Senator EAGLETON. 1968 was a bad year for the company, partially or somewhat attributable to the loss of passengers on the transit system. Would the severity of the loss of riders in 1968 have had such an effect on the company if its debt structure had been in a healthier situation? Mr. AVERY. If it had more equity capital?

Senator EAGLETON. Right.

Mr. AVERY. Unquestionably it would not have had as bad an effect. Debt is fixed charge. If you have a higher equity ratio then you have less fixed charges and you can withstand the thing more. The other side of the coin-in fairness you have to look at both sides-the more equity money there is the more return you have to give because equity money costs more than debt money.

So that while you get the benefit when you have the higher equity, an ability to withstand the kind of things which have happened in the past year, on the other hand in the good years you have to pay more and fares would be higher because of greater amount of equity in the company.

Senator EAGLETON. Isn't it sort of, you used the word hornbook, a hornbook rule that for sound financial management a company ought to have its equity situation and its debt structure in a position to ride out a bad year that may occur from unforeseen circumstances? Mr. AVERY. Yes.

Senator EAGLETON. This company has not been able to ride it out. Mr. AVERY. It is 2 bad years, not just 1. I think it would have been able to ride out one bad year. If we had not had the loss in ridership, due to the riots and the crime situation that caused us to put in the scrip system, I don't think the company would have been in the situation that it is in today.

So, in 1967 was not a good year and it was followed by 1968 which kind of really did it in.

Senator EAGLETON. Do you feel you have the authority under present law, or that you should have the authority under future laws, to impose some kind of debt ceiling or reserve fund to provide for some kind of fluctuations in income?

Mr. AVERY. Let me take what the present law is first. It is pretty clearly recognized again that regulatory commissions cannot order changes in the capital structure. What they do is use hypothetical capital structures in setting rates.

The FCC does this and many State commissions do it with regard to the telephone company. There the situation is just the opposite of what you have here. The regulatory commissions feel that the telephone company has too much equity and therefore they get too high a return because of the high imbalance in equity.

There they use a hypothetical structure which assumes there is more debt than there actually is in the capital structure, thereby reducing the return. That has been the traditional approach of commissions when they think that the capital structure is not what it ought to be, to use a hypothetical one, in setting rates which puts an indirect pressure on the management to bring its structure in line with what the commissions think it is.

So, I don't think we have the power to order a change. It might be worthwhile considering a way to change the law to give the Commis

sion more power in that regard. I would rather think about that than to give an answer on it right now.

Senator EAGLETON. Let us get on the question now of the shortages in the union funds-the pension, health, and welfare funds. When was this first brought to the attention of the Commission, Mr. Avery?

Mr. AVERY. We knew about it for some time before it became a matter of public concern. Do you remember, Mr. Lewis, when we first became aware of these arrears?

Mr. LEWIS. About last fall.

Mr. AVERY. Last fall.

Senator EAGLETON. In the fall of 1968.

Mr. AVERY. Right. Six or 8 months ago.

Senator EAGLETON. Based on such investigation, as you made of the situation, when did the shortages first begin to occur?

Mr. AVERY. In July of 1968.

Senator EAGLETON. Weren't there some shortages in 1966 and in 1967 that were later made up?

Mr. AVERY. Right, there were.

Senator EAGLETON. There have been delays in management contributions but ultimately they were made up?

Mr. AVERY. Right. They were current for a while and then they fell behind again starting in July 1968.

Senator EAGLETON. Does the transit company have any unencumbered properties at the present time which it could sell, or dispose of, in order to pay off its obligations? By the way, what is the amount of the obligation?

Mr. AVERY. About $2 million the last time I checked.

Senator EAGLETON. Does it have any unencumbered assets to pay off this old obligation?

Mr. AVERY. It does have some unencumbered properties that are in operating status. They couldn't sell those because they need them to operate. I assume you mean nonoperating. There are the three garages Trinidad garage, Eastern garage, and Brookland garagewhich were used for transit operations but are no longer so used because of a consolidation of operations.

Senator EAGLETON. Are they all above the line?

Mr. AVERY. They are all still above-the-line properties.

Senator EAGLETON. Can you try to hold them there for us?

Mr. AVERY. That is exactly what we are doing.

Senator EAGLETON. Do you know whether they are mortgaged already?

Mr. AVERY. All three of them are unencumbered.

Senator EAGLETON. Do you know the current market value of those? Do they approximate $2 million?

Mr. AVERY. We could get the assessed valuation.

The assessed valuation, Mr. Lewis tells me, is about $1 million. I understand the assessed valuation is somewhere between 50 and 60 percent of the actual market value. So, it appears, the actual market value would be somewhere around $2 million.

Senator EAGLETON. Have you made any suggestions to management as to what they might conceivably do in order to fulfill their obligations with respect to these funds?

Mr. AVERY. Yes.

Senator EAGLETON. What have you suggested?

Mr. AVERY. We have discussed with them the sale of those garages. In fact, you may know one of them, the Eastern garage, the one on East Capitol Street. The city has wanted to purchase it for 2 years.

They have had the item in their budget for the last 2 years. It has been stricken out both times. It is in the budget this year and hopefully it will be approved and then it could be purchased.

At the city government's request, and specifically at Mr. Fletcher's request, I inquired of Mr. Chalk whether he would use the proceeds of the sale of that garage or any of the other two garages if they were both by a public authority, whether he would use those proceeds to pay off the existing debt of the company rather than passing them along to stockholders. Mr. Chalk gave me an unequivocal oral commitment that he would do that. This was about 2 weeks ago. He said that if those properties were purchased by the government that the proceeds would not go to stockholders, that he would use them to pay off the existing debt of the company.

Again, I hope you will ask Mr. Chalk about that when he is on the stand.

Senator EAGLETON. If the properties are not sold to pay off this debt and the debt remains as it is, some $2 million, it is expected that if the subsidy proposal went through part of the subsidy would go toward retiring this debt. I am talking about the health and welfare pension. Mr. AVERY. I hope you will ask Mr. Chalk about this directly.

Senator EAGLETON. I will ask him that and many other questions, I presume, but you are the proponent of the subsidy and you are the regulatory commission. You have some oversight in how the subsidy is to be utilized.

Mr. AVERY. I was going to give you an answer, but since he has control of his own cash, I would like to have him on the record too. I think the answer to that is twofold. In Mr. Fletcher's testimony you asked him about the meetings with the Mayor in regard to these arrears. I was present at those meetings and Mr. Chalk indicated that if the company were restored to financial health, either through a fare increase or through the subsidy, that he would be able to obtain new and additional financing which would enable him to pay off those arrearages immediately. Then he would have to, of course, pay the cost of that new financing out of what would otherwise be profits.

That makes sense to me, from my knowledge of finance and my knowledge of regulations, that he could raise more. Once he got in a position where he was not suffering loss he could raise capital, whether debt or equity, I would hope equity.

If for some reason he could not do that, what he would have to do is use what would otherwise be his profits. He would have to forgo any profits and any dividends until such time as he used those funds to pay off these obligations.

Senator EAGLETON. What would be wrong with that?

Mr. AVERY. Nothing. He really had better do it. Of course, you understand there is that provision in the bill, itself, that requires that any funds being paid through the subsidy goes directly to pay off those obligations that are still existing. We were concerned about that problem and tried to write it into the bill.

Senator EAGLETON. Does it seem quite right that Congress, at this time, should subsidize Mr. Chalk to pay off debts upon which he has defaulted in the past?

Mr. AVERY. First of all I don't think you are subsidizing Mr. Chalk. I don't think I am asking you to subsidize Mr. Chalk. I would not come here and ask you to subsidize Mr. Chalk.

Senator EAGLETON. You were subsidizing his company.

Mr. AVERY. Subsidizing the expense.

Senator EAGLETON. You are guaranteeing him a profit. You are going to enhance the value of his company. Make it a no-risk, no-loss, heads I win, tails you lose operation. Could anything be nicer for Mr. Chalk than that?

Mr. AVERY. He has already got, not the guarantee, but an opportunity to earn a fair return. We already have an obligation to give him a fare structure which pays his expenses and provides for him a fair return. What I am concerned about here is, if we don't do something, I will be raising those fares again and again and again.

I don't think that is right. Now, there are problems and there are some of these side effects that you are talking about. They could be characterized in terms that make it look like it is a pretty good deal for Mr. Chalk. But I think that the kind of problems you are talking about can be subjected to proper control, either through the existing regulatory prospect, or by some change in the law that you could

write in.

You would be achieving, what I think we have to achieve, which is some solution to this problem of constantly rising bus fares.

Senator EAGLETON. Do you see the light, talking in terms of the subsidy, that this puts Congress in? In the financial operation of the company, based on its past record, since Mr. Chalk acquired it, the properties have gone below the line. Where they paid out dividends in years in which there were losses. When they have paid dividends out of capital, and so forth. Should Congress be expected to subsidize, in the future, the operation of a company whose past record has not been, to me, very wholesome?

Therefore, doesn't Congress have to have some assurance that there will be some control or regulation over future financial activities of this company in the same regard?

Mr. AVERY. Well, you in Congress have to protect yourselves as to the controls to which any subsidy moneys you give the company, if you decide to go that route, are satisfactory to you. If the existing controls of the regulatory system aren't enough, and you want to subsidize them, you should think about what additional controls you want and write them into the bill.

It is a very difficult question for me when you start characterizing what has been done in the past as being good or bad. There have been some regulatory problems with the company and the Commission has been reversed a couple of times in decisions it has written in regard to fares. Most of the things that are talked about as somehow being wrong, on close analysis and reasoned analysis, do not appear as bad as they are made out to be when they are characterized in an unemotional way.

Senator EAGLETON. Are there other debts that the company owes other than the $2 million to the health and welfare fund?

Mr. AVERY. The last time I asked, which was in the last few days, the total accounts payable was around $4 million.

Senator EAGLETON. Does that include the $2 million?

Mr. AVERY. Yes.

Senator EAGLETON. Could you submit, at a later date, a detailed breakdown of what the debts are for the other $2 million?

Mr. AVERY. What we will do is ask the company to supply it to us. If you want, it can be supplied through us, or we can ask the company. Senator ÉAGLETON. Either way you want to.

Mr. AVERY. We will get it from the company and pass it along to you. (The document follows:)