loss the Commission will place the burden of making good the original investment on the consumers just as is done with depreciable properties for which insufficient depreciation has been taken due to unforeseeable obsolescence.

The majority repeatedly speaks of "obsolescence and declining markets" with respect to land.31 However, the concept of obsolescence in conjunction with land simply does not work. The truth of the matter is that if land is sold at a loss due to sudden obsolescence the loss falls on Transit's investors-and statements such as that in the text, supra at note 322, are simply wrong as to land. The only authority to the contrary is distinguishable easily on the basis of different accounting systems and different administrative practices in other jurisdictions.32 There is no depreciation reserve mechanism as to land whereby farepayers must make good the original investment as in the case of depreciable properties-and it is the fact of depreciation that dictates the farepayers' burden as to depreciable properties, not the fact of possible fluctuations in market value. The hypothetical on pages 807-808 of the majority opinion insofar as it deals with land is completely erroneous. It simply states ipse dixit the startling conclusion that it is "the notepayers' burden to compensate [investors] for the loss on their investment in the land." For authority, footnote 194 refers to cases (text and cases at footnotes 211-218) that deal exclusively with depreciable property and are of no authority for the proposition stated. Repeatedly the majority speaks of "obsolescence" as to land but refers the reader only to cases involving obsolescence as to depreciable property.33 Such citations beg the very question before us which is whether or not the treatment accorded depreciable property should be extended as well to nondepreciable assets. While there might be some "inside information" that is not apparent, it stretches credulity to suggest that the Commission would depart from its own system of accounting and repeated past administrative pronouncements to place the risk of decline in market value of land through obsolescence on the farepayers. And to use that as an ostensible basis for awarding the farepayers the gains on that property is tortured logic at best.

The majority does conclude that even though this analysis would support an award of the gains to the farepayers if there were a palpable risk of declining markets, that risk is not present here.34 Thus it appears that the "obsolescence" of which the majority speaks is in reality only the threat of declining market values. And I must repeat that this again demonstrates that "obsolescence" is a concept applicable only to depreciable property in this context. It is not the risk of sudden declines in market value of depreciable property that dictates the award of gains to the farepayers, but rather the fact of depreciation, in that farepayers are required to make good the cost investment of the prematurely retired asset through the depreciation mechanism. And this in turn is founded, of course, on the fact that depreciable property invariably wears out or is consumed. This simply has no application to nondepreciable property and it is undisputed that land is nondepreciable. Accounting principles are not conjured up out of the air, but are themselves representative of studied policy judgments. As such they deserve some respect and where an administrative agency consistently adheres to them, that should not be the subject of de novo judicial examination.

Moreover, the majority does not even maintain internal consistency. Even while disclaiming any reliance on "risk of capital loss" as to land in this case due to the inevitability of land value appreciation,35 the majority seems unable to refrain from further gratuitous reference to that doctrine to lend support to its result.36 It also reappears in discussing the supposedly distinct ground of "benefit follows burden" (the dispositive ground in the majority's opinion) and figures importantly there, despite the prior disclaimer of reliance thereon for the purposes of this case.37

Since notions of risk of loss cannot and do not support the majority's disposition of the gains from land, what other grounds are advanced in the opinion? The second and controlling "doctrinal consideration" in the majority opinion is termed "economic benefit follows economic burden". The makeup of these "burdens" is crucial. A large part of this consists of enumerating the various equities of the farepayers in light of the history and circumstances of Transit.38 My brief analysis of these equities follows.

a. Conversion-relationship

Running all through the opinion is a basic equitable notion that gains on properties which are intimately related to the conversion to an all-bus system undertaken by Transit as a condition of its charter, should inure to the consumers who are bearing the enormous costs of the conversion program. It is undisputed that consumers are bearing the $5-15 million cost of the conversion. In the majority opinion, this fact leads to the conclusion that "the crowning consideration [in totaling the various equities] is the incontrovertible fact that the conversion, at full cost to the farepayers, was the sine qua non to release of value properties from operating roles in the transportation scheme for uses in non-transportation ventures." Supra at 816. While the proximity of the relationship of the land to the conversion process is an important equitable factor, it is not a legally sufficient ground in and of itself to support the majority's result. To dispel all such doubt, the following analysis seeks to trace the proper role of "conversion-relationship" in light of past precedents.

(1) Precedents

This concept is derived from cases in this jurisdiction indicating that with respect to depreciable properties for which obsolescence losses are incurred due to the conversion, consumers should be allowed to share equitably in the proceeds on disposition. How this principle developed and to what extent it is applicable here requires a close analysis of the cases in which it has appeared.

It first arose in D.C. Transit Sys., Inc., (Order No. 4577) 30 P.U.R.3d 405 (D.C.Pub.Utils.Comm'n 1959). In that case there were profits on the sale of conversion-related properties over and above the depreciable cost of the assets.39 The PUC noted that under its Uniform System of Accounts, all gains normally should be credited to the depreciation reserve as salvage (to benefit the consumers). Id. at 410. Then it observed that this was a highly unusual situation in that there were gains over and above the amount needed to retire the original cost of the assets and therefore departure from the Uniform System of Accounts was deemed warranted. The company sought the "over and above" gains in total, but the PUC noted the compelling equity of the close relation of the gains on these properties to the conversion program.40 This is somewhat odd because the PUC really approached the question "backwards." That is, since the Uniform System of Accounts required all gains to go to the farepayers, why should it not have searched for some equities on the side of the investors rather than the farepayers. Somehow the PUC seemed to adopt a presumption that all "over and above" gains should now go to the investors, contrary to its own Uniform System of Accounts.

Nevertheless, this approach was later cited by this court sitting en banc as a valid method of determining when gains on depreciable property (presumably over and above the depreciation reserve although this is not clear) can be applied to offset other charges arising out of the conversion. In that case the question was whether a profit on the depreciable portion of an asset41 could be used to offset an obsolescence charge for the retirement of a different asset, underdepreciated due to the conversion. The court seemed to say the profit on one piece of depreciable property could not be used to offset the obsolescence deficiencies on another asset unless the requisite relationship to the conversion were established. 350 F.2d at 775-776. The court remanded to the Commission to determine whether the profit-yielding property was in fact conversion-related.

On remand, however, the Commission further clouded the question. After determining that the property in question was not conversion related (which would have settled the issue) it continued:

Therefore, the ratepayer is not entitled to share in any portion of the proceeds of that sale, unless there was a profit on the depreciable portion of the asset sold. There was none in this case.

D.C. Transit Sys., Inc., (Order No. 563), 63 P.U.R.3d 32, 33-34 (WMATC 1966). This is confusing in that the Commission seemed to say in a casual manner that if the sufficient conversion-relationship were shown, the farepayers would have a right to the profit on nondepreciable assets-a principle it has never accepted. It is correct in that farepayers are entitled to profits on depreciable properties to some extent regardless of the conversion relationship. And since there was none here, farepayers are not entitled to any portion of the proceeds of the sale. The tricky word is "therefore" and it must be concluded that this is merely ill-considered loose language on the part of the Commission.

The principle boils doen to this: farepayers may get the gains on depreciable properties in all situations on that particular asset up to the depreciation reserve, but gain over and above that42 will not be credited to offset other depreciation obligations incurred on other assets due to the conversion program unless the gains also were occasioned by the conversion. This is a reasonable approach, although it is based on the Commission's rather surprising position of inclining to give all "over and above" gains to the company rather than to the farepayers as is required under its Uniform System of Accounts. Apparently the Commission felt that its accounting procedures never contemplated such extraordinary gains over and above depreciation reserves-and it is true that the whole premise of depreciation is that an asset will usually decline in value to the point of an insignificant predicted salvage figure.

(2) "Over and above" gains on depreciable assets

This raises the difficult question of whether farepayers should automatically be entitled to these "over and above" gains. The majority maintains at footnote 227 (last two sentences) that because the farepayers bore the risk of loss up to the total cost of the asset, equitably they should receive the total gain. Since the investors are assured protection of their investment, the majority argues, they have no equitable claim to any gain. However, the better analysis seems to be that the farepayers must undertake in all situations to make good the original cost of the asset to the investors because it is assumed that the asset will be consumed in the business and its value dwindle to the point of salvage. This was the expectation in setting up the depreciation schedule and in estimating the useful life of the asset. When these calculations go awry and the salvage value is somewhat higher than predicted, clearly the farepayers should get back their contributions to depreciation to that extent-and this is how the Uniform System of Accounts works. However, when calculations are so far afield that the depreciable asset on retirement brings in not only the total cost, but a sizeable profit as well (a highly unlikely situation), the farepayers in recovering back only the amount of their contributions to depreciation and in being relieved of any further depreciation obligation in respect of the asset, nevertheless are receiving an unexpected windfall to that extent. When there is a sizeable profit as well, it seems the Commission is completely justified in departing from normal accounting procedures as it did in D.C. Transit Sys., Inc., (Order No. 4577) 30 P.U.R.3d 405 (D.C.Pub.Utils.Comm'n 1959) and allow both investors and ratepayers to share in these over and above gains according to the equities-one of which is the relation the property bore to the conversion and the enormous obsolescence charges associated therewith. This would appear to be the better rule but I concur in the result reached by the opinion which gives the over and above gains on depreciable properties to the farepayers because of the equities of this particular case.43

(3) Analysis of the majority's use of the concept of

conversion-relationship with respect to the land

How then does the majority employ the notion of conversion relationship? While at times the majority uses it only as another equitable factor (a role I deem appropriate), at other times it appears to be a dispositive legal consideration. See supra at 818. I would simply like to clarify the point that language in our past opinions dealing with conversion relationship has referred solely to depreciable properties and, as discussed above, there is indisputably a rational basis for distinguishing nondepreciable property in this context.44 Any past discussion of conversion relationship has been with respect to depreciable property already prima facie awarded to farepayers under the Uniform System of Accounts and has involved questions as to the appropriate sharing between investors and farepayers as to gains over and above the depreciable cost of the asset. Here, under the Uniform System of Accounts, duly adopted by the Commission, the gains on real property automatically go to investors as discussed supra. Moreover, under the applicable precedents, once a conversion relationship is found to exist, only then does it become a matter of balancing the equities to determine to what extent farepayers shall share in the proceeds. "The extent to which they are to share depends upon a fair balance between the interests of the public and those of the company's investors." D.C. Transit Sys., Inc. (Order No. 4577) 30 P.U.R.3d 405, 412 (D.C.Pub.Utils. Comm'n 1959).

(4) Summary

Therefore, to summarize the precedents insofar as they address this issue, on close analysis, the method appears to be this: if depreciable property is sold at a gain, those gains belong to the farepayers up to the point of the depreciation reserve of the asset. If there remains any gain over and above that figure, it must be determined whether these properties in question were disposed of as part of the conversion program. If so, then the other equities are examined to balance the relative interests of the public and the consumers. Thus the depreciable nature of the property is an essential prerequisite to any conversion-relationship analysis; and in turn, a conversion-relationship is a necessary predicate to any balancing of the equities. In no way is there any precedential support for applying either a conversion-relationship analysis or a balancing of the equities to nondepreciable assets. That is not to say that the fact of the conversion-relationship does not create a powerful equity-but rather that any reliance on this concept as an independent source of support based on precedent is misplaced. And certainly with respect to nondepreciable properties nonrelated to the conversion, the only conceivable ground for the opinion's similar disposition of the gains in favor of the farepayers is simply the general equities of the situation45-which leads to the following discussion.

b. Other equitable considerations

It is indisputable that the equitable considerations involved in this case preponderate in favor of the farepayers. They have been required to bear the burden of over $10 million in track removal and repaving as well as the $5 million underdepreciated cost of the tracks and streetcars. Moreover, the fact that the conversion program borne by the farepayers freed these parcels of real estate to be disposed of at a profit by the investors is a very compelling equitable consideration.46 Transit's investors benefited from a purchase of the stock of the company at a cost far below the fair market value of the assets,47 (not to mention not paying any sort of premium for acquiring a going business with a virtual monopoly assured by charter) and it appears that sizeable dividend returns have been received over the years.48

I must note briefly however, that some dispute can be taken with some of the specific factors in the majority opinion. For example, some of the factors cited as benefiting the investors, such as Transit's virtual monopoly position (supra at 815), its preferred tax treatment (supra at 820), its changeover to an operating ration system of fixing a fair return as opposed to the old rate base method (supra at 815), and the general rise in property values (supra at 816), are present in almost every case involving a public utility. To weigh these factors against the investors is tantamount to "fixing" the outcome of the game before it begins. Moreover, we read nowhere in the majority opinion of any equities on the side of the investors. A regulated public utility is a unique operation in which it is often said the investors have only a "fishing license." While they stake their entire investment in the enterprise and face a large downside risk, they have a ceiling on their possible gains (a regulated reasonable rate of return)-and they are not guaranteed this return, but only given the right to "fish" for it. In return for agreeing to this arrangement, they receive a number of advantages such as their monopolistic position, tax preferences and perhaps an operating ratio method of rate determination. Where the investors must bear the entire business risks, consumers bear only the incidental maintenance costs on utility assets and must protect the investors' investment in depreciable property since it has a limited useful life (but not land-land stability is their only protection here). That this arrangement has long been the practice in public utility regulation is admitted by the majority. Yet never before have such factors been considered equitable considerations which militate against the investors, at least to my knowledge. To so hold is equivalent to saying that in every case the equities are against the utility. In our case it is true that the conversion has placed extraordinary burdens on the farepayers -and it is these extraordinary burdens which rightly should figure in the equitable balancing process. But I object to "stacking the deck" by adding into the balance the normal incidents of every publicly regulated industry.

c. Resurrection of "risk of capital loss" under the topic

heading of "burdens"

As conceded above, a large part of these "burdens" consist of various equitable factors which weigh generally in favor of the farepayers. However, it seems that an equally large part of the majority's rationale in this "benefit/burden" section is nothing more than a restatement of the erroneous principle that farepayers are entitled to capital gains because of the obsolescence risk of capital loss-i.e., the first of the majority's two controlling principles. While supposedly discarding that factor for the purposes of this case,49 the majority somehow manages to slip it back into the deck with an impressive sleight of hand maneuver. Repeatedly in this section of the majority opinion, there is language about "depreciation" and "obsolescence" burdens of the farepayers.50 The fact of the matter is that such concepts simply do not apply to nondepreciable assets such as land. Such statements as "consumers bear the risk of that loss unless investors have been compensated for assuming it" (text accompanying note 217, supra) are completely wrong as to land. What is more important is that they involve identical considerations to those the majority claimed to have set aside.51 Here we have two basic doctrines advanced to support the result and one consists to a considerable extent of a restatement of the other. And when it is asserted that the one factor is to be shelved, it should not reappear in another form. If truly consistent in this regard, what then would remain of the majority's crucial second "doctrinal consideration", the dispositive benefit/burden analysis? When the repeated doctrine disappears, we are left with only "half a doctrine." On careful scrutiny, then, the marvelously voluminous and superficially authoritative arguments for the existence of increased farepayer burdens evaporate, leaving a much lightened scalepan on the farepayers' side of the equity balance.52

C. The critical inquiry.

As to the central issue, I find myself in agreement with the majority. The statement that "[a]ccounting directive . . . must survive the test of rationality" (text accompanying note 316, supra) precisely frames the question as I would desire. Clearly then our difference centers around whether the majority's "equities" are sufficient to render the Commission's actions irrational, arbitrary and capricious.

To be sure, there is no question that the Commission is not bound by traditional concepts of private enterprise and private property in its treatment of various transactions-at least not by any constitutional considerations. The cases rejecting the fair value theory of rate base and depreciation53 have demonstrated a marked willingness to accept commission departures from such restraints in public utility ratemaking. As the majority opinion points out, the Supreme Court has said that "[u]nder the statutory standard of 'just and reasonable' it is the result reached not the method employed which is controlling. . . . It is not theory but the impact of the rate order that counts." FPC v. Hope Natural Gas Co., 320 U.S. 591, 602, 64 S. Ct. 281, 287, 88 L. Ed. 333 (1944). Therefore conceivably we should look only to the relevant facts and circumstances and proceed to balance the equities. This is essentially what the majority does with respect to the nondepreciable nonrelated properties and, under my analysis what it must do with respect to all the land since there does not appear to be any other persuasive justification for the result reached.

Yet while such an approach may be constitutionally valid and would undoubtedly be upheld had the agency in fact adopted it, we are not faced with such a situation nor are we operating in a vacuum. There enters another very powerful judicial doctrine-that of deference to agency adherence to rules promulgated under statutory authority unless arbitrary and capricious. Again the ultimate question is whether the equities of the situation are so overwhelming that we can say that the Commission's adherence to its Uniform System of Accounts and its uniform administrative pronouncements was clearly arbitrary and capricious under the circumstances. It is my conclusion that the Commission's actions were reasonable enough to withstand attack on review. It is true that a system of accounting which is unreasonable may be overturned by this court, yet I cannot agree that because of the equities in this case, the traditional manner of accounting employed here is such a departure from economic realities as to warrant a finding of arbitrariness. Clearly if the Commission were to adopt an accounting procedure like that employed in N.Y. Water Service54 we would uphold its decision and we now would have before us a different case. Moreover the equities on careful analysis are not so overwhelming as the majority would like to paint them. Many of the numerous factors cited by the majority are makeweights and the valid ones are insufficient to render the Commission's actions arbitrary and unreasonable. The apparent de novo review of the agency's procedures in the opinion and the wholly unprecedented treatment of the nondepreciable properties based solely on equitable balancing seems to be stretching the law to reach a desired result.

It is clear that the majority gives very little deference to the applicable accounting rules and the Commission's decision to follow them.55 It states that "[a]ccounting procedures are not selfjustifying" and "[t]o permit an accounting device to dictate the rule of law is to allow the tail to wag the dog. To judicially accept an accounting method without inquiry as to its reasonableness is to pervert the law. And to yield, on judicial review, unquestioning obeisance to administrative authority over utility accounting is to abdicate the responsibility to review." Supra at 819. Yet while the judicial responsibility to review, certainly should not be abdicated, neither is it a license to ignore all limits on our discretion. It is the majority, rather, that "perverts" the law in ignoring such firmly embedded concepts in our judicial system as deference to agency procedures. The Supreme Court has spoken decisively on this issue:

This court is not at liberty to substitute its own discretion for that of administrative officers who have kept within the bounds of their administrative powers. To show that these have been exceeded in the field of action here involved, it is not enough that the prescribed system of accounts shall appear to be unwise or burdensome or inferior to another. Error or unwisdom is not equivalent to abuse. What has been ordered must appear to be "so entirely at odds with fundamental principles of correct accounting" (Kansas City Southern Ry. Co. v. United States, 231 U.S. 423, 444, [34 S. Ct. 125, 58 L. Ed. 296]) as to be the expression of a whim rather than an exercise of judgment. Norfolk & Western Ry. Co. v. United States, 287 U.S. 134, 141 [53 S. Ct. 52, 77 L. Ed. 218]; Kansas City Southern Ry. Co. v. United States, supra, [231 U.S.] p. 456, [34 S. Ct. 125, 58 L. Ed. 296].

American Telephone & Telegraph Co. v. United States, 299 U.S. 232, 236-237, 57 S. Ct. 170, 172, 81 L. Ed. 142 (1936) (emphasis added). See also, Northwestern Electric Co. v. FPC, 321 U.S. 119, 124, 64 S. Ct. 451, 454, 88 L. Ed. 596 (1944) (emphasis added):

Although . . . the Commission's prescribed method of eliminating the write-up may not accord with the best accounting practice, it is sustained by expert evidence. It is not for us to determine what is the better practice so long as the Commission has not plainly adopted an obviously arbitrary plan. [footnotes omitted].

See also, D.C. Transit Sys., Inc. v. PUC, 110 U.S.App.D.C. 241, 242, 292 F.2d 734, 735 (1961); Arkansas Power & Light Co. v. FPC, 87 U.S.App.D.C. 385, 185 F.2d 751 (1950); Alabama Power Co. v. FPC, 75 U.S.App.D.C. 315, 128 F.2d 280, cert. denied, 317 U.S. 652, 63 S. Ct. 48, 87 L. Ed. 525 (1942); Pacific Power & Light Co. v. FPC, 141 F.2d 602 (9th Cir. 1944); Pennsylvania Power & Light Co. v. FPC, 139 F.2d 445 (3d Cir. 1943), cert. denied, 321 U.S. 798, 64 S. Ct. 938, 88 L. Ed. 1086 (1944). To dismiss such an established and sound principle of law so cavalierly is wholly unjustifiable.

I repeat, the majority accords no deference to consistent administrative adherence to widely accepted established accounting procedures-themselves a product of careful policy judgments. It would rather consider each situation individually on the basis of the equities. This effectively injects our court into the regulatory process without benefit of expertise and creates an environment in which we are allowed to give free reign to our equitable inclinations on each factual situation without the restraining parameters of an orderly accounting system. This violates fundamental notions of administrative law and the role of the judiciary.

Brief mention is required as to the majority's claim that it has been cited to no operative accounting rule on the issue at hand. This selective blindness is difficult to understand. Surely the majority does not mean to dispute the existence of a Uniform System of Accounts. The PUC, for example, repeatedly referred to it in D.C. Transit Sys., Inc., (Order No. 4577) 30 P.U.R.3d 405 (D.C. Pub. Utils. Comm'n 1959): "while cognizant of the desirability of adhering to the Uniform System of Accounts . . ." (Id. at 410); "starting from the conceded premise that a strict application of the Uniform System of Accounts requires . . ." (Id.); "the Uniform System of Accounts, applicable to accounting procedures of utilities under the jurisdiction of this commission . . ." (Id.). On this precise point the Commission has informed us in its brief that: "Under the system of accounts now in effect, where property is transferred by Transit from an operating to a non-operating status because it is no longer needed in the company's transit operations, the following results:

(2) As to non-depreciable property, that is property for which no depreciation charge is assessed against the ratepayer, a different result ensues. In this case, the property is merely removed from the rate base at original cost. If there is a gain, that is if the fair market value exceeds original cost, or if there is a loss, there is a credit or charge made to retained earnings, so that the investor receives the full benefit of any gain and the full detriment of any loss.

Depreciable property is a capital item which the investor has put into service which, while it remains in service, is wearing out. As it wears out and thus its value is reduced, the ratepayer reimburses the investor for the reduced value through a depreciation charge which is set to reflect the rate at which the property is assumed to be wearing out. At the time of transfer, the amount of the accumulated depreciation is deducted from the original cost to determine the unrecovered cost. If the fair market value exceeds the unrecovered cost, there is a gain in that amount, and it is fair that the gain be credited to the ratepayer up to the amount he contributed in depreciation charges for that property. At the same time, if the gain exceeds the amount needed to repay the ratepayer in full, it seems equitable that the investor receive that surplus.

With respect to non-depreciable property, on the other hand, since the ratepayer makes no contribution to the capital cost, he shares none of the profit if a profit is indicated when the property is taken out of service. The investor has provided the capital to acquire the property and the ratepayer in no way thereafter has provided reimbursement to the investor for that capital outlay, as he has through depreciation charges on depreciable property. While nondepreciable property is in service, the ratepayer pays maintenance and taxes on the property, which expenses are regarded as legitimate operating expenses; but they do not represent a contribution to the capital cost. That cost is borne by the investor; thus, when the nondepreciable property is removed from service, it is equitable that any gain in value over original cost be passed on to the investor.

Respondent's Br. 9-11 (emphasis added). Now is this a failure to cite to us the Commission's Uniform System of Accounts as the majority contends? Is it defective because no section numbers or quotations appear? Or does the majority simply assume that the Commission has lied to us? I think such an assumption wholly unjustified and improper to say the least. Moreover, this cannot be a "post hoc rationalization" since, as the majority admits,56 the Commission has repeatedly and consistently stated this to be its position and this statement is not contradicted in this record.

A Uniform System of Accounts is not enacted piecemeal. This Agency's system has been in effect since the days of the PUC and the WMATC clearly inherited it in toto.57 It is a broad system of accepted accounting procedures applicable to all regulated industries under the Commission's authority. The enactment of Regulation 61 was necessary because it is in abrogation of traditional accounting rules. No such regulation is required where the disposition is in conformance with such accounting principles.

And even were there no clear Uniform System of Accounts provision on this issue, my position would be precisely the same. The policy of deference to consistently applied agency procedures and practices in areas of its expertise and authority is well established and incontrovertible. No such deference has even momentarily given the majority pause in its zeal to deal with the issue de novo.

Finally, if a close conversion relationship in conjunction with the other equities favoring the farepayers did serve to render the Commission's accounting practices and administrative decisions manifestly unreasonable and arbitrary, there would be insufficient support for this result as to the nonrelated nondepreciable properties. The fact that the conversion program, the cost of which was borne by the farepayers, was the sine qua non of the gains realized by the investors on the related properties is a strong and appealing equitable factor. And, when joined with the other equitable considerations weighing in favor of the farepayers, I can certainly sympathize if not concur with, the notion that this renders the Commission's accounting procedures unreasonable. However, where the factor of conversion-relationship is absent, it seems clear that it cannot conceivably be said that the general equities alone reach the "critical mass" necessary to a finding of "arbitrary and capricious."

I thus dissent as to all the land (both related and nonrelated to the conversion) and, while concurring in the result as to the depreciable properties, would like to make clear my view that the "over and above" gains should not be considered as inexorably belonging to the investors.