of WBPL's actual investment, reflecting its purchase price, as a rate base, because the purchase price itself is based on the property's earning ability. The Shipper Group argues that there is circularity in using as a rate base a figure that reflects the earning capacity of the assets, when that earning capacity itself depends on the level of rates to be charged. The Shipper Group also opposes the use of the Commission's valuation as a rate base, considering the valuation. procedure objectionable in a number of aspects, and believing that the use of a valuation base is unnecessary under current judicial standards and is at variance with the original cost concept.

In reply, WBPL opposes the use of an original cost rate base, stating that such a standard would be inconsistent with criteria employed in past pipeline rate cases, and was not contemplated by WBPL when it purchased the pipeline properties. WBPL favors the use of its actual net investment as the rate base, contending that its investors are entitled to a fair return on the capital that they have invested in the pipeline. WBPL acknowledges, however, that it made the purchase with notice of the likelihood that the Commission would use its valuation as the rate base for rate making purposes, and accepts the use of a valuation rate base.

We conclude that the Commission's valuation of WBPL's properties is the proper rate base to be employed in this proceeding. The Commission previously considered the reasonableness of pipeline rates in Reduced Pipe Line Rates and Gathering Charges, 243 I.C.C. 115 (1940), Petroleum Rail Shippers' Assn. v. Alton & S.R., 243 I.C.C. 589 (1941), and Minnelusa Oil Corp. v. Continental Pipe Line Co., 258 I.C.C. 41 (1944). In each of those proceedings, the Commission's valuation of the carriers' properties was used as the rate base in judging the reasonableness of the carriers' rates. Considerations of consistency and fairness require that we adhere to our previously recognized criteria in investigating the rates of particular pipelines at the present time. Use of either original cost or actual net investment as the rate base would be such a fundamental change from previous policy that it may not properly be adopted for the first time in a proceeding involving the existing rates of a particular pipeline. Accordingly, the use of a rate base other than the Commission's valuations will not be further considered herein.

The Shipper Group contends that the valuation procedure used by the Commission produces an excessive rate base and results in unreasonable rates, arguing that (a) it uses an excessively inflated and unsupported "cost of reproduction new;" (b) it gives excessive

weight to the cost of reproduction new as compared with the original cost; (c) it utilizes an arbitrary depreciation concept of "condition percent," without giving full recognition to actual accrued depreciation; and (d) it includes an arbitrary and unsupported 6 percent for going concern value. In reply, WBPL states that it followed conventional and well-established practice in relying on the Commission's valuation procedure, and that any proposed changes are not appropriate for consideration in this proceeding.

The technique employed by the Commission in making its valuations was discussed in the division's report. As the division found, this is not the proceeding for considering a change in the valuation methods. Such questions will be dealt with in the pending rulemaking proceeding in Ex Parte No. 308, Valuation of Common Carrier Pipelines.

The Shipper Group also objects to the use in this proceeding of the Commission's valuations of WBPL for the years in question, on ground that those valuations are tentative and not final. In making our findings herein, we have employed the final valuation of WBPL for 1970 and the tentative valuations for 1971, 1972, and 1973. As an alternative to the tentative valuations, we could have used WBPL's estimates of the valuations for those years, which do not differ materially from the tentative valuations.

We note that the valuations for 1971, 1972, and 1973 have not been made final because they were protested by the same parties that oppose WBPL's rates in this proceeding. No disposition of those protests has been made because the parties in the valuation proceedings requested that those proceedings be held in abeyance pending the outcome of the instant cases. Certainly, it cannot now be urged that the Commission is barred from using the tentative valuations, or reasonable estimates of valuations, for those years in this proceeding. Such a holding would leave the Commission without an acceptable basis for rendering a decision in these proceedings. The shippers have had the opportunity in these proceedings to state whatever objections they may have to the valuations used. They have not shown that there are errors in the property inventory used in the valuations, nor that the valuations, tentative valuations, and WBPL's estimated valuations for the years in question are inconsistent with the established valuation procedures. Rather, their objections go to the nature of the valuation procedures themselves, a matter not appropriate for consideration in this proceeding.

A question has also been raised by the shippers as to the inclusion of certain valuation figures in the rate base. In making a valuation for the carrier, the Commission establishes a value for property that is "owned and used" by the carrier, as well as for property that is "used but not owned." The Shipper Group objects to the inclusion of “used but not owned" property in the rate base; it contends that to allow a return on such property while also allowing as an expense the rental payments on the same property results in a double charge to the ratepayer. WBPL replies that inclusion of this property is consistent with the Commission's valuation methodology and that, in any event, exclusion of this property would not affect the showing that WBPL's rates are reasonable.

We have included the value of "used but not owned" property in the valuations employed herein to judge the reasonableness of WBPL's earnings. However, we note that the valuations of such property amounted to only $1.6 million for 1970 and to about $4.5 million for 1971, 1972, and 1973. Exclusion of these amounts from the valuations would not substantially change WBPL's rates of return on valuation for the years in question. Whether such property should be included in the rate base is matter that may be considered in Ex Parte No. 308.

Rate of return.-Both WBPL and the Shipper Group used cost-ofcapital studies to find what they considered proper rates of return. They determined the cost of debt capital by finding the overall interest rate that WBPL was paying for its outstanding debt. They computed the cost of equity capital in terms of the earnings available to investors in other firms or industries. Then they found a composite cost of capital by weighing these two figures according to WBPL's actual debt/equity structure. Not surprisingly, their procedures yielded similar results: the shippers found a cost of capital for WBPL of 8.25 percent, while the figure found by WBPL was 8.41 percent.

Where the parties diverge, however, is in their application of these figures. The shippers contend that the carrier is entitled only to a fair return on the original cost of its property. Thus, they would apply the determined cost of capital to an original-cost rate base. They state that if valuation, rather than original cost, is to be used as the rate base, then the cost of capital figure should be adjusted downward to find a fair return. They reason that the valuation base provides investors with a measure of protection against inflation, and that investors having such protection will accept a lower percentage return.

WBPL, on the other hand, would apply the cost of capital figure to an actual investment rate base. It states that, in order to provide its debt and to attract equity capital, it must have a sufficient return on its actual capitalization. For this reason, it would adjust its cost of capital figure upward if this figure is to be applied to a valuation rate base that is lower than WBPL's actual capitalization.

Rates of return of 8 percent on valuation for crude oil pipelines and 10 percent on valuation for petroleum products pipelines were determined to be reasonable in the Reduced Pipe Line Rates, Minnelusa, and Petroleum Rail Shippers cases, supra. In keeping with these decisions, division 2 found that the earnings of WBPL, a carrier of petroleum products, would be reasonable if within a 10percent return on valuation. The division also recommended that the scope of the proceeding in Ex Parte No. 308 be broadened to include consideration of the rate of return question.

The Shipper Group argues that it was improper for the division to go "outside the record" to rely on the Petroleum Rail Shippers decision as the basis for adopting a 10-percent return on valuation standard. It contends that the use of such a rate of return in the present proceeding is arbitrary, and that the rate is excessively high, affording the carrier double protection against inflation when applied to a valuation rate base.

WBPL considers the 10-percent standard employed by division 2 to be conservative. It notes that capital costs have been considerably higher in recent years than they were at the time of the Petroleum Rail Shippers case. It also argues that, as an independently owned pipeline, its financial risks and capital costs. are higher than those of the shipper-owned pipelines in the cited

case.

We agree with division 2 that WBPL's earnings may be found reasonable if they are within a 10-percent return on valuation. In accordance with the division's recommendation, we issued an order on January 4, 1976, expanding the scope of the proceeding in Ex Parte No. 308 to include an examination of the proper rate of return for petroleum pipelines. In the interim, until the principles underlying the determination of a fair rate of return for pipelines can be formulated in a proper proceeding, it would be unwarranted for us to hold that a rate of return which was considered reasonable in 1941 is excessive today.

In order to determine whether WBPL's earnings have been within the allowable limits, it is necessary to identify the dollar amount of those earnings. Thus, we begin with its operating revenues, and

substract its expenses and income taxes. Issues can arise as to v hat should be included in each of these categories. The manner in which such issues are resolved will affect the dollar amount of the income that the carrier is found to have earned. The record presents issues as to several of the revenue and expense categories.

Incidental revenues.-WBPL's operating revenues are shown in its annual reports to the Commission for each of the years in question. For example, for 1972, WBPL reported operating revenues of $60,523,560. In appendix B to the report of division 2, however, revenues for 1972 are shown as $59,974,532. The difference is accounted for by the omission of the amount shown as "incidental revenues" in WBPL's annual report. The Shipper Group argues that the incidental revenues should not have been excluded, and we agree. As indicated in the Uniform System of Accounts for Pipeline Companies, 49 CFR 1204, account 260, the category of "Incidental revenue" is clearly a component of operating revenues, and no reason for its exclusion appears. Accordingly, we have included incidental revenue in the operating revenues used in our computations.

Depreciation. The major issue presented with respect to expenses is the amount of depreciation to be allowed. The value that WBPL records in its books for its properties is based on the purchase price that it paid to Great Lakes. Its annual depreciation charges are based on the property values so recorded.

The shippers argue that this depreciation charge is too high. They contend that WBPL's property should be recorded in its books at the original cost of the previous owner, that WBPL's depreciation expense should be based on the original cost so recorded, and that the $91,359,860 in depreciation charges made by the previous owner should be reflected in WBPL's books.

Division 2 accepted WBPL's reported depreciation charges in computing its earnings for rate making purposes. We agree with this holding. The Commission stated in Uniform System of Accounts for Pipeline Companies, 337 I.C.C. 581, 522 (1970), that:

When property is resold at a higher price than that for which it was originally purchased, the new owner is ordinarily entitled to record the price paid in its property accounts and to treat the current cost of ownership as an operating expense over the remaining life of the property.

The amount of depreciation expense reported by WBPL, is in keeping with this holding.