The first of these subjects is the alleged purchase price of $500,000 in August of 1956, when the D.C. Transit System acquired the transit system from the Capital Transit Company. This is untrue. The predecessor company was paid $13,540,000 with a $500,000 down payment on signing the contract, $9,100,000 on taking title, and the balance under the terms of notes, bond, and mortgages over a period of years.

The total acquisition cost was actually $23,879,041. We respectfully call attention to the fact that the Company purchased a net worth valued, according to the balance sheets of the Capital Transit Company, the predecessor owner, in the sum of $23,879,041. The differential between the payment of $13,540,000 and the actual value was in the sum of $10,339,041. The Public Utilities Commission caused the D. C. Transit System to pay this additional $10,339,041 by what is known as the acquisition adjustment cost. This was entered on our books on the credit side as an amount to be deducted from our expenses for the benefit of the riding public. Each year until the $10,339,041 acquisition adjustment item is completely dissipated, the stockholders of the D. C. Transit System will be deprived of an annual amount, sometimes as much as a million dollars. Thus, the actual cost price to the D. C. Transit System, including the acquisition adjustment cost item, is $23,879,041.

The question of where did the $13,040,000 come from, in addition to the original $500,000, is another subject which should be clarified. First, it came in part from the earnings of the Company. Second, in part from the sale of some of the real estate of the Company, and third, in part from cash available within the Company. This is normal business practice when a company determines that it has surplus available to reduce debt.

The next point of controversy is brought up when it is said that the D. C. Transit System has a monopoly. This is untrue. As long as automobiles are permitted to operate within the District of Columbia and its environs, the D. C. Transit System has no monopoly. As a matter of fact, the monopoly lies on the automobile side more than it does on the transit side, in that the automobiles, and not buses, monopolize the streets.

Other means of transportation within the District of Columbia are:

1. The pedestrian ;

2. The taxicab;

3. The car pool; and

4. Other bus systems, who are now permitted to encroach into the District of Columbia.

The next subject which was brought up during the hearings of the House Committee on H.R. 9686, was whether the value of the Company would be enhanced by the subsidy and thus ultimately the purchase price be increased in the event the Company would be sold to public authority. This is not true. The subsidy would not increase the earning power of the Company and would not be added to the capital assets of the Company. The earning power of the Company would only be increased by the amount that the WMATC would authorize as a reasonable rate of return. Whether or not there was a subsidy, the WMATC is legally bound to set such fares as would make the Company an attractive investment to investors and, as stated by Congress in the franchise, 61⁄2 percent would not be considered unreasonable. In the last rate proceeding, the rate of return was set at 5.34 percent and this is the earning power that would govern the value of the Company. The subsidy would merely reimburse the Company for monies taken away from it and given to the public. Thus, if the proper fare was 35 cents the subsidy of 10 cents would merely reimburse the Company for the difference between the amount of the fare set by the WMATC and the amount of the fare charged to the public. This is best described as a reimbursement for differential cost. If it were a subsidy it would be a subsidy of the public not of the transit system, Subsidy is a matter of social concern and does not add to the value of the transit system.

Another interesting commentary is the fact that with or without the subsidy the Company is bound to get an increased fare, increased revenues, and a reasonable profit to be determined by the WMATC. This fact alone will influence the value of the Company not the subsidy.

Another controversial subject has been brought up involving the Union. It has been suggested that the Company has been too liberal in granting the requests of the Union. This is untrue. In its Collective Bargaining relationship with the Union, the Company has exercised every possible restraint in attempting to keep down to normal limits and prevailing scales the wages and other labor

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costs. The answer can best be obtained, in connection with this subject, by propounding the question to the Union and asking them whether they consider the Contract too liberal.

The next point of controversy on which questions have been asked is the subject of dividends. It has been implied, particularly in the newspapers, that it is a crime to make a profit and that it compounds the crime when it is paid in dividends to its stockholders. This is manifestly untrue for all business and also for the D. C. Transit System. It has also been implied that dividends should be related only to the original cost or to the original investment rather than to the present value of a company or to the volume of business it presently does. This is likewise a fallacious theory.

First, let's make it clear. Manhattan Island was purchased for $24.00 in beads from the Indians, but it cannot be bought back for the same price today. Likewise, the proper rate of return for U. S. Steel, General Motors, or the corner drug store does not depend upon the original cost. It is related solely to the volume of business that is done and the value of the product. General Motors bases its profits and its dividends on the volume of business that it does and it's a higher profit than the 0.93 percent profit which the D. C. Transit System earned over the past 13 years. Also, the percentage of dividends paid on gross revenue by comparable business far exceeds the 1.14 percent average paid by the D. C. Transit System to its stockholders. The D. C. Transit System is a private enterprise differing in no respect from any other private enterprise except that it is more highly regulated and supervised.

The next subject on which controversy exists is the matter of real estate. Much has been said about using Company assets such as real estate, both operating and nonoperating, for the purpose of subsidizing the riding public. Right now, based upon the losses of the past few years the Company has been subsidizing the riding public by a sum in excess of $2,000,000. This $2,000,000 has come out of the assets of the Company, its cash, and proceeds received from mortgages on its real estate. The surplus account of the Company since December 31, 1966, has been depleted from $2,890,840 to $444,299. It was not intended by Congress, when it granted a franchise to the D.C. Transit System, that the Company lose money, nor that the Company shall subsidize the public in furnishing transportation services below cost. Such misconception is completely unjustified. The Company is not under any obligation to sacrifice its capital assets to provide the riding public with a fare below cost. Court decisions have so held through the years. As to the nonoperating properties held directly by the Company or indirectly in wholly-owned subsidiaries, the Company is fully justified in holding these assets apart as not available for subsidizing the riding public. They belong to the Company's 10,000 stockholders and not to the rate payers, as Chairman Avery has correctly testified.

The next subject for controversial discussion is whether the Company should make available funds from its real estate by mortgage or otherwise in order to support the operations of the transit system. Our answer to this question is in the negative. However, we have actually done so. Although we were not under legal obligation to do so, as I have just described, the Company has, nevertheless, made available funds from its real estate to support the operations of the transit system. The real estate companies have made available approximately $3,400,000 to the transit system in order that it might meet its payments to the Union, to its creditors, and for the purchase of equipment. Earlier in my testimony, I indicated that I concur with the statement of Chairman George Avery before the House District Committee as to the practical aspects of the Commission's proposal. Should this Committee decide to approve S. 1813 we believe certain changes should be made to make it more effective. We are accordingly submitting the bill in rephrased form.

The differences between the rephrased bill and S. 1813 are as follows: The introductory purpose clause of the rephrased bill emphasizes that the proposed payments of public funds are for the purpose of reducing the fares which the public would otherwise have to pay to use the mass transit system. By way of comparison, the purpose clause of S. 1813 states that the bill is intended to "permit public assistance to mass transit bus companies in the District of Columbia." The maintenance of fares at a reasonable level is, as Chairman Avery testified, sound public policy and sound transportation planning. As Chairman Avery stated in his testimony, it is the public which is being subsidized, not the transit companies. It is the transit-riding members of the public who are the ultimate beneficiaries of the proposed legislation. The reason the public is the

ultimate beneficiary is that as a matter of constitutional law and our franchise, the transit company is entitled to charge a fare sufficient to cover all of our operating expenses, interest requirements and a reasonable return on our equity. Since we are entitled to charge the public a sufficient fare to provide such a return, it is the public which ultimately benefits from the proposed legislation. Section 1 of the bill contains the same 25 cent formula set forth in Section 1 of S. 1813, and provides the same arrangement for the payment by the District of Columbia Government to the Transit Company of the differential between such 25 cent fare and the higher fare authorized by the Washington Metropolitan Area Transit Commission.

Sections 2 and 3 of the bill contain the procedural aspects of the making of the payments to the Transit Company by the District of Columbia Government. The procedure followed in our bill provides that the first payments shall be made on the first day of July, 1969, and that the amount of such payment shall be computed by reference to the number of fares collected in May, 1969. Similarly, for each calendar month during the life of the plan, the payment must be made prior to the first day of each such month and the amount of such payment is computed by reference to the number of fares collected in the second month preceding the month for which such payment is made.

Section 4 of the bill provides that any carrier which does not receive a payment under the bill prior to the first day of any particular calendar month would be entitled on the first day of such month to revert back to the normal fares which would be in effect as established by the Commission absent the bill.

Section 5 of the bill covers the material set forth in Section 3 of S. 1813. Our bill establishes definitive procedures and standards to be applied to the transportation plans required to be submitted by carriers for the improvement of service. Section 6 of the bill covers the substance of Section 2 of S. 1813 relating to the use of funds from the bill to give priority to meeting obligations to employee retirement and health and welfare programs. We believe that Section 2 in S. 1813 is unduly restrictive in requiring that all the funds from the proposed legislation must first be used to meet obligations to employee retirement and health and welfare programs. The reason not all of the funds can be used for such purposes is that such a procedure would worsen our present cash flow problem because part of those funds now represent a replacement of fares currently coming in through our cash box. Both the Commission and the Transit Company must have a degree of latitude in the use of such funds in order to assure the public the best possible service. We are aware of our obligations to our employees and of the importance of assuring their welfare. For this reason, in the bill a formula is provided for assuring contributions to employee retirement and health and welfare programs on the basis of applying 75 percent of the amount by which the sum of the net operating income and funds received pursuant to the proposed legislation exceed interest requirements. For those who question whether the employees obligations will be met, we have provided in the bill a procedure by which the Commission can withhold certification of further funds in the event of our failure to comply with the 75 percent requirement.

Another difference between our bill and S. 1813 is that, whereas S. 1813 exempts payments under the bill from income taxes, the bill does not contain any such exemption provision.

While discussing the matter of taxes, I should point out that the bill does contain a provision (Section 7) which clarifies that the amounts received by the D.C. Transit System, pursuant to the proposed legislation, are to be excluded from the computation of net operating income for the purpose of determining whether we are required to pay the District of Columbia real estate and gasoline taxes under our franchise.

The last difference between the bill and S. 1813 is in the language used to amend the existing school fare legislation. Whereas Section 4 of S. 1813 permanently repeals the existing school fare legislation, the bill (Section 8) merely suspends Section 2 of the Act relating to school fare subsidy for any period during which a carrier receives payments under the bill. Under the proposal, in the event payments were not made as contemplated under the proposed new legislation, the existing school fare subsidy legislation would become operative as to any such period.

CONCLUSION

The D.C. Transit System cannot cope with increased operating costs, particularly rising expenses for labor, without a substantial increase in the rates of fare.

Substantial increases in the rates of fare will inevitably produce a loss in ridership thereby adding to the traffic congestion and may possibly diminish the revenues of the Company.

Paralleling this problem are social repercussions which, in effect, means that the public likewise cannot cope with substantial increases in the rates of fare. It particularly will work a hardship on those least able to assume the burden of these unfortunate but necessary increases of fares.

The solution appears to be to reduce the fares and arrange for a plan whereby the general public will subsidize the riding public to the extent of the differential between fares actually paid and the fares required to enable the Company to continue in operation. Even if the transit facilities were to be operated as a publicly-owned utility, it will be necessary to increase fares or pay an operating subsidy, plus an annual capital outlay budget which for buses alone will be approximately $4,000,000. Additionally, we believe the cost of government operation will be even greater than under private ownership, on the basis of the cost being paid in cities having public ownership. As an example:

The record has shown that the D.C. Transit System provides as good or better bus transportation by comparison with any other system in the world. Its costs are as low as can be effectively achieved. No one can do a better job than we have done without increased costs. We believe we can do a better job for the same or lower costs than any government agency.

The D.C. Transit System stands ready to assist this Committee in any way possible.

I want to thank you in the behalf of the D.C. Transit System for the courtesies extended.

PROPOSED SUBSTITUTE FOR S. 1813

[91st Cong., first sess.]

A BILL To maintain the fares to be paid by the public for mass transportation within the District of Columbia at levels which are consistent with the public interest

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. Whenever the fare forming part of a tariff of any carrier furnishing mass transportation subject to regulation under the Washington Metropolitan Area Transit Regulation Compact ("Compact") (74 Stat. 1031) which has become effective pursuant to Section 5(e), Article XII, Title II, of the Compact (74 Stat. 1031, 1040) or the fare for any such carrier prescribed by the Washington Metropolitan Area Transit Commission ("Commission") pursuant to Section 6, Article XII, Title II, of the Compact (74 Stat. 1031, 1040-41) (hereinafter called "Authorized Fare"), exceeds 25¢ for regular route transportation within the District of Columbia, and whenever, in lieu of collecting such Authorized Fare, such carrier shall undertake to and be permitted by the Commission to collect 25¢ for such transportation, or shall collect such lesser fare as may be paid in accordance with the Act entitled "An Act to provide for the regulation of fares for the transportation of shool children in the District of Columbia approved August 9, 1955," as amended ("School Fare"), the Commissioner of the District of Columbia shall pay to such carrier the difference between the Authorized Fare for such transportation and 25¢ and between the Authorized Fare for such transportation and the School Fare, such payment to be made under the terms and conditions hereinafter provided.

SECTION 2. On or before the 15th day prior to the first day of each calendar month commencing July 1969 and ending June 1972, the Commission shall certify to the Commissioner of the District of Columbia the number of fares for regular route transportation within the District of Columbia and the number of School Fares which were paid to each carrier to which Section 1 of this Act applies during the month next preceding the month in which such certification is made. SECTION 3. Prior to the first day of each calendar month commencing July 1969 and ending June 1972, the Commissioner of the District of Columbia shall pay each carrier with respect to which a certification was made pursuant to Section 2 of this Act an amount computed by (a) multiplying the sum of (i) the aggregate number of fares for regular route transportation within the District of Columbia and the number of School Fares by (ii) the Authorized Fare in effect on the last day of the month certified; and by (b) subtracting therefrom the sum of (i) the amount computed by multiplying (A) the number of fares for regular route transportation within the District of Columbia certified to have been paid to such carrier by (B) 25¢ and (ii) the amount computed by multiplying (A) the number of School Fares certified to have been paid to such carrier by (B) the School Fare.

SECTION 4. Any carrier to which Section 1 of this Act applies which has not received the payment contemplated by Section 1 of this Act prior to the first day of any calendar month shall, effective the first day of each such calendar month and during each such calendar month, be entitled to receive and shall be paid the Authorized Fare for regular route transportation within the District of Columbia.

SEC. 5. (a) The Commission shall not submit to the Commissioner of the District of Columbia any certification under this Act as to any carrier which has not filed with the Commission a comprehensive plan for the regulation and improvement of transit and the alleviation of traffic congestion within the meaning of Article II, Title I, of the Compact (74 Stat. 1031, 1032) with respect to such carrier and a program for the implementation of such plan.

(b) The Commission may, by order, require any carrier to file with the Commission additional or revised plans and programs for the regulation and improvement of transit and the alleviation of traffic congestion with respect to such carrier from time to time but not more often than once in any 12 month period.

(c) The Commission may issue an order, after notice and opportunity for hearing, declining to make any certification under this Act as to any carrier which the Commission finds has not made substantial progress in implementing the plan filed by such carrier to the extent that the Commission has directed such carrier to implement such plan and that such implementation is within the power and authority of such carrier.

SEC. 6. Any carrier receiving payments pursuant to this Act shall meet its accrued obligations to employee retirement and health and welfare programs by allocating to such programs amounts which shall not exceed seventy-five per centum of the excess of the sum of its net operating income and funds received pursuant to this Act over interest requirements. The Commission may issue an order, after notice and opportunity for hearing, declining to make any certifi cation under this Act as to any carrier which the Commission finds has not complied with the provisions of this Section.

SEC. 7. Amounts received by D.C. Transit System, Inc. pursuant to this Act shall be excluded from the computation by the Commission of net operating income pursuant to subsections (c) and (g) of Section 9 of the Act entitled "An Act to grant a franchise to D.C. Transit System, Inc., and for other purposes" approved July 24, 1956 (70 Stat. 598).

SEC. 8. Section 2 of the Act entitled "An Act to provide for the regulation of fares for the transportation of school children in the District of Columbia" approved August 9, 1955, as amended (D.C. Code, Section 44-214a) is suspended as to any carrier to which Section 1 of this Act applies for each calendar month for which such carrier has received a payment pursuant to Section 3 of this Act. Mr. CHALK. I do wish to note that the record which I have submitted to you contains a great deal of information which I believe it is imperative to consider in depth, and I believe you have gone through it. It is not the kind of information you are assailed with so frequently that it gives the impression that the D.C. Transit System has not done a good job in the Nation's Capital and it has not been