"There is no doubt that good public transportation service is vital to a metropolitan area. Millions of American citizens do not have access to private automobile transportation, by reason of poverty, sickness or age. According to the 1960 census, 22% of all American households and 37% of the households in urban areas with more than 250,000 population do not have automobiles. In Washington, D.C., 119,262 households out of a total of 252,066 did not have access to an automobile.

"Millions of other people have such access only because they have been forced to divert an inordinate percentage of their income to meeting their transportation needs. In 1961 the average American family spent 14.7% of its budget on transportation, of which 13% was spent on automobile transportation. This is a heavy burden on a low-income family."

All witnesses at the hearing stated or relied impicitly on the assumption that efficient mass transit is essential for the District of Columbia. We believe that without it, the city would tie itself into traffic knots and the inner city would continue to die from strangulation.

History of Transit in the District

Originally travel in the District was by horse and the principal highways and bridges were built by private turnpike-bridge companies who charged tolls. As these failed to make out financially, the Government took some over and operated them toll free. Wisconsin Avenue, for example, was acquired by the Government for $3,000 as late as 1883. Franchises were then granted various private companies to operate horse-drawn and electric cars. Sometimes they had to provide some maintenance of streets.

Early street railway companies included the Washington and Georgetown Railway Company and the Capitol, North O and South Washington Railway Company. The Rock Creek Railway Company was authorized in 1895 to acquire the Washington and Georgetown Railway and to become the Capital Traction Company. In 1902 over a dozen other railway companies merged to become the Washington Railway & Electric Company (a subsidiary of the North American Company), which obtained control of Potomac Electric Power. These two companies, Capital Traction and WR&E, operated independently but with various transfer arrangements until 1933 when they were allowed to merge into the Capital Transit Company, with ownership in the North American Company and in independent stockholders.

Capital Transit Company

During World War II there was exceedingly heavy patronage of Capital Transit caused by the number of people brought to Washington for the war effort, by dramatically improved service resulting from the new "PCC" streetcar, and by gasoline rationing. Simultaneously, there were few demands for the retirement of old equipment and speedy amortization was possible for emergency facilities. The years 1942-45 were very profitable, although the fares were kept at 10¢ for a single ride, 3 tokens for 25¢ and a weekly pass for $1.25. The school fare was 34. The stock dividend was $2 per year.

This profitability was concealed from the general public, however, by transferring operating revenues into various reserves, charging all taxes as operating costs and other devices detailed in 1952 in a Congressional Report prepared by James M. Landis for John F. Kennedy, then Congressman and Chairman of the Public Utilities Subcommittee of the House District Committee. The accrual of reserves was due to a natural conservatism by Capital's officers who were anxious to pay off debts and concerned with post-war problems, and possible conversion to other means of transportation.

In 1944 a survey recommended streetcars going underground at Dupont Circle and continuing underground to south Fourteenth Street, S.W. and also east just beyond the Library of Congress. The city was to build the system for an estimated 56 million dollars, paying for it out of the highway fund's gasoline tax revenues. The Commissioners reduced the proposal to a 35 million dollar version and Congress levied the proposed tax increase. The Dupont Circle underpass and an underground turnaround at south Fourteenth Street were built. These may have been the beginning of the subway or may have resulted from pressures to reduce traffic congestion. The increasing use of the auto after the war reduced passenger loads and created a demand for more street space by the removal of streetcar tracks and conversion to buses.

In 1948, Louis E. Wolfson apparently became aware of Capital's reserves and began buying its stock. In 1949 he received permission to take over at $20 per share. Fares were raised in 1947, 1948, 1950 and 1952 to 15¢ for single rides, 3 tokens for 40¢ and a weekly pass for $2.10. In 1950 the dividend rose to $3; in 1951 to $4. Early in 1952 the Company declared an extra dividend of $10 and applied for another fare increase. By June 1952 the purchasers at $20 had received $18.40 back in dividends. The price of stock had risen to $39 when it was split 4 to 1. The Landis report quoted it at $54 on the pre-split basis.

Dean Landis was not critical of the fare increases; they were not the basis for the dividend melon. What happened, he said, was a change in dividend policy and "the distribution in 1952 of earnings accumulated by the old management during the war years of 1942-45." But both he and "Congressman" Kennedy were critical of the Utilities Commission for its failure to order the windfall held as a cushion for future lean years, perhaps in a special reserve to be used later in the public interest. Kennedy said: "If the Public Utilities can recapture for the public some of the excess earnings of the war years . . . a good cushion against the vagaries of the future will have been provided."

Our future President declared: "The present situation has developed as a result of the laxity of the Public Utilities Commission in years past. It is certainly its duty to see what corrections can now be made. . . . Apart from whatever the legalities of the situation may be, the new management of the Capital Transit Company-the so-called Wolfson interests--has adopted an attitude that has emphasized the investment possibilities of the transit system without proper consideration of its responsibilities to the community. Transit companies, whether in Washington or any American city, are vitally affected with the public interest and are not primarily avenues for developing personal fortunes."

In 1955, the affairs of Capital Transit reached their nadir. Under the leadership of Mr. Wolfson, its equipment became dilapidated and its service impoverished. Confidence reached an all-time low. In this sorry setting, company relations with the union broke down and the city was plunged into a long, hot summer strike. Metropolitan residents walked, rode bicycles, and shared rides with surprising patience, while city policemen worked overtime to reduce traffic jams and keep the automobiles moving. Congress revoked the franchise and gave Mr. Wolfson one year to operate. City and Congressional officials began their search for a company to take over a new franchise.

Public Authority vs. Private Corporation

On October 10, 1955, the D.C. Public Utilities Commission received six applications for the permit. All were found to be deficient but conferences were held with each applicant in efforts to develop a feasible project. On December 3 the P.U.C. found that a group of Baltimore investors represented by former Senator Millard Tydings had a prima facie case and announced a hearing for December 15–16. At the hearing, however, and again on the 19th, Senator Tydings reported that his group had been unable to negotiate a satisfactory labor agreement with the Transit Union and would have to withdraw. The P.U.C. concluded that no other application met basic requirements.

On December 30, Samuel Spencer, President of the D.C. Board of Commissioners, reported to the Congress the "failure of efforts to develop sound plans for private operation" and stated that the Commissioners, with the aid of the Public Utilities Commission, were turning to plans for a public authority. He concluded: "Since it now appears that a public authority with private financing is the most practicable form of transit system. . . ., it is a matter of highest importance that the Congress act promptly."

On May 10, the United States Senate passed a bill providing for a three-year "interim" Washington Metropolitan Transit Authority which would take over the Capital Transit System. It was to be financed by a 20 million dollar loan from the U.S. Treasury. The vote was 41 to 31.

In the meantime, however, there were new efforts in the private sector. Senator Tydings made another attempt, although unsuccessfully. Morris Fox said the First National Bank of N.Y. had agreed to lend his group three million dollars to buy the Wolfson interests. Max Kampelman was busy organizing another group. In March, Congressmen McMillan and Broyhill introduced bills to give Wolfson another chance, with tax exemptions, a guaranteed return and greater latitude in fixing fares and service standards. Daniel Bell of American Security

and Trust advanced a plan to buy the Wolfson interests, which made the restoration of the franchise more attractive. This legislation passed the House in May.

The battle thus moved to the conference committee, between the two legislative bodies. The National City Lines, operator of some 40 urban transit systems throughout the country, then negotiated a contract with Capital Transit to buy its assets for $13,440,000, conditioned upon stockholder approval and on getting a satisfactory franchise from Congress. NCL objected, however, to responsibility for streetcar track removal and requested a guaranteed profit of 10% of the gross operating revenue. These demands were resisted by the D.C. Commissioners. In June, Morris Fox introduced O. Roy Chalk to the scene. The Commissioners expressed doubt about his financial resources. Mr. Chalk thereupon displayed a letter of credit from the Chase Manhattan Bank for $500,000 and disclosed his bid to buy the Capital Transit assets for $13,440,000, of which eight million dollars would be in cash. On June 21 the Commissioners found that all offers were inadequate and recommended to the Conference Committee that the Senate Bill for an interim public authority be passed.

However, by nightfall of that day (6/21), the Commissioners reached an agreement with a local group of businessmen headed by Harry A. McDonald on the satisfactory terms for a franchise and so notified the Congress. Nevertheless, on June 26, the Commissioners formally recommended to the Conference Committee that it give the franchise to the Chalk-Fox group on franchise terms substantially the same as those already agreed to by McDonald. Commissioner Karrick noted that Chalk-Fox "have put the money on the line. The others say they can get it. But time is of the essence." In the meantime, California Eastern Aviation, Inc. announced it would buy Capital's assets for the $13,440,000 and would negotiate terms with the company.

The Conference Committee met at 2:30 p.m. on June 27. Waiting outside were Chalk, Fox and their attorneys. The Committee endorsed the criteria for franchise terms which the D.C. Commissioners had recommended and formally rejected the offer of National City Lines. Chalk and Fox et al. then "raced" to Capital's office to negotiate their contract to purchase Capital's assets. The agreement was announced that night.

D.C. Transit Is Born

As a result of these negotiations, Congress passed in July 1956 an Act To Grant a Franchise to D.C. Transit System, Inc. The franchise was for 20 years except for nonuse and also except that Congress could cancel it after seven years without the payment of damages. The fare rates were required to be the same for one year, i.e. to August 15, 1957, after which they could be raised if the Utilities Commission did not disapprove.

In the Franchise Act Congress declared as a matter of legislative policy that the Corporation "should be afforded the opportunity of earning such return as to make the Corporation an attractive investment to private investors. As an incident thereto the Congress (found) that the opportunity to earn a return of at least 62% net after all taxes properly chargeable to transportation operations . . . on either the system rate base or on gross operating revenues would not be unreasonable, and that the Commission should encourage and facilitate the shifting to such gross operating revenue base as promptly as possible and . . . if conditions warrant not later than August 15, 1953."

The Franchise Act provided that the Corporation was obligated to convert its street railway operations to bus operations and remove its tracks within seven years, unless the Utilities Commission extended the time.

Congress likewise granted D.C. Transit exemption from the following taxes: franchise tax, gross sales tax, compensating use tax, motor vehicle titles tax, tangible personal property tax, and the mileage tax. Exemptions for the motor vehicle fuel tax and taxes on realty used in transportation operations were granted to the extent needed to allow a 62% rate of return on operations. The fuel tax exemption has been granted every year except 1959 and the realty tax since 1961 when the streetcar conversion was 50% completed.

On September 15, 1960, the Congress gave its consent to the Washington Metropolitan Area Transit Regulation Compact, which was signed by the District Commissioners and by the Governors of Maryland and Virginia on December 22, 1960. By this Compact, the Washington Metropolitan Area Transit Commission (WMATC) was given jurisdiction for the regulation and improvement of transit, including the power to prescribe fares, regulations and practices. Pro

cedures for the filing of rate schedules, suspension by the Commission and appeals to the United States Courts of Appeals were set forth. The tax exemptions and other provisions of D.C. Transit's franchise were left intact.

The Compact provided that in fixing rates, the Commission should give due consideration, inter alia, to their effect on the movement of traffic, to the need of "efficient transportation service. . . at the lowest cost consistent with the furnishing of such service; and to the need of revenues sufficient to enable such carriers... to provide such service." The Compact declared as a matter of legislative policy that the opportunity to earn a return of at least 62% on gross operating revenues should not be considered unreasonable. (This language was similar to the franchise except that it did not mention the "system rate base.")

History of D.C. Transit's Finances

D.C. Transit of D.C. was organized by TCA Investing Corporation which obtained all the stock and put $500,000 in the treasury in payment therefor. This stock was subsequently transferred to D.C. Transit of Delaware, whose stock is largely held by Trans Caribbean Airways. The original $500,000 was the only money paid in by stockholders. D.C. Transit of D.C. was able, however, to buy the assets of Capital Transit in 1956, as of August 15. Those assets were:

Capital Transit cash on hand.

Materials and supplies..

Other current assets (accounts, notes)
Deferred accounts receivable_

U.S. Government bonds‒‒‒‒‒

Miscellaneous physical property--

Real estate, plant, and equipment at cost less depreciation__.

Total

Less liabilities__.

Net book value____

$7, 580, 650. 46 724, 013. 55 201, 824. 44

24, 000. 00 60, 037. 50 2, 426. 59

18, 100, 922. 05

26, 693, 874. 59 2, 814, 833. 40

23, 879, 041. 19

D.C. Transit purchased the above assets by the following procedures: Cash supplied by D.C. Transit stockholders__ Cash borrowed from Chase Manhattan Bank at 4 percent, payable $600,000 on Dec. 1, 1956, $1,000,000 on Jan. 2, 1957 and Feb. 1, 1957, all secured by $5,600,000 of Capital Transit cash deposited without interest in Chase Manhattan and pledged for security-. Cash borrowed from Chase Manhattan Bank payable in 20 quarterly installments of $175,000 each, with 5 percent interest, secured by chattel mortgage on all streetcars, buses, and certain accessory work equipment, acquired from Capital Transit---Purchase money mortgage at 5 percent, given Capital Transit on all real estate acquired in the transaction; $100,000 payable semiannually starting Feb. 15, 1957----.

Total

$500,000

5, 600, 000

3,500,000

3,940, 000

13, 540, 000

By the time of the actual exchange, two parcels of real estate had been sold for $62,000, reducing the value of the real estate, plant and equipment item by that much and likewise reducing the amount owed on the Capital Transit mortgage to $3,878,000.00.

In the next 42 months, i.e. by the end of the calendar year 1956, D.C. Transit reduced its purchase money obligations by $5,775,000. Presumably this completely paid off the $5,600,000 loan at Chase Manhattan secured by the time deposit and the first of the quarterly installments of $175,000 due November 15, 1956, to Chase Manhattan on the chattel mortgage. Transit apparently accomplished these payments by taking $4,000,000 out of its cash balance and $1,775,000 out of its Gross Operating Revenues for that 42 months. Its cash flow from operations, consisting of net operating revenue and depreciation accrual, totaled $868,516 and its current liabilities were allowed to rise $1,284,493. These funds were slightly more than adequate to make the payment on principal and the $205,906 that was paid in interest during this period.

During the year 1957, D.C. Transit reduced its purchase money obligations by $900,000. This clearly consisted of the four quarterly payments of $175,000 each due to Chase Manhattan on the chattel mortgage plus the two semi-annual installments due Capital Transit on the purchase money mortgage. In addition

Transit paid $383,458 interest obligations, raised its cash balance by $1,773,614 and paid dividends of $290,000 to its stockholder. All of this came out of Gross Operating Revenues, from which the cash flow of net revenue plus depreciation accrual totaled $3,002,237. The dividends thus paid were 58% of the stock investment.

During 1958, Transit reduced its purchase money obligations by $2,825,250, made interest payments of $321,828 and paid dividends of $400,000 to its stockholder. This was accomplished largely out of the cash flow from Gross Operating Revenues ($2,916,306) with $630,772 coming probably from the lowering of the cash balance. The dividends thus paid were 80% of the stock investment. During 1959 Transit paid off the balance of its purchase money debts, i.e. $3,477,750 plus $160,496 for interest and $450,000 in dividends. $3,035,116 of this could have come out of the cash flow from Gross Operating Revenue. However, 1959 was the year Transit sold its car barns on 4th Street, S. W., to the Redevelopment Land Agency for a net profit of $2,251,218 which would have been applied to the balance and final payment on the real estate mortgage. Both funds were undoubtedly used. Transit's Retained Earnings rose that year to a total of $2,549,415.24. The dividends amounted to 90% of the stock investment.

To summarize, from August 1956 through 1959, from its operating revenues and its acquired assets of cash and real estate, D.C. Transit made these payments:

Thus, in three years, 42 months, the D.C. Transit stockholder had paid off all its purchase debts, reimbursed itself for its original investment of $500,000, collected an additional $640,000 in dividends (about 32% per year) and accumulated retained earnings of $2,549,415.00.

Commencing in about 1959, Transit began to borrow large sums of money, largely from insurance companies, to buy new buses and otherwise improve service. All costs of debt service, debt retirement and all costs of all kinds have been paid from operating revenues or reserves funded from operating revenues. Dividend payments of $500,000 (100% of the par value) were made for each of the six years from 1960 through 1965. $250,000 dividends have been paid in 1966. Transits' balance sheet as of August 31, 1966 is as follows: