The subsidy discount provisions were filed to become effective concurrently with the proposed 8-percent increase. In its special permission application, HTL requested that the effective date of the proposed 8-percent increase and the subsidy discount be set at March 28, 1976. The subsidy discount provisions were also set to expire on July 15, 1976, unless sooner changed, cancelled, or extended. Under the indicated order of March 26, 1976, both the proposed 8-percent increase and the subsidy discount were suspended to and including October 27, 1976.'

Respondent is affiliated with 16 other corporations: Hudson Transit Corporation, Short Line Terminal Agency, Inc., Newburgh Terminal Corporation, Harriman Hudson Corp., Hudson Mahwah Realty Corp., Liberty Hudson Corp., Short Line Operating Co., Inc., Wurtsboro Hudson Corp., Short Line Bus Tours, Inc., Limousine Rental Service, Inc., Educational Tours, Inc., Fordham Operating Corp., American New York Tours Corp., Colonial Coach Corp., Chenango Valley Bus Lines, Inc., and Hudson Chenango Realty. These companies are engaged in the motor transportation and related businesses. While respondent and its affiliates are owned by various members of the Rukin family and families related thereto by marriage and the individual stockholders and their respective percentages of ownership in each company vary, David Rukin exercises effective control over HTL and all of the indicated affiliates by virtue of stock ownership and the common and interlocking ownership, control and management among the companies.

In 1975, respondent had intercompany transactions with 14 of the indicated affiliates, which were variously engaged in leasing land, facilities or equipment to HTL, and/or selling passenger tickets for respondent. Eight of these earned 80 percent or more of their total 1975 income from dealings with respondent. In the indicated year, respondent incurred and paid over $2,600,000, or approximately 30 percent of its total operating expenses, in intercompany charges to affiliates. Respondent also derived significant revenues by providing services to affiliate companies, some of which do not have regular employees. In 1975, this amounted to approximately $800,000, which included payments for various office and administrative services, equipment maintenance and repair services, and a substantial charge to Hudson Transit Corporation for providing buses and drivers for that affiliate's New York intrastate operations.

'As a result of a change in the Orange County subsidy agreement, HTL modified the subsidy discount, as published in 2d revised page 4B, Tariff No. 25, MP-I.C.C. No. 48, effective May 28, 1976, under S.P. No. 76-3634-M. The figures herein reflect this change.

The principal issue in this proceeding is whether the proposed increased passenger fares have been shown by respondent to be just and reasonable under the Interstate Commerce Act.

To demonstrate the reasonableness of the proposed increases, respondent submitted comparisons of its commutation fares between New York City and points in New York and New Jersey with those of Maplewood Equipment Co., Inter-City Division (Inter-City), Rockland Coaches, Inc. (Rockland), and Warwick-Greenwood Lake-New York Transit Division of Maplewood Equipment Co. (Warwick-Greenwood). These comparisons reflect that between New York City and several points in New Jersey, namely, Paramus, Ridgewood (South) and (North) and Wyckoff, the proposed fares of HTL are substantially similar to those of Inter-City, which according to respondent is presently subsidized by the State of New Jersey in that its buses are owned by the State and leased back for $1 per year a bus. Additionally, the comparisons show that the proposed fares are substantially the same as the corresponding fares of Rockland between New York City on the one hand, and on the other, Paramus, N.J., and Suffern, N.Y.; and, when converted to a mileage basis, the proposed fares from New York City to Harriman, Monroe, and Chester, N.Y., also compare favorably with the fares of Warwick-Greenwood for corresponding distances to the adjacent Orange County communities of Greenwood Lake and Warwick, N.Y. Tables showing respondent's existing fares and the proposed increased fares were offered and appear in appendix B hereto. Justification for the proposed increases was also postulated on respondent's overall need for additional revenue to maintain the adequacy of its earnings. HTL's evidence supportive of its asserted revenue needs included, among other information, comparative balance sheets and statements of operations for the years 1973, 1974, and 1975, which showed, among other things, that respondent incurred a net operating loss of $132,943 in 1975, with an operating ratio of 101.2, a negative return on its investment, a consolidated balance sheet as of December 31, 1975, and a consolidated income statement for the year ended the same date for HTL and 11 of its affiliates supportive of its operations, with the elimination of all intercompany accounts and intercompany transactions. Separate balance sheets as of December 31, 1975, and income statements for the year ending the same date were presented for the nonsupportive affiliates: Fordham Operating Corp., American New York Tours Corp., Colonial Coach Corp., and Chenango Valley Bus Lines, Inc.

Further justification for the proposed increases was permised on: (1) the favorable comparison of the increases in HTL's commutation fares of 55.5 percent, including the proposed increase, over the base year 1969 with the increase of 71.1 percent in the consumer price index for transportation in the New York metropolitan area (New York and Northeastern New Jersey) over the same base year; (2) presentation of evidence showing dividend payments and distributions of earnings of HTL and its 11 supportive affiliates in the years 1973, 1974, and 1975, which indicated a distribution of less than 25 percent of net earnings after taxes on a consolidated basis; (3) a schedule of salaries received by the principal officersstockholders of respondent and its affiliates prepared from the individuals' 1975 income tax returns; (4) a favorable comparison of the 1975 rate of return on equity computed for respondent and its 11 supportive affiliates (14.8) with the corresponding rate for all class I motor carriers of passengers for 1975 (13.98 percent) and 1974 (14.96 percent) as compiled by the Commission's Bureau of Accounts for selected carriers whose 1974-1975 rates of return ranged from 0.00 percent to over 32 percent; (5) the fact that the 11 percent cost of capital used by respondent's cost analyst in his cost study, infra, is less than the actual cost of capital under current financial conditions, since the cost of debt for the past few years has been running between 10 to 16 percent due to the fact that banks in the New York metropolitan area have been charging between 8-to 12-percent prime interest rates and requiring a minimum of 30percent compensating balances (the amount of cash balance is required to be kept in lendee's bank account to offset principal amount of loan); (6) the fact that in early 1974, when the Commission permitted all motor carriers to file a 6-percent fuel surcharge, respondent decided to forego the 6-percent surcharge; and (7) the opinion of its independent certified public accountant that respondent has a need for the proposed increases in the light of the increasing costs which HTL and its affiliates will face in 19761977.

Respondent's principal justification for the proposed increase is a cost study of respondent's total traffic and commuter-only traffic that has been consolidated to portray the revenues and expenses of respondent and those of its affiliates, to the extent incurred in providing services for transportation of passengers in the name of respondent. In other words, this study, the results of which are reproduced in appendix C hereto, treats respondent, the services of

the affiliates that provide services to respondent and the facilities of those affiliates as a single transportation entity by, among other things, eliminating payments made by HTL to its affiliates and substituting therefor the actual costs to the affiliates of providing those services (excluding general officer salary expense incurred and paid by the affiliates). This cost justification for the instant proposal is based on respondent's base year revenues and expenses that were taken from its books and records for the actual year of 1975 and which are identical to the data reported to the Commission in the 1975 annual report, with the exception of certain accounts which were separated for adjustment purposes. Once the base year (1975) actual data were determined, respondent made adjustments in this data to eliminate intercompany transactions between it and its affiliates, to reflect changes in revenues and expenses that occurred during the base year period, to reflect changes in revenue and expenses that have occurred since the close of the base year, and to give effect to the proposed 8-percent increase on issue traffic revenues. After making the indicated adjustments, respondent provided a statement of operations for its projected year ending June 30, 1977, including the proposed increase.

In projecting revenues, 1975 revenues were updated according to account classification and include increases that became effective during the base year and subsequent to the close of 1975, including the proposed 8-percent increase. Subsidy discount revenues were also developed in accordance with respondent's proposed subsidy discount provisions scheduled to become effective concurrently with the proposed 8 percent. In addition to subsidy revenues received from Orange County, respondent included respondent included revenue received from Rockland County and Duchess County, N.Y.

The 1975 system expenses were increased to reflect cost increases for certain of respondent's expense accounts. Projections of drivers' wages were based upon respondent's current labor contract. The wage rates were separated among those paid on a mileage basis, those paid on a daily basis, and those paid on an hourly basis. The percentage increase factors relative to each type of pay schedule were developed from a comparison of the weighted average rate for 1976 over the weighted average rate for the base year 1975. The comparison of average rates for the two periods resulted in increases of 6.18 percent on the mileage basis, 10.34 percent on the daily basis, and 11.08 percent on the hourly basis. Projection of

mechanics' wages were based on respondent's current labor contract. The percentage increase factor was developed from a comparison of the weighted average hourly rate for 1976 over the weighted average hourly rate for the base year. The comparison of average hourly rates for the two periods resulted in an increase of 10.4 percent. Respondent increased the remaining salary and wage accounts, except general officers' salaries, on the basis of the weighted average dollar increase in wages for drivers and mechanics. The weighted average increase amounted to 8.63 percent. Parts and materials costs for repairs and servicing of revenue equipment were increased by 16 percent, which increase factor was based on price information furnished by respondent's suppliers, General Motors Corp. Respondent increased utility expenses by $7,419. The increase was based on increased dollars in the first quarter 1976 over the first quarter 1975. Public liability and property damage insurance expenses were increased by 8.73 percent on the basis of revenue levels at the projected year level over actual 1975 revenues, excluding subsidy revenues. Communication expenses were increased by 36.28 percent on the basis of increased dollars in the first quarter 1976 over average communication expenses in 1975. Respondent restated its depreciation expenses on owned buses on the basis of a 9-year depreciable life in lieu of the 8-year life which had been previously used. Respondent's restatement is based upon the Commission's findings in docket No. 35976, Commutation Fares, Hudson Transit Lines, Inc., 350 I.C.C. 900. Social security taxes were increased by 7.80 percent to reflect the change in the social security tax base, which increased from $14,100 to $15,300, effective January 1, 1976. Employees' welfare expenses were increased by $49,168, which represents a 30-percent increase in Blue Cross/Blue Shield rates and a 20-percent increase in pension expenses. Respondent restated ticket sale commission expenses by eliminating all duplication of expenses on transactions between affiliated companies. The restatement resulted in a reduction of commission expenses of $66,142. All other base year (1975) system expenses, including general officers' salaries, were not increased. These expenses comprise approximately 17 percent of all system expenses.

Based on the foregoing analysis, respondent projected operating revenues amounting to $9,421,028 and expenses of $9,354,563 with an operating ratio of 99.3 percent and $66,465 in net operating