INVESTIGATION OF TENNESSEE VALLEY AUTHORITY

TUESDAY, NOVEMBER 22, 1938
CONGRESS OF THE UNITED STATES,
JOINT COMMITTEE ON THE INVESTIGATION

OF THE TENNESSEE VALLEY AUTHORITY,
Senate Office Building, Washington, D. C.
The committee met pursuant to adjournment at room 318 Senate
Office Building, at 10 a. m.

Present: Senator Vic Donahey (chairman), Representative James M. Mead (vice chairman), Senators Schwartz and Frazier, Representatives Barden, Thomason, and Jenkins.

Chairman DONAHEY. You may proceed with the witness.
Mr. BIDDLE. All right, Mr. Kellogg.

TESTIMONY OF CHARLES W. KELLOGG Resumed

YARDSTICK OF RATES FOR HYDROELECTRIC SERVICE

Mr. KELLOGG. Mr. Chairman, as I am resuming from last Friday, may I remind the committee very briefly of what I started to say at that time on the subject of yardsticks?

The essential point that I made was that the electric utility business requires in the case of hydro property about 13 times as much capital as industry as a whole for the same sized output in money, and also that from this fact it follows that fixed charges, consisting of dividends, interest, depreciation, and taxes, comprise over 90 percent of the cost of furnishing hydroelectric service.

IMPORTANCE OF ACCURATE ACCOUNTING

And from this I deduce the further fact that necessarily accuracy in accounting for investment and for fixed charges is the very essence of an accurate or factual yardstick. So I am starting off, first, to consider this matter of investment.

When privately owned utilities start out to develop hydroelectric power on navigable streams, and a great deal of that has been done, they are required out of their funds to pay for all of the costs of the investment. The only exception that I know to that is in more recent years that the Government has paid for the cost of the locks in the dams. All of the rest of the costs for improvement in navigation or for flood control or for any other purpose has to be paid for by the company which builds the property.

In addition to that they have to pay the cost of interest and taxes during construction; they have to pay general overhead expenses.

And in a great many cases especially these large hydro plants during the period of loading up the plant, which takes a very long time in many cases, they have to provide for inadequate earnings on their investment during this initial development.

TENNESSEE VALLEY AUTHORITY'S LOW YARDSTICK RATES

Now, the T. V. A. has not allowed for a good many of these items. I have, for example, taken the actual costs as reported by the T. V. A. or by the Army, which built Wilson Dam, of the three completed dams, Wilson Dam, Wheeler Dam, and Norris Dam, and from those have computed what those would cost a private enterpriser to build. In the case of Wilson Dam, starting with the original cost and allowing 10 percent for overhead, allowing for interest during construction in this case, I have used the average rate of interest on Government money during the year, and allowing for the loss in ability to earn interest during the years that earnings were not adequate for that purpose, I get the following figures. I find a cost was computed for Wilson Dam to correspond to what a utility company would have to pay of $77,581,000, compared to $30,120,000-odd reported by the T. V. A. in its allocation report of June this year.

I find that Wheeler Dam similarly figured would have cost $39,384,000, as compared to $32,473,000 reported by T. V. A.

Norris Dam would have cost $44,075,000 compared to $31,532,000 reported by T. V. A.

I have added into the T. V. A. structures, however, the cost of step-up stations. That is to say the high tension transformers and switch gear at the stations which we consider part of the power station investment.

And in that way I find that private companies would have spent $161,000,000-odd to build these plants and carry them to their present state, while T. V. A. figures their total cost to be, at the time of the allocation in June of this year, $97,690,000-odd.

So the T. V. A. starts in this case, with a total investment, including navigation and flood control, and all of the other factors included in their investment, about 60 percent as much as privately owned and privately operated utilities would have to spend to make a similar development and carry it to its present state.

Now, I realize perfectly, gentlemen, that T. V. A. argues that since they paid no interest or depreciation or overhead, and since they did not have to bother about deficient earnings during the development period, that they simply didn't charge these things in.

To that I reply to two things. In the first place those charges existed, they were carried by the taxpayers. And private companies. would have had to carry them.

My claim therefore, is that to that extent, to the extent of this margin of 60 percent, the investment figures represented by T. V. A. are not a measure of what somebody else would have to pay, and therefore are not a factual yardstick.

Now, coming next to the allocation of costs, as you gentlemen have heard until perhaps you are sick of hearing that, the T. V. A. has not charged all of its costs to power, even the costs which it admits having spent. It has allocated them

Representative THOMASON. May I interrupt you?

Mr. KELLOGG. Certainly.

Representative THOMASON. You mean it has failed to charge something that it admits that it spent for the purposes which it sets outMr. KELLOGG. No; I say that the amount which it admits it has spent, it does not charge entirely to power.

Representative THOMASON. Spent for what?

Mr. KELLOGG. For the entire development of these three dams. I am discussing these three dams, that is the three dams which are completed, for which it admits to have spent a total of about $97,690,000, and which I claim would have cost a private developer about $161,000,000 to construct and develop.

Of that $97,000,000, however, the T. V. A. does not charge all of it to power. In the allocation report, which was filed with the President on June 17, 1938, about 40 percent of the combined charges were allocated to power, which makes a grand total allocated to power of 52 percent of the total.

So that taking 52 percent of 60 percent, we find that what would have cost private utilities about $161,000,000 to build and develop, T. V. A. has whittled down for power investment purposes to about $49,000,000, or 30 percent of what it would have cost private utilities to make this development.

Mr. BIDDLE. Mr. Kellogg, just to correct I think a figure, isn't there a typewritten mistake on page 3? Shouldn't the $43,000,360 be $49,000,360 in your press release?

Mr. KELLOGG. $49,000,360 is what I have here. Does the press release show $43,000,360?

Mr. BIDDLE. The press release has $43,000,360.

Mr. KELLOGG. That is a typographical error.

Mr. BIDDLE. That is right, that should be $49,000,360 on page 3. Mr. KELLOGG. That is the 52 percent.

Mr. BIDDLE. Yes; I understand that.

Mr. KELLOGG. Fifty-two percent.

Mr. BIDDLE. Yes.

Mr. KELLOGG. I might just interject there in passing that companies with which I am definitely familiar have actually had to spend these entire amounts.

For example, the Mississippi River Power Co., which built the Keokuk Dam, which maybe you probably have heard about for years the company which I had charge of from 1914 to 1919-built the entire navigation improvement, they created a pool 50 miles long on the Mississippi River, they built a lock of the same width as the Panama Canal locks, and an even greater lift, although not as long, they built a large drydock, furnished buildings and equipment, shops, tools, storehouses for the Government, all of that being furnished by the power company as part of its development cost, and had to be carried by it.

And I think the same thing in a general way is true of all of the developments by private companies on navigable streams. One of the companies in my group built a few years ago the Rock Island development on the Columbia River, the first time the Columbia. River had been dammed. The entire cost of that development has been carried by our company. It is true that if in later years a lock is installed there, it will be at the Government's expense.

But the entire improvement to navigation as to water levels, fish ladders, and all that sort of thing have been installed by the power company as part of its investment.

The same thing is true of Conowingo and the two other plants on the Susquehanna River, and it is generally true, so that I am talking about a perfectly specific thing that the power companies are up against, not something fanciful or theoretical.

115943-39-pt. 10-2

With regard to the matter I mentioned of development costs, that is loss of earnings during the development period, we had a particularly difficult time with that in the Keokuk development. During the years I was there, we were frantically trying to sell enough power to pay the charges on our investment, and for the first 2 years or more we actually were unable to earn the interest charges completely from the earnings of that plant. So that what I am presenting along that line is not as I say guesswork or theoretical matter, but actual factual experience of my own and other companies.

I might also add, I note from my notes here, that this 30 percent of the total cost to a private utility of a development, which was shown in the allocation by T. V. A. of the actual cost of the first three completed dams, first three dams completed, compared with the Bonneville Dam on the Columbia River, in which case on the initial investment only 22 percent of the cost, total cost, was allocated to power and the balance to navigation, although on the eventual investment at Bonneville about 57 percent will be allocated to power.

The point I stress, of course, is that the ability to simply change by changing the names to avoid investment, as has been done in this case, cannot possibly be a fair measuring stick of what anybody else is up against who actually makes such charges.

Now, coming next to charges. I have been speaking now about investment, but coming now to charges against that investment, of course, they are just as important as the investment itself in affecting costs.

As I said earlier, over 90 percent of our cost in private companies for operating hydro plants is in the nature of fixed charges, return on the investment, which is either interest on bonds or dividends on stock. (We try to keep our bond indebtedness down to not over 50 percent of the total cost in order to protect the bonds adequately); depreciation and taxes.

Now, up to date T. V. A. in its statements of operation, published in its annual reports and reported to committees of Congress has not charged anything whatever for interest or depreciation, our largest costs, and for taxes during the last year they charged $71,051, which I figure is of the order of magnitude of about one-tenth of 1 percent on the investment in the plants in question.

Now, I submit without attempting to attack the T. V. A., which I am not doing for this, that is a matter of public policy, which I do not feel competent to pass on, but I do definitely feel competent to say that where no interest or depreciation is charged and only nominal taxes, in other words, where what amount to the greatest charges for private utilities are almost completely ignored, the result cannot be called a fair or factual yardstick. It simply is not measuring the same thing or doing it in the same way.

Now, of course, the reason why. the utilities as a whole are very much interested in this situation and why 1, representing the utilities in a purely factual way, am coming before you gentlemen on this subject is because of the competitive effect which results from these so-called yardstick rates.

It is not an effect limited entirely to the Tennessee Valley. It spreads all over the country. At every other place that we do business there is a threatening effect from the alleged statements that T. V. A. rates are lower than any other rates, and are a fair measure of what other rates should be. That is why this matter is of such great and serious importance to all of the utilities in the country.