3. Dominant Carrier Theory After thoroughly examining all the evidence relating to traffic and operations of the four carriers in the trade, the Board determined that Bull is by far the dominant carrier in the trade. It makes three sailings weekly, as compared with only weekly services by each of the other three carriers (J.A. 17 & 20). Unlike any of the other three carriers, Bull is not engaged in substantial vessel operations in other trades (J.A. 17 & 20). And with the ships used in the Puerto Rico trade, Bull calls at no foreign ports on two of its three weekly sailings, while on the third, it calls only at one foreign port and handles a proportionately small volume of foreign traffic (J.A. 17). Two of the other three carriers carry substantial volumes of foreign cargo, and call at a number of foreign ports, with the same ships which serve Puerto Rico (J.A. 20). Consequently, the Board followed the theory, also followed in its prior decisions, that the dominant carrier in a noncontiguous domestic trade may, on facts such as these, be taken as the ratemaking line. The issues in the proceeding were determined, therefore, by treating Bull as the ratemaking carrier (J.A. 49). 4. Rate of Return The Board carefully projected an estimate of operating results for the year 1958, based on actual operating results of record for the first half of 1958. 1958 was the first year in which the carriers operated under the increased rates. The Board found that Bull, with a rate base of $11.5 millions, would earn before taxes a net profit of $580,293 for 1958 with the increased rates in effect. * The gross revenues for the first half 1958 were as follows: Bull Lykes Waterman and Waterman P.R.. $11.706,918 4.215.049 1,940.279 4,121,323 (J.A. 48) Such earnings are equivalent to a return of 5.0 percent, before taxes, on the rate base. The Board found that a rate of return of not in excess of 7.5 percent after income taxes would be fair and reasonable (J.A. 49). Inasmuch as the combined 15 percent and 12 percent increases thus resulted in a return of not more than 5.0 percent before income taxes to Bull, the ratemaking carrier, the Board reached the ultimate conclusion that the increased rates were just and reasonable (J.A. 50). 5. Operating Ratio as Measure of Reasonableness The Board, finding that the rate increases under investigation were just and reasonable under the fair-return-onfair value standard adopted by the Board and its predecessors in similar investigations, found no reason to depart from that standard. Consequently, the Board rejected the contention of the Conference that the operating ratio theory, rather than the rate base theory, be used as a method of determining the reasonableness of rates (J.A. 50). C. The Instant Petitions The instant petitions, filed separately by the Commonwealth and by the Conference although consolidated for argument, seek review of the order of the Federal Maritime Board finding the increased freight rates in the United States Atlantic and Gulf Coast to Puerto Rico to be just and reasonable. On the one hand, the Commonwealth challenges (a) the vessel valuations, (b) the rate of return, and (c) the depreciation expense allowed by the Board as unreasonably oppressive on the shippers, and as excessively liberal to the carriers. On the other hand, the Conference challenges as unreasonably oppressive on the carriers and excessively liberal to the ratepayers (a) the Board's valuation of terminals, (b) its exclusion from the carriers' rate base of certain terminals which are used, but not owned, by the carriers, and (c) the amount of working capital allowed by the Board. The Conference, in addition, attacks the Board's (d) use of the "ratemaking line" ap proach, and (e) the Board's refusal to use the operatingratio formula rather than the fair-return-on-rate-base formula in determining a just and reasonable rate level. SUMMARY OF ARGUMENT There are three basic considerations which closely affect any exercise by the Board of its power to prescribe just and reasonable rates under the Intercoastal Shipping Act, 1933. The first of these considerations is the fact that the Board cannot control entry into the regulated field, for there is no statutory requirement of a license or certificate of public convenience and necessity as a prerequisite to operation in the domestic off-shore trades. Secondly, there is no limitation upon abandonment of service. Any carrier in the domestic off-shore trade is entirely free to decrease the number or scope of its sailings or to abandon service altogether. Thirdly, the capital equipment employed in the regulated off-shore trades is mobile and immediately useable in unregulated business. The vessels employed in the regulated trade can be shifted readily into the foreign trades where the level of rates is unregulated. These three factors distinguish the regulated off-shore domestic trades from all other businesses in which rates are regulated. Such other businesses where there are limitations on inauguration and abandonment of service, and where capital equipment is not adaptable to unregulated use, give rise to regulatory principles which are not always applicable to the regulatory problems confronting the Board with respect to rates in the domestic off-shore trade. A. Summary of Argument in Response to Brief of Commonwealth of Puerto Rico I. The Board was correct in valuing vessels at current market value for rate base purposes. If the Board were to limit vessel valuation to net book cost depreciated, as urged by the Commonwealth, carriers would feel a strong inducement in inflationary times such as these to take their ships out of the regulated trade and place them into foreign trades. The basic reason for using net book value in determining a rate base lies in the great difficulty encountered in determining an exchange value for the capital equipment used by most types of utilities. This consideration does not apply in the case of ships, for ships are commonly bought and sold in the market, and they have a readily ascertainable exchange value. Another reason for adhering to net book value for rate base purposes is the fact that the capitalization of net earnings furnishes an unrealistic yardstick. This is because future net earnings depend on the rates allowed by the regulatory body. In the case of ships, however, current market value is in fact a capitalization of earnings realizable in the unregulated trades. In other words, vessels have a value independent of what the Board allows for rate base purposes, since they are immediately available for use in unregulated trades. In view of these considerations, the use of market value by the Board was reasonable and proper. It resulted in a valuation very substantially lower than that argued for by the carriers who sought to introduce reproduction cost as a relevant factor. The Board's use of market value has the merit of insuring that carriers will not abandon the domestic service for more profitable ventures elsewhere. II. The Board did not err in finding a 72% rate of return to be reasonable. Contrary to the Commonwealth's contention, Bull should not have been restricted to earnings which would merely permit it to pay the interest on its debt capital and to realize a reasonable return on its equity capital. Since the company is to an overwhelming extent debt-financed, the approach urged by the Commonwealth would result in an unreasonably small return on the investment risked in the trade. Whether the capital is borrowed or owned, its value remains the same and the public benefits to the same degree. In any case, the Board simply engaged in obiter dictum in establishing a 72% rate of return as the maximum allowable rate. In fact, as the Board expressly found, Bull, the ratemaking carrier, earned a return of only 5.0% on its rate base during the first year of operation under the increased rates. With allowance for income taxes, this rate of return is reduced to roughly 2.5%. This can scarcely be condemned as an excessive rate of return. The rate of return allowed by the Board compares reasonably with the returns allowed in comparable trades serving Alaska and Hawaii. It is lower than the 10% rate of return allowed to subsidized carriers in foreign commerce before recapture of subsidy. It is not out of line even with returns earned by other regulated utilities which have the benefit of a franchise or other protected monopoly. The rate of return allowed by the Board is very substantially below the rate of return contended for by the carriers. III. The Board did not allow excessive depreciation charges. In this connection, the Commonwealth argues that the Board erred in allowing Bull to use as a vessel acquisition cost a cost higher than the original cost to a predecessor company. It further argues that the residual values for ships have been fixed too low, with the consequence that annual depreciation expense is too high. With respect to the acquisition cost allowed for Bull's vessels, the Board found on undisputed evidence that the present owners of the Bull Steamship Company purchased that company from its predecessors in a bona fide, armslength transaction. The purchase price was prudent and, as ratably apportioned to the vessels, resulted in an acquisition cost for the vessels considerably below their then market value. It is settled that where a utility purchases capital equipment at a cost higher than the seller's book cost, the excess may properly be amortized over the life of the property if such excess is a "true increment of value." In the instant case, the higher acquisition cost reflected a true increment of value since ships had in fact appreciated in value. Since the acquisition cost of the ships was the result of a bona fide, arms-length purchase, |