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54    HELICOPTER AIR SERVICE PROGRAM

sources (including the service mall payments from the Postmaster General) fail to meet its prudently incurred costs, in establishing subsidy rates since 1938, the Board has developed ratemaking principles of general applicability to implement the mandate of the act that only those losses which are incurred under "honest, economical, and efficient management" shall be underwritten with subsidy. Therefore, the basic determinations in subsidy rate cases involve (1) reasonableness of capacity operated; (2) reasonableness of costs; (3) the proper investment base to be recognized for rate purposes and the related fair return; and (4) the amount of revenue to be recognized for rate purposes. 

The Board's procedures provide for detailed analyses and findings in each of these areas. The Board's Rules of Practice provide that carrier subsidy petitions must include a 12-month forecast of operations upon which the carrier's subsidy claim is based. Preliminary staff analyses are made as to all elements of the carrier's forecast, and additional information is requested from the carrier with regard to any area of its subsidy claim which is not substantiated or for which clarification is needed. After receipt of all necessary information, detailed analyses, prepared in accordance with law and established Board policy, are conducted which embrace: (a) the reconciliation of the carrier's estimates with its reported experience for the most recent 12-month period, (b) current and prior audits, (c) trends in the carrier's operations, and (d) staff expertise and knowledge of the carrier's operations gained from studies, reports, prior cases, and field trips.

In accordance with the statutory requirement that subsidy not be provided to defray costs other than those incurred under "honest, economical, and efficient management," and that only those services required in the public interest shall be subsidized, there is close Board review or "screening" of the pertinent factors underlying the carriers' subsidy claims. Thus, for example, costs whose recognition would be contrary to public policy, such as charitable contributions, and entertainment and lobbying expenses, etc., are not allowed. Other typical expenses disallowed include expenses reported on bases inconsistent with sound accounting principles, excessive costs (exceeding standard levels), unsubstantiated increases, uneconomic costs (i.e., those exceeding costs of comparable carriers), and costs not reasonably related to the carrier's air transportation services. Excessive equipment in number of capacity is not subsidized. The same is true of depreciation expense recorded at rates which may be excessive according to experience and established Board standards. The recognizable investment is also developed according to established standards, which are designed to provide a fair return on the facilities and capital used and useful for the required services. In addition, in determining the recognizable amount of revenues, all sources thereof are scrutinized. Thus, profits earned by the carriers for services performed in military airlift operations are used to reduce the subsidy otherwise required by such carrier. Net revenue from other types of transactions, such as charters, are similarly considered in determining a carrier's subsidy requirement. On the other hand, losses from charter operations and all-cargo services are not underwritten with subsidy nor are any other losses unrelated to the carriers' air services. This brief summary of the "screening" process, designed to assure maximum productive use of each subsidy dollar in the public interest, is merely illustrative of the adjustments made in the subsidy process which are detailed in each of the Board's public orders determining the subsidy rates for the various carriers.

Local service class subsidy rate

The above summary is applicable to cases in which a subsidy rate is determined for a single carrier as well as to cases in which a single subsidy formula is designed to embrace a class of homogeneous carriers. Because of the importance of the latter type of subsidy rate, commonly know as a class subsidy rate, it is appropriate to summarize its origin and development.

Prior to January 1, 1961, subsidy rates had generally been established for individual carriers on a case-by-case basis. By reason of a combination of factors - including particularly the rapidity of change in their developing route systems - the local carriers were often in position where there subsidy rate was open or undetermined. Since, in this situation, the carriers locked the certainty of a final rate, the single carrier subsidy determination process did not create optimum climate for long-range carrier planning nor maximum incentive for optimum operations. Finding that the 13 local carriers, despite various differences, represented a homogeneous group which could be encompassed by