has spoken on that point. It has said that they are not partners. It is a customer-seller relationship.

The customer pays for what he gets and the funds that go to the company belong to the company to do with what it will. Now, you can argue about that point. That has been thought about and discussed in the Supreme Court decisions. That is what the courts have said about it.

I can't disagree directly with what you say. Those funds have been provided by the riding public.

Senator EAGLETON. Now, help me out on these figures. They were distilled from some of the Commission reports. Verify the accuracy for me, if you can. Mr. Chalk's original investment was $500,000— a half million dollars.

Mr. AVERY. Equity investment.

Senator EAGLETON. Yes.

Mr. AVERY. Yes.

Senator EAGLETON. The stockholders have derived the following benefits during his operation of the company: $4,390,000 in dividends. Mr. AVERY. That is correct.

Senator EAGLETON. $3,931,266 which represents the difference in what was paid the operating company for six retired properties and what they were worth or are worth on the market today.

Mr. AVERY. You are talking about the five below-the-line properties. Senator EAGLETON. I have six marked down here.

Mr. AVERY. I guess that is including Grace Street shops. It is not a subsidiary but it is a nonoperating property. You are saying the difference between the price paid for that and the current fair market value?

Senator EAGLETON. Yes.

Mr. AVERY. I will have to check that figure. We can supply that answer later. I don't know what the current fair market values are. The only thing we can check, of course, is the set evaluation for tax purposes and find out what the tax authorities say that is.

Senator EAGLETON. The staff member points out this figure is based on a table that you supplied the House, when you testified there, a week or so ago.

Mr. AVERY. Yes. It could well be. I just don't have that figure at my fingertips. I would prefer to check it and be sure of its accuracy. If it is from a table we supplied the House I am sure it is accurate. (The information follows:)

NONOPERATING PROPERTIES, D.C. TRANSIT SYSTEM (D.C.), BASED ON JULY 1968 ASSESSMENT

Note A: Assuming assessment at 75 percent of fair market value of land and 65 percent of buildings, per statement of D.C. Assessor's Office.

Senator EAGLETON. The next figure I have here is $13 million toward the original price which was taken from the fare box and the assets on hand. This does not allow for the $10.3 million added to the price by the Commission and paid off from fare box revenues nor does it account for the increase in the company's values since 1966.

Mr. AVERY. The purchase price was $13.5 million, a half million dollars of which we have already mentioned. The other $13 million was paid for out of either profits earned by the company or profits from the sale of certain properties that were owned by the company, also out of cash that was in the company at the time it was acquired. Senator EAGLETON. How much cash was in the company at the time?

Mr. AVERY. About $7 million. Seven million some other hundred thousand dollars was shown on the balance sheet as of the date of that acquisition.

Senator EAGLETON. So, assuming that our $3.9 million figure is correct, which is the one we borrowed from your table, it would add up to more than $21 million based on a half million dollar investment.

Mr. AVERY. I wonder about the saying on those below-the-line properties. The way you put that it sounds as though he has realized on those properties. Of course he has not realized on them. Whatever the realized value, it is still owned by the D.C. Transit System, Inc.

They are held as subsidiaries but they are still owned by them and there has been no actual realization of that value, over and above the book value, of those properties. So, except for that I think the analysis is correct.

Senator EAGLETON. On these below-the-line properties, does your Commission have any authority to order them sold in order to make them pay off any debts owed?

Mr. AVERY. No, we haven't. This is a subject which has been discussed repeatedly. There are some fairly well-established principles of utility law that such an order would run up against. We have always had serious doubt that any order to that effect would be upheld.

Senator EAGLETON. So, these below-the-line properties then really belong to the stockholders. They have little value to the transit rider? Mr. AVERY. I hope you will get into all of this with Mr. Chalk, he is a lot more familiar with a lot of the financial arrangements than anybody else

Senator EAGLETON. You ought to be somewhat familiar with them in setting the fares.

Mr. AVERY. Yes. I would say I am almost second in line in being the most familiar with those things. Maybe third in line behind Mr. Lewis,

Senator EAGLETON. I don't want to get into the semantical discussion about spinoffs and what have you. Let us stick to below-the-line properties, whatever that subtle distinction is. If they had not been dropped below the line and had been considered as functioning property, what would your answer be as to defaulting on debts, defaulting on contributions, contractual obligation to union funds, and so forth. Mr. AVERY. The answer to that lies in some very old and very worthwhile principles of utility law that it is well established, as one of the hornbook principles, the first thing you read in any book

on utility regulations, that the utility is entitled to a rate structure which covers its expenses and provides it with a fair return.

Anything less than that is confiscation of its property. The case in point has been discussed in many Supreme Court cases but the one usually cited by that is the Bluefield case, Bluefield 262 U.S. 679. That case holds that you can't confiscate utility property by refusing to give it sufficient revenues to cover its expenses and provide it with a fair return.

It seems to me, whether it is above-the-line property or below-theline property, if the company came to us and said we are not making enough revenues to cover our expenses, that provides us with a profit, and we said to them we are not going to give you a rate increase, go sell some of your assets in order to pay your expenses as they occur, that they could go to court and say this is confiscation, we are taking property away from them, we are making them use up their assets in order to meet their expenses.

I have serious question whether such an order would be upheld in the court; that is, whether it is above-the-line property. You could say, look, reduce the size of your fleet by 400 buses and use the money you get by selling them to pay your expenses.

That is the problem that we have always seen and every commission has faced that decision.

Senator EAGLETON. If we go along with S. 1813, the subsidy bill, what practical remedy or option is available to you to prevent the utilization of this subsidy to further enhance the value of the company and thereby make even more burdensome on either the District or WMATA, or whatever, at a later date if they then want to acquire the company.

Mr. AVERY. We have given a lot of thought to that, Mr. Chairman. We have tried to analyze what possible enhancement in value would take place. It seems to us there are two.

First, it would be said that the company is currently in financial difficulty and by means of a subsidy would have gotten out of their difficulty and, therefore, you have enhanced the value of the company.

The second possible enhancement of value comes from the fact that by giving them a subsidy you substantially reduce the risks involved in the business and therefore you have made it a more valuable business. On our analysis it seems that it wouldn't be fair to deprive the company of the possible enhancement of value in the event of a sale-the possible enhancement of value from the first source.

This is subject to argument but it seems to me this is a fair analysis. I say that because there is another way they can get out of their financial difficulty, and they are clearly entitled to get out of their financial difficulty, and that is by a fare increase.

In other words, we could just raise the fares and give them enough to cover their expenses and provide them with a profit. That would get them out of their financial difficulty just as a subsidy would.

I question whether you could say, with regard to that particular enhancement in value, that it should not be taken in any public purchase.

The second enhancement of value clearly should not be taken into account in any public purchase. If you decided to go the S. 1813 route I would suggest an amendment to it which would take care of that

problem, which would provide that in the event of public purchase, appraisal be made of the enhancement of value involved in the elimination of risks through providing the subsidy and that the company not recover whatever value is assigned to that factor.

That is how we see the problem of enhancement of value.

Mr. Schneider is pointing out to me that what we would be suggesting is that that be an independent appraiser, that we get an independent valuation of that, and then if there were still arguments about it, that it would be submitted to binding arbitration.

Senaor EAGLETON. You mentioned something, in your digest of your prepared statement, about tying in the subsidy with a condition of improving the quality of the service.

Mr. AVERY. Yes.

Senator EAGLETON. Just how would that work?

Mr. AVERY. What the bill provides is that the company has to submit an annual plan. Once each year it would have to submit a plan for improving service. That could cover any number of items: Improving the fleet, increasing schedules, improving routes, any number, a whole range of things that could be done.

We would not just accept the plan and that is it. We would require implementation reports that would have to be programed for the implementation of that plan. Those reports would be submitted on a monthly basis. If the plan were not being implemented to the staff of the Commission, then the subsidy payments would be subject to be cut off. The company would face the financial difficulty that that would cause until it brought itself back into compliance with the plan.

Senator EAGLETON. Would this plan entail expanded routes and new equipment?

Mr. AVERY. Yes; anything you could think of. There are any number of things. Perhaps improvement in the marketing of their service. Senator EAGLETON. Insofar as it brought in new equipment, expanded the routes and new facilities, et cetera, then, of course, the value of the company would be enhanced, would it not?

Mr. AVERY. Yes; that is correct.

Senator EAGLETON. So, again, 10 years from now or whenever the Congress wanted to authorize the acquisition of the company publicly the price would be up?

Mr. AVERY. Yes; it would be up because you are buying a better company. At least you are getting something for that money in that situation and the community would have had 10 years of much improved bus service.

Senator EAGLETON. What we would be getting for our money at that time would be things which we purchased with our own money; to wit, the subsidy.

Mr. AVERY. In part. The subsidy does not pay 100 percent but the subsidy makes a contribution.

Senator EAGLETON. Apparently we are at the point now where there will be no improvement under the present operation.

Mr. AVERY. We hope that is not right. We work all the time on improvement. We have had very substantial improvements within the last year or 18 months.

Senator EAGLETON. Do you think the quality of the system has improved in the past year in terms of new equipment?

Mr. AVERY. Not new equipment because the 85 new buses, that under our established rules should be purchased and in operation beginning next month, have not yet been purchased because of the financial difficulty of the company.

In terms of service; yes. We think there has been substantial improvement the last year. We have had them put in several new routes into the Southwest employment area that had not existed before.

We had them put in this new service from Anacostia through the Northwest which was a partial success. It is now providing better service from Anacostia to downtown than was available before. It was not a success so far as running all the way out to the far Northwest. That is what we started out trying to do. It has not worked too well. It has stayed in as new improved express service from Anacostia to downtown Washington.

There have been a number of other improvements that have been put into effect. We are anticipating some more. We are just in the final stages of completion of the intra-District route structure which has been done by independent consultants under a DOT grant. The report is in final draft form. We should be getting it within another month.

We look to, perhaps, significant improvement in bus service in the District when we have that report. We have our own study which we ordered the company to do and which the company is paying for without assistance from DOT, of its suburban route structure, taking a look at that and seeing whether that could be improved.

So, there are service improvements going on. I think it is an inaccurate statement to say that no service improvement will be forthcoming in the absence of a subsidy. In fact, when I got on the Commission one of the conclusions I reached was that too much of the Commission's energies had been absorbed in the fare area.

It seemed like all we were doing was raising the fare, raising the fare. I made it a point, myself, to say "Let us try to do something besides raise fares. Let us get better service." We had a service improvement proceeding and it resulted in a service improvement order. Some of these things, which I talked about, flowed out of that. Since I have been on the Commission we have hired an urban transit planner. Specifically so that we would have the capability of one man whose job would be but to think of ways that service could be improved. I regard this as a very important area of responsibility to the Commission and we are trying to do something about that.

Senator EAGLETON. Under your proposal would the Commission establish this hypothetical fare, whether 25 cents or 30 cents, and then would you determine what a fair rate of return, and so forth, was for the amount of the subsidy?

Mr. AVERY. Yes.

Senator EAGLETON. The Congress would appropriate the difference? Mr. AVERY. That is right. The hypothetical fare would not be 25 cents or 30 cents. The 25 or 30 cents would be the fixed amount which would determine the subsidy. The hypothetical fare would be above this. The hypothetical fare would include a fair return element.

Senator EAGLETON. What determination would Congress make in this matter other than just to appropriate the money?