Mr. KELLOGG. As a matter of fact I just had interest in that capital cost, I didn't figure any tax.

Mr. BIDDLE. You didn't figure any tax?

Mr. KELLOGG. No; nor depreciation. They simply failed to earn interest.

Mr. BIDDLE. You figure the depreciation in the sense of not permitting it in Wilson Dam, if that can be called figuring?

Mr. KELLOGG. I figured it this way, that it never had been earned, and that it was figuring losses during the build-up period, so that if I had put it in it would have made the losses greater, and the cost that much greater, and I thought I would leave that out, since it was not earned.

Mr. BIDDLE. We will come back to that later. Go ahead. I think you just finished with the discussion of steam versus hydro. Mr. KELLOGG. Yes.

INCLUSION OF TAXES IN TENNESSEE VALLEY AUTHORITY RATES

Vice Chairman MEAD. While you are on the matter of taxes, I have looked up a statement that you made a few days ago that I would like to get rid of right here. You testified that the national average of taxes paid by private utility companies amounted to 121⁄2 percent, or approximately 12% percent?

Mr. KELLOGG. No, if I did, that is wrong.

It is 16.1.

Vice Chairman MEAD. 16.1. Anyway, I take it for granted you said the national average was somewhere in the neighborhood of 121⁄2? Mr. KELLOGG. That is on the gross earnings?

Vice Chairman MEAD. Yes. Now, I notice on page 1178 of the hearings, Mr. Lilienthal, in testifying, stated that T. V. A. included an item of 12%1⁄2 percent of its gross revenue in computing wholesale rates, and that 5 percent of that item is actually paid to the respective States in lieu of taxes.

And I find further in the same hearing, in a contract with a municipality, Lenoir City, in Tennessee, it provides, from the remaining revenues, the municipality shall thereafter pay into its general fund a tax equivalent as provided in the financial accounting policy in the schedule of terms and conditions of the contract to which this contract is subdivision D, section 10, the following provisions, which permit the municipality to take from the electric department revenues for the general fund of the municipality an item in lieu of taxes equivalent to the prevailing municipal property tax, and county and State taxes, so that Mr. Lilienthal in the letter to Senator McNary indicates that they are paying 5-percent taxes to the States, indicates that they are including in an item of cost an amount equal to 121⁄2 percent, and indicates further that in the contracts with municipalities the municipality is paying into its own fund a fair and reasonable tax rate.

And it occurs to me in all these charges that are made that the T. V. A. pays no taxes, that it ought to be emphasized and reiterated that T. V. A. pays taxes, that in its contracts with municipalities, the municipalities are recompensed with taxes, and that in the computation of wholesale rates a fairly reasonable general national average is used.

And I don't say that you made any statements to the effect T. V. A.

was unfair in the matter of taxes.

115943-39-pt. 10-4

Mr. KELLOGG. I will repeat what I said this morning, and I got it out of the published reports of T. V. A.

Vice Chairman MEAD. They are, I would say, a little bit incorrect, I wouldn't say that they were extremely unreasonable, I would say the statements are incorrect. And it occurs to me that T. V. A. down there in Tennessee, when you consider the tax rate paid in other dams by other companies, based upon an assessed valuation rather than upon the valuation of the physical properties themselves, that T. V. A. is meeting its obligations fairly reasonably.

Mr. BIDDLE. Let's see what you did say exactly, Mr. Kellogg. In the second paragraph of this statement of yours to the press, which I take it is the same statement that you want to use with us, you say;

A private company must pay interest and taxes during construction and (where some time is required to load up the plant) preliminary losses in operation. (Tennessee Valley Authority pays none of these, although their entire investment is represented by interest-bearing debt of the Nation, and all taxes not paid by them must be added to the tax burden of others).

Now, isn't it true that as Senator Mead just said, the T. V. A. in computing their rate base for wholesale rates made an allowance of 31⁄2 percent interest, and an allowance of 12% percent on their gross to take care of those elements of interest and taxes which you indicated to us was not considered in their computations?

Now, what difference does it make whether as a matter of bookkeeping the item of tax appears in a ledger, as long as that item is made the basis for your rate? That is the essential thing, isn't it? Mr. KELLOGG. Well, I was testifying entirely as to what the reports of the T. V. A. had shown.

Mr. BIDDLE. Now, point out one report to me. Let's see about this first report here. I will just see what it says about that.

I refer you to page 34 of the annual report of the T. V. A. ending June 30, 1934, for that fiscal year.

Now, you say "The T. V. A. has stated proudly," that they never paid any taxes. Let's see exactly what they say here:

The rates approved by the Authority, both wholesale and retail, are designed to cover all costs properly chargeable to the rate payers including operation and maintenance of the electrical properties, depreciation, interest on an amortization of the capital investment and taxes.

Now, there is a specific statement in their report.

Mr. KELLOGG. A statement of what they plan to do, but never have done, that is my story.

Mr. BIDDLE. No; not what they plan to do. They state they take into consideration for rate-making purposes these elements.

Mr. KELLOGG. Then they don't do it.

Mr. BIDDLE. What difference does it make whether the taxes which are not actually paid out, or interest which is not actually paid out, are charged on the books, so long as the rates are based on those considerations?

Isn't that the essential thing, and isn't it therefore most misleading to say, as has been said constantly by you and by other representatives of the utilities, that the T. V. A. never pays taxes, indicating to the public that their rates are not based on a fair comparison with the private utility companies, which do pay taxes?

Mr. KELLOGG. Yes; I think that is a correct statement, it is a correct statement. But, I have the last year that they reported, and their taxes that were in their published operating statement are $71,051.00. That is what they say.

Mr. BIDDLE. I must press you on that.

Mr. KELLOGG. They have no deduction for interest whatever.

Mr. BIDDLE. Isn't the important point whether those considerations are taken into account for the purpose of making rates? It is not a question of whether they are paid in cash; if those rates are based on these considerations, isn't the comparison a fair one?

Mr. KELLOGG. If the rates take into account all of their costs, they are of course rates based on their cost

Mr. BIDDLE. And you then

Mr. KELLOGG (continuing). Based on the costs they claim, I mean. Mr. BIDDLE. Then why do you say anything about whether the taxes are actually paid in cash? Has that anything to do with it if they are taken into the base rates?

Mr. KELLOGG. I think it has a lot to do with it. I think the published Government reports should show their costs.

Representative JENKINS. May I ask a question?

Mr. BIDDLE. Yes.

Representative JENKINS. Suppose, you read from the report there, you read from the report that says that they do take taxes into consideration?

Mr. BIDDLE. Right.

Representative JENKINS. In fixing the rates?

Mr. BIDDLE. That is my point.

Representative JENKINS. Suppose as a matter of fact they only take, we will say, $1 for taxes?

Mr. BIDDLE. I am not assuming that now. I am assuming, as Mr. Lilienthal testified, and as Senator Mead pointed out, that the T. V. A. is basing these rates on a figure of taxes of 12% percent of their gross, 31⁄2 percent on their money. If you state, and it has been stated again and again to the public, that they do not pay any taxes, without stating at the same time that their rates are based on a consideration of taxes comparable to taxes of the utility, that is misleading and incorrect.

Did you ever in any literature put out by your organization, or have you today in this press release qualified your statement of their not paying taxes?

Mr. KELLOGG. No.

Mr. BIDDLE. By a statement that it is true nevertheless that their rate base contains these elements for making rates, have you ever done that?

Mr. KELLOGG. NO.

Mr. BIDDLE. That is all.

Mr. KELLOGG. No; I have just stated the facts.

Vice Chairman MEAD. Mr. Biddle, so that the statement that I made might be reinforced by the actual words of Mr. Lilienthal, let me read this on page 1177 of the printed record [reading]:

Taxes were included in the following manner. Five percent of estimated gross revenues for the output of the plant. To this was added 7% percent on gross revenues, making a total of 12 percent of gross estimated revenues as a tax charge in the wholesale cost of power. This 121⁄2 percent was adopted because

at the time the rates were fixed this was the percent of gross revenues paid in taxes by private utility companies throughout the country. That is to say, the national average percentage of 121⁄2 out of every dollar goes to taxes, to pay taxes by private utilities.

Continuing, Mr. Lilienthal says: "Which was the national average percent of gross revenues paid as taxes by private utility companies.' These words were the words of Mr. Lilienthal to this committee and they were embodied in a letter which he had sent prior to that to Senator McNary, so that I maintain that it is grossly unfair, unsportsmanlike and untrue to be a party to the presenting of information to the country that T. V. A. pays no taxes.

And I don't insinuate that you do that, but I do say that some of the literature that is going around about the country conveys that information, and it seems to me that it would be more proper for an organization of the standing and the dignity and the ethical background that your organization has to present the exact bold truth just as it is presented in this sworn record

Mr. KELLOGG. That is what I have

Vice Chairman MEAD (continuing). That T. V. A. does pay taxes, and emphasize it and emphasize it, and then after that if you disagree with the amount, give the details. But I think that your statement ought to be reinforced with the bold truth that T. V. A. pays taxes and figures them in their rates.

Mr. BIDDLE. Now, let me add to that this, Mr. Kellogg, for your consideration. That tax base, according to Mr. Lilienthal, was made in 1933. His calculation was 12% percent.

Are you aware of the fact that the Securities and Exchange Commission have figured as of 1937 on a study which was offered in evidence when Mr. Moreland was testifying that the actual percentage of taxes to gross revenue, the average percentage paid by those utilities which had registered with it, including the Commonwealth and Southern and the Electric Bond & Share, was 12.55, so that the allowance made by Mr. Lilienthal was extraordinarily close to what the national average was; are you aware of that?

Mr. KELLOGG. I have the figures right here.

Acting Chairman SCHWARTZ. Mr. Kellogg would you be willing to adjourn now until 1:30 and you can reply to him then? Mr. KELLOGG. I can answer that question right now.

Acting Chairman SCHWARTZ. All right.

Mr. KELLOGG. In 1933, it was 12.9 percent of the gross national average.

Mr. BIDDLE. That was pretty close, wasn't it?

Mr. KELLOGG. Yes; but

Acting Chairman SCHWARTZ. The committee will now recess until 1:30.

(Whereupon, at 12:30 p. m., the hearing was recessed until 1:30 p. m.)

AFTERNOON SESSION TUESDAY, NOVEMBER 22, 1938

(The hearing was reconvened at 1:30 p. m.)

Acting Chairman SCHWARTZ. We will be in order.

TESTIMONY OF CHARLES. W. KELLOGG Resumed

Mr. BIDDLE. I think that you had finished with the study of the comparison of steam and hydroelectric; did you want to say anything more before passing on to the next subject?

Mr. KELLOGG. No; but I did want to say something more to the question which was more of a statement than a question, which I wanted to say, that is, impugning the accuracy and fairness of the figures issued by the Edison Electric Institute in connection with the T. V. A. cost. The criticism was made that on account of fixed charges allegedly having been figured by the T. V. A. in setting up its rates, it was not proper to say that interest and taxes in full were not charged.

INTEREST CHARGES AND TAXES NOT ADEQUATE

Now, in the first place, with regard to the set-up of the rates, I will simply remind the committee of the showing by Mr. Moreland's analysis, very detailed analysis, that with the rates so set up he would expect T. V. A. to show a loss of $10,000,000 a year, in a normal year, when the system was fully loaded, that is; but the matter goes beyond that-it is a fact, regardless of what figures we use in ascertaining rates, that the T. V. A. in its published operating statements, has not included any charge for interest, and only a very trifling amount for taxes. For the best proof that by so operating they considered they were making a profit leaving these matters out, I refer you to the table on page 1016, of the hearings before the Appropriations Committee last December, table (c) "Operations and summary."

Acting Chairman SCHWARTZ. Who presented the table to the committee?

Mr. KELLOGG. That was presented by the T. V. A., at the request of Mr. Wolverton.

Acting Chairman SCHWARTZ. Who was the witness presenting it? Mr. KELLOGG. I think from the context, that it was Mr. Blandford; is he connected with the T. V. A.?

Mr. BIDDLE. Yes, he is the general manager.

Mr. KELLOGG. This is a statement submitted by the T. V. A., I think while he was on the stand.

Acting Chairman SCHWARTZ. Specifically submitted by him at the time?

Mr. KELLOGG. Yes; because it is so considered in the record; one of the fine print insertions; not oral testimony but presented by the witness. That is the way it appears in the record.

That shows from the fiscal period 1938, $71,051 paid in taxes, which is called here, "Revenue deductions," section 13, T. V. A. Act, and the balance is shown as net income from electricity, and my claim is that that is a distinct showing of alleged or claimed profits from which interest was omitted entirely, as well as depreciation, and an amount for taxes of $71,000 on something over $60,000,000 of investment, so that I stand on those figures as to what the public has been told as to what T. V. A. does, and may I just go on a little further with my point?

Acting Chairman SCHWARTZ. Did you say $60,000 investment? Mr. KELLOGG. $60,000,000 investment on their own basis at that time.

I go further and say that all of the private utilities, if they could say that "we figure taxes in our rates" and don't pay them in full,