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Mr. BIDDLE. What is the name of the president of your company, of the Messilla Co., do you remember?

Mr. KELLOGG. I am not sure who it is now.

Mr. BIDDLE. Was F. C. Womack the president?

Mr. KELLOGG. He may have been the president. Does it say president there?

Mr. BIDDLE. That is right.

Mr. KELLOGG. He is the resident manager.

Mr. BIDDLE. I have before me an article of Mr. Womack, which I am going to show you in a minute, describing the Mesilla Valley Electric Co., and you said that you took the Mesilla Valley property there in Las Cruces, because you thought that its surrounding conditions were fairly comparable to Tupelo, and so will you read that part in pencil there?

Mr. KELLOGG. I don't think that you put quite the right words in my mouth.

Mr. BIDDLE. You put them, and I don't want to misquote you. I thought that you said that you took two operations which were fairly comparable in the surrounding circumstances, that it was the same type of operation, the same physical circumstances.

Mr. KELLOGG. I said about the same number of kilowatt-hours, and approximately the same peak load, and the load factor. Mr. BIDDLE. But you wouldn't have taken that

Mr. KELLOGG. I didn't say the conditions were exactly the same. Mr. BIDDLE. I didn't say exactly the same, you wouldn't have taken it to compare to us as a fair sample if you thought that other circumstances that should be taken into consideration were strikingly dissimilar, would you, that would hardly have been fair?

Mr. KELLOGG. No, I shouldn't have wanted to do that.

Mr. BIDDLE. Substantially the same, all right, will you read that, then.

Mr. KELLOGG. This is an article by F. C. Womack, president of the Mesilla Valley Electric Co., from the Electrical World of September 25, 1937.

The second paragraph reads as follows:

The Mesilla Valley Electric Co., a subsidiary of Engineers Public Service, is a small company serving an irrigated farming area along the Rio Grande River in southern New Mexico. The largest town served has a population of approximately 7,000. Approximately 50 percent of the entire population served is Mexican, a condition somewhat nonconducive to high electric-power consumption. On the other hand, the soil of the area served is highly productive.

Mr. BIDDLE. Do you think that that is a fair comparison to Tupelo, still?

Mr. KELLOGG. Yes; I am not familiar with the fertility of the soil, in the two places, but I thought that it was a reasonable comparison.

CROSS EXAMINATION ON WITNESS' ESTIMATES !

Mr. BIDDLE. Well, let us go back to some of the former part of your statement, having started at the back we will come back to the beginning again.

Do you know what the T. V. A.'s operating expenses were for last year? Mr. KELLOGG. The last year of which a public record was made, that is all that I have here. The fiscal year 1937, they reported as exclusive of taxes, as $852,000.

1 See pp. 4113-4117.

Mr. BIDDLE. Do you know the potential output of the dam, the last year?

Mr. KELLOGG. The year to which the expenses refer, according to my record, 323,807,000 kilowatt-hours, approximately.

DEPRECIATION BASIS USED BY WITNESS

Mr. BIDDLE. Now you base your whole statement solely on the three-dam-operated system, have you not?

Mr. KELLOGG. That was all that I took an account of in my statement to which I referred on the subject, but I recall that I prefaced that by saying that I would rather leave it out because of the more thorough coverage that Mr. Moreland made in his statement.

I realize it is a limited viewpoint.

Mr. BIDDLE. Do you remember Mr. Moreland saying that he thought it was unfair to take a three-dam-operated system, on a system which was based ultimately on 11 dams. Do you remember, and perhaps you didn't hear that, but I asked him what his figures would be on the three-dam system?

Do you think it is fair to take the basis on the three-dam system and not on the entire system?

Mr. KELLOGG. I think that the three dams are a more successful operation than the rest of the system, but all I did was to present what the latest year showed. I agree that it will do better in the future, and in fact so stated in my testimony.

Mr. BIDDLE. Now, you took a straight line depreciation throughout, did you not?

Mr. KELLOGG. Yes.

Mr. BIDDLE. And that was a 2-percent depreciation, was it not? Mr. KELLOGG. Yes.

Mr. BIDDLE. You therefore depreciated the land at the rate of 2 percent, did you not?

Mr. KELLOGG. I took an average of 2 percent.

Mr. BIDDLE. It did cover the investments in land, the depreciation of 2 percent, didn't it?

Mr. KELLOGG. Well, the land would probably not depreciate at all. Mr. BIDDLE. Why did you put the depreciation on the land? Mr. KELLOGG. I took an average of 2 percent for the whole. Mr. BIDDLE. Then if you took an average of 2 percent, it would make it a higher depreciation rate on the concrete, would it not? Mr. KELLOGG. On some elements; yes.

Mr. BIDDLE. Well, this land, if it is not depreciable, and the investment in land, I take it, is at least $75,000,000, that will be the whole system, but the investment of land in even these three dams is very heavy, and obviously the depreciation of the concrete would be more than 2 percent, would it not?

Mr. KELLOGG. The depreciation of the concrete?

Mr. BIDDLE. On the dams themselves; I am not talking about the power facilities but on the dams themselves.

If the over-all rate is 2 percent, and the land is not depreciable, then the depreciable rate on the depreciable property must be more than 2 percent?

Mr. KELLOGG. Yes; that would apply more to equipment and that sort of thing.

Mr. BIDDLE. Why would it apply more to equipment, and the main investment here is in the dam property, and the equipment is a very small part of the main investment, isn't it?

Mr. KELLOGG. No; it is fairly substantial.

Mr. BIDDLE. It is substantial, of course, but the major investment is in the dams themselves, before the equipment is put in, isn't it? Mr. KELLOGG. Well, I have the figures here in the allocation report. Mr. BIDDLE. What is the figure allocated per kilowatt to the machinery?

Mr. KELLOGG. The direct charge on power is in these allocation. figures, about $24,000,000 out of the $94,000,000.

Mr. BIDDLE. Now, let us see, on page 8, your note there, I think that you say, the income from such power at such rate would pay charges and costs on only $65 per kilowatt. Now, what was that $65, was that the allocation to power?

Mr. KELLOGG. That is the cost per kilowatt of machinery.

Mr. BIDDLE. Now, your total allocation, which I think is on page 6, what is that?

Was that $553?

Mr. KELLOGG. Yes.

Mr. BIDDLE. All right; so that the equipment, the machinery and equipment actually used in the production of electricity is $65 as against a total cost of $553, is that not right?

Mr. KELLOGG. Yes; on that basis it is.

Mr. BIDDLE. Well, it is your basis. I am taking it.

Mr. KELLOGG. That is correct.

Mr. BIDDLE. Well, then the allocation against the power machinery is, as I said, very small compared to the other costs, is it not?

Mr. KELLOGG. That is correct.

Mr. BIDDLE. So that now your depreciation rate against the dam costs, leaving out the machinery, is far in excess of 2 percent, isn't it? Mr. KELLOGG. I think 2 percent is high, it is based on the 50-year life which we think of under the licensee provisions of the Federal Power Commission, that is what it is based on, and I do not think probably it represents the true physical depreciation.

Mr. BIDDLE. Can you translate that into the sinking fund? Mr. KELLOGG. You can translate it into the sinking fund. Of course, the sinking fund requires the accumulation of a large amount of interest, and you get more money out of your interest than you do out of the charges to depreciation.

Mr. BIDDLE. If that same rate were taken in a sinking-fund rate, how long would it take to work out, how would it work out?

Mr. KELLOGG. I think that Mr. Moreland testified that with the 50-year life, with 321⁄2 percent, would correspond to about 0.76 percent per annum. That is not the total amount, because the total amount of the depreciation has got to be arrived at at the end of the period.

Mr. BIDDLE. You said that you didn't take any depreciation on Wilson Dam because it was not earning depreciation, but they were selling power to Commonwealth and Southern and the Alabama Power Co. at about 2 mills during those several years.

Mr. KELLOGG. I don't know what the rate was, all I have seen is the amount of the deficiency.

Mr. BIDDLE. Why wasn't it earning depreciation if it was operating? Mr. KELLOGG. Well, there was none charged against it, that is all.

Mr. BIDDLE. Well, whether there was any charged or not, the dam was depreciating all of the time, was it not, why did you refuse to allow any depreciation, and you just added back what T. V. A. allowed. Mr. KELLOGG. For the purpose of that computation, I was trying to allow for what I call the losses during the development period. Mr. BIDDLE. But you depreciated your

Mr. KELLOGG. Pardon me, just a moment, and those losses would consist in toto of the amount by which the earnings failed to pay interest and depreciation and taxes.

They were so obviously insufficient to earn all of that, that I simply allowed for interest and I didn't want to mushroom the thing any more than I had to, I just allowed for the amount by which interest had not been earned.

Mr. BIDDLE. And by not allowing for depreciation, just increased the cost of Wilson Dam.

Mr. KELLOGG. It made the cost that much more, and then you deduct the same for the end of the period, and get back to the same point exactly, and in other words, you would

Mr. BIDDLE. I don't see that.

Mr. KELLOGG. Why, it is clear as daylight.
Mr. BIDDLE. Well, but I don't see-

Mr. KELLOGG. You would add as much in the lost depreciation as you take out later for the depreciation de facto, if that was the rate. Mr. BIDDLE. I don't follow you, I confess; you said that Wilson Dam ought to have been taken down at cost and not depreciated value? Mr. KELLOGG. Let me give you an example. Suppose that the charges including interest, depreciation, and taxes, and I am just taking suppositious figures now, were $100, and that you earned gross $40. You would be short $60 for the year. That would be an amount of money that you failed to earn, and which if you were on your own and had no taxpayers behind you, you would have to dig up from somewhere.

I left out depreciation in that computation, because it is not a cash item, because if I had put it in, the $60 lost, say, that I figured, would have had to be decreased at the end of the period by that depreciation element.

If it was $2, let us say, if that had gone on year after year as a loss, it is perfectly clear to me.

Mr. BIDDLE. It is not clear to me. Well, let us pursue this depreciation a little bit longer. You say that 2 percent over-all is a fair depreciation against land and the concrete structures of the dams, at least that, it would be more than that?

Mr. KELLOG. I say that it is based on this 50-year license period, and I do agree that these large hydro projects will have a longer life than 50 years.

Mr. BIDDLE. Then why do you take 50 years?

Mr. KELLOGG. On account of the fact that the private company would be obliged to figure on giving up its license and losing the property at the end of the 50-year period.

Mr. BIDDLE. As a matter of fact, then, this depreciation shouldn't apply to Government dams then, if they are going to live longer than that. Let me just read-do you know Major Whitman?

Mr. KELLOGG. I know him slightly. From Maryland, do you mean? Mr. BIDDLE. I don't know where he is from, but I notice an article of his that appears in one of the Edison Electric Institute bulletins,

as of June 1935, at page 209, and now I want to ask you if you agree with what Major Whitman says in here, in the publication.

One

I have two volumes of study on the depreciation of hydroelectric plants. of 90 pages, and the other of 65 pages. Where studies have been made of most of the important hydroelectric installations throughout the country

He is not talking about Government dams, but he is talking about hydroelectric installations throughout the country.

And after this careful and thorough study, the land there and the mass concrete in the dam within the project excavation and fill are looked upon as nondepreciable, and the shortest life of any of the elements, that is outside of the land and the concrete in the dam, excluding the machinery, was estimated at 40 years, while many of the elements had a life of 100 years, to an indefinite period.

Do you agree with that statement?

Mr. KELLOGG. I think that a mass concrete dam has a long life, of course it is subject to some depreciation, that is on account of frost, largely frost.

Mr. BIDDLE. Let us assume you have taken 100 years as a depreciable life. That would entirely change the set-up, would it not, or very substantially_change it?

Mr. KELLOGG. If you took 100 years for the average life of all the property, some of which of course would be much shorter than that, yes, it would cut this down, we will say on a straight line basis, it would be 1 percent instead of 2 percent, and it would make a difference ofif we used 1 percent depreciation instead of 2 percent, it would cut the 6.33 mills down to 5.54 mills per kilowatt hour.

INTEREST RATES USED BY WITNESS

Mr. BIDDLE. Now, I direct your attention to the figures at the top of page 3. You have taken first the figures reported by T. V. A., in other words, the actual cost, with the exception of Wilson, and you have added other elements to that, those elements I understand are interest during construction, at 6 percent, to start with, is that right? Mr. KELLOGG. No.

Mr. BIDDLE. How much was that, that you took, that is on page 3. Mr. KELLOGG. What we have done in this case, which is the correction or amendment of the T. V. A. figures, to what a private company will have to pay, is to use the Government rates of interest. Mr. BIDDLE. Three and a half percent?

Mr. KELLOGG. Well, it varies. We used the average rate for the year in question. For example, in the case of Wilson Dam, the rate varies from year to year.

Mr. BIDDLE. What rate did you take in Wilson Dam?

Mr. KELLOGG. Well, we took the amount for each year, we took the rate reported by the Government in that abstract which I referred to this morning, and applied it to one-half of the expenditures each year. Mr. BIDDLE. What was the rate?

Mr. KELLOGG. It varies for different years.

Mr. BIDDLE. I see, each year?

Mr. KELLOGG. Yes.

Mr. BIDDLE. The years that the dam was being built?

Mr. KELLOGG. Yes. Being built or suffering these losses.

Mr. BIDDLE. And that was the average rate on long-term money, defined as money borrowed for a period of 8 years or more? Mr. KELLOGG. Yes, sir.

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