Mr. BIDDLE. Can you conceive of any construction company that would borrow its money for construction periods at long-term rates instead of the shorter periods? Mr. KELLOGG. No private company would dare do so. I don't think that a private construction company would dare to go into a great construction project on short-term money. Mr. BIDDLE. The Government certainly could. You are taking the Government rates. Mr. KELLOGG. I am taking Government rates. Mr. BIDDLE. Why shouldn't you take short-term rates for the Government? Mr. KELLOGG. Because I believe in this case, the Government has such an enormous pocketbook, that that would represent cost, that year. Mr. BIDDLE. I don't follow that; the Government could borrow on short-term money for a construction period of 3 or 4 years or less, at a lesser rate. Why don't you take the Government rates, when you are taking Government rates? Mr. KELLOGG. I was taking the Government rates for the 8-year money. Mr. BIDDLE. On long-term money. Mr. KELLOGG. That is true in each case, and as I have testified before, I added 10 percent for general overhead expenditures, the cost of the various Government departments in administering and handling this work. Mr. BIDDLE. You mean the cost of the T. V. A. or of other Government departments? Mr. KELLOGG. Other Government departments. Mr. BIDDLE. So that you have added to the cost of the T. V. A., and the interest on the money, 10 percent on other Government departments? What had the other Government departments to do with the building of these two dams, Wheeler and Norris? Mr. KELLOGG. They are affected in a general way, there is a general overhead in operating any great enterprise of this size, that is unavoidable. Mr. BIDDLE. What elements did you consider to make up that 10 percent? What departments did you have in mind? Mr. KELLOGG. Well, I don't know what departments they would be. I was making a comparison with private experience and basing it on the firm belief which I do hold most firmly, that with the general size of the Government organization, that percentage would be fully as large if not larger with the Government than it would be with private Mr. BIDDLE. These are actual costs; these are not estimates. Mr. KELLOGG. They are cash expenditures, except the loss of earnings, is an estimate. Mr. BIDDLE. We haven't come to that. cent to actual cost, whose 10 percent is it? Mr. KELLOGG. The taxpayer. Mr. BIDDLE. Where? Why do you add 10 per Who pays that out? Mr. KELLOGG. Through the general Government bureaus. Mr. BIDDLE. But what does the general Government bureau add to those two dams by way of costs? Mr. KELLOGG. I can't specify it by departments. Mr. BIDDLE. Can you specify any costs that you have in mind? Mr. KELLOGG. I can't specify by departments. Mr. BIDDLE. Not by departments, but by any actual costs, that are added, that make up that 10 percent? Mr. KELLOGG. Why, the general overhead cost that is involved in doing any large construction job. Mr. BIDDLE. But the T. V. A. pays its own overhead, and the overhead is reflected in those actual costs, Mr. Kellogg. Mr. KELLOGG. Well, I just didn't think it was. Mr. BIDDLE. So you added 10 percent to be sure? Mr. KELLOGG. Yes. Mr. BIDDLE. And you can't give me any costs that you had in mind when you added the 10 percent; you can remember no costs that you had in mind? Mr. KELLOGG. No, I had simply the ratio of a minimum of 10 percent as the overhead cost of doing any large construction job, based on private experience and belief. Mr. BIDDLE. But the 10 percent in private experience is paid in cash costs, just the way you might say that the administration overhead costs of T. V. A. was 10 percent, but that is actually reflected here in the figures, and why do you add it again? Mr. KELLOGG. Well, because I didn't think it was affected in those. Mr. BIDDLE. Well, it is just a good margin of error, you mean? Mr. KELLOGG. Well, it is based on the experience of private companies, yes, sir. Mr. BIDDLE. Well, we will come on to the next thing; we have got depreciation, and we have got interest, and we have got 10 percent added, and now what is the next one? Supposing that we break these down. The last one of all would be, as I understand it, loss in profits on operation during construction period. Could you give me a break-down taking first your $77,000,000, and breaking that down for me so I could see how it is made up? Mr. KELLOGG. Well, you have to go through it by years. I go back, for example, if I may just read this into the record Mr. BIDDLE. Perhaps you could give me one typical year. Mr. BIDDLE. I would prefer to take, if you don't mind, a year on Wheeler Dam; some of the stuff that T. V. A. has actually built. Let us see what one of the years would be on that-or Norris. Mr. KELLOGG. I have Norris here. Mr. BIDDLE. Give us Norris; any year you want. Mr. KELLOGG. Norris, I begin with the year 1934. Mr. BIDDLE. All right. Mr. KELLOGG. I have expenditures of $6,920,132. Mr. BIDDLE. What does that represent. Mr. KELLOGG. It is the expenditures reported that year. Mr. BIDDLE. All right, that is the cash expenditures for that year, is it? Mr. KELLOGG. Yes. Mr. BIDDLE. All right. Mr. KELLOGG. That is on page 64 of the Annual Report of the T. V. A. for the fiscal year ending June 30, 1935. Mr. BIDDLE. We will accept that. Now, what do you add to that to show what it really cost T. V. A.? Mr. KELLOGG. I add 10 percent for overhead. Mr. BIDDLE. Yes. Mr. KELLOGG. And I add Mr. BIDDLE. Let us get this: That would be $692,000 that you add for an overhead of which you don't know any of the elements but think would be about a fair addition? Mr. KELLOGG. Yes. Mr. BIDDLE. Although the actual administrative overhead of T. V. A. is already reflected in the $6,000,000. Mr. KELLOGG. Well, I just on general principles deny that. Mr. BIDDLE. Well, on general principles, what was your next item of cost? Mr. KELLOGG. The next item for that year was interest on one-half of the expenditures. Mr. BIDDLE. At what percentage? Mr. KELLOGG. At 3.1 percent. Mr. BIDDLE. What was that? Mr. KELLOGG. That made $107,262. Mr. BIDDLE. And that represented short-term money, at long-term rates, didn't it? Isn't that right? Mr. KELLOGG. Well, I have no information on the actual shortterm money in that year, but it does represent the average of 8 years or over that the Government borrowed money. Mr. BIDDLE. It didn't take 8 years or over to build the dam, did it? Mr. KELLOGG. No; but that is what it is based on. Mr. BIDDLE. All right, get the next item. Mr. KELLOGG. So that adds up, if you add those two items together, it makes $7,719,407. Mr. BIDDLE. I will take your figure. I am a rotten adder. What did you add to that $7,000,000, as an addition? Mr. KELLOGG. I first added the interest on the total expenditure, which had then been going for a year. Mr. BIDDLE. I thought that we had interest already? Mr. KELLOGG. This is a previous expenditure; in other words, I took a year's interest on the total at the beginning of the year, you see, at the beginning of 1935, you had this $7,719,407 invested and you had to carry that for a year, so that I charged interest on that for a year. Mr. BIDDLE. Well, aren't you charging interest on interest there, because one of your items of the $7,000,000 is interest, so that you are charging interest on interest, aren't you? Mr. KELLOGG. That is the way interest goes; you get money invested in something, and it goes on, and you can't stop that. Mr. BIDDLE. All right. Mr. KELLOGG. That amount was 2.7 percent; and do you want to add these up? Mr. BIDDLE. You run right through them. Mr. KELLOGG. That is 2.7 percent, and amounts to $208,424. Then I add the expenditures for that year, 1935, which I got again from the Annual Report of the T. V. A., page 64, the 1935 report. Mr. BIDDLE. I am trying to get 1 year at a time, and I thought that you were giving me 1934. Mr. KELLOGG. I will give you 1934. Now, I have completed that. Mr. BIDDLE. Before we leave 1934, or any year, don't you add something for losses? That was one of the elements that you spoke of. Mr. KELLOGG. Well, I have added interest, you see, during construction, and the losses would come after the plant is finished. Mr. BIDDLE. You count 6 percent interest on the value of the plant as losses during its construction period, in addition to the interest on the investment? Mr. KELLLOGG. Not 6 percent, but whatever the interest is-2.7. Mr. BIDDLE. Then you add the interest twice, don't you? The interest you have to pay for your money and the interest you have to pay for the loss on not getting interest from your operations, is that right? Mr. KELLOGG. Well, you put in full interest during the construction period, of course. CHARGE MADE FOR LOSSES DURING CONSTRUCTION Mr. BIDDLE. I don't understand. You said specifically that during construction you added an item for operating loss, which had nothing to do with depreciation, and which had nothing to do with interest on your investment. Now what is that? Mr. KELLOGG. If I said during construction, I made a slip of the tongue, because, of course, we do not do that; we do not charge for any operating losses until the plant is finished, and the reason for that is this: That the interest goes on then, the same, but after we get started, you begin to earn some money. Mr. BIDDLE. I assumed that, of course, but you said to the committee that you were charging operating losses during the construction period. Mr. KELLOGG. No, that would be the interest. Mr. BIDDLE. Where does the operating loss begin? It begins immediately after the dam is finished? Mr. KELLOGG. Yes, the first entry that I have here of anything of that sort, is for the year 1937. Mr. BIDDLE. And what is that entry, and how much is it? Mr. KELLOGG. I had less power-operating income, 1937, $768,364. Mr. BIDDLE. Now, see if I get this clear: $768,000-and what is that? Mr. KELLOGG. In that particular year, of course, there was Mr. KELLOGG. $768,364. Mr. BIDDLE. Now, that is the operating loss. Excuse me; that is wrong. It is 14 percent of $768,364 and 14 percent is the percent of total T. V. A. power generated by Norris Dam. Mr. BIDDLE. I am completely lost; I am trying to get at what the operating loss was charged against any dam, any year; how it was calculated, and what it was? Now, if you will take that figure and explain it; what is the operating cost charged against that in dollars and cents, charged against that particular dam? Mr. KELLOGG. Well, in the fiscal year 1937, which was the first year in which any earnings were made, we had a total interest of the following amounts: $984,990, plus $31,567, the first of those being the interest on the investment at the beginning of the year, and the second being the interest on one-half of the expenditures during the year. Those two items there make the total interest against that project, in the year 1937. Mr. BIDDLE. But I am trying to get your operating loss. Mr. KELLOGG. I understand. Now, as an offset to that the only credit that we had that year was $107,571, which was 14 percent of the total operating income of the T. V. A., so that the loss against Norris that year I will add these up-the net loss through failure to earn interest in that year was $908,986. Mr. BIDDLE. So that I understand what you do, you take your interest and your depreciation Mr. KELLOGG. I didn't take anything but interest in this case. Mr. BIDDLE. You take your interest, and then, because the dam hasn't begun to depreciate yet, being just completed, I suppose that that is the reason Mr. KELLOGG. The depreciation not being earned, it wasn't taken, because if you put it in, as something that you fail to earn, then you would have to take it out as something that occurred by way of depreciation, and one would offset the other, that is the reason it is limited to interest. Mr. BIDDLE. What you do, you take your interest on your investment, and then you find what you call your operating loss, which operating loss is represented by deducting what you took in in revenues from those carrying charges by way of interest, and then adding that on. Mr. KELLOGG. Right. Mr. BIDDLE. As a capital cost, in addition to the interest. Mr. KELLOGG. Oh, no; it is the net amount; it is the interest less whatever you earn. Mr. BIDDLE. Well, that is the operating loss, but you have also got your interest already in the picture, haven't you? Mr. KELLOGG. Well, what we call-it isn't really true operating loss, it is the failure to earn interest, it is the amount by which interest was not earned. Mr. BIDDLE. Now, does the average company show in its balance sheet or its original investment capital account, a specific item of operating losses during construction? Mr. KELLOGG. Yes; they definitely do. Mr. BIDDLE. In addition to the interest on construction? Mr. KELLOGG. For example, on our Rock Island project, before the plant was finished, we began to deliver power into our own system there, and we credited the cost of construction with the fair value of that power. Mr. BIDDLE. Of course. Mr. KELLOGG. And that tended to be an offset against the interest charges. Mr. BIDDLE. And you added operating losses, also. Mr. KELLOGG. That was the extent of the operating losses, that is to say, all interest went against the construction cost, an offset against that was whatever you earned from it. Mr. BIDDLE. I suppose, then, according to that, every year that Wilson Dam would not have been operating, would have been added |