basis for depreciation charges but instead is basing depreciation on the earnings from the sale of power by charging 10 percent of the gross revenue to operations as depreciation and accumulating the amount of such charges as a reserve for depreciation. * * * Such reserve appears to be entirely inadequate. The properties in question are depreciating in value and if the return from operations is to be properly determined, the reasonable value of all things consumed, including depreciation of original investment must be taken into consideration. Now, will you indicate how before a valuation allocation with respect to Muscle Shoals had been decided on, the depreciation could have been taken on a straight line sinking fund or any other basis except a percentage of gross revenue? Mr. TULLOSS. Here is the depreciation. The basis which should have been used was the amounts shown on the books, as the value of the properties, rather than on revenue from current. Mr. BIDDLE. I quite understand that, but if they hadn't valued the property, how could they base depreciation on a value which had not. been ascertained? Mr. TULLOSS. So far as we knew, they had valued it. Mr. TULLOSS. Well, they said it was $51,000,000. Mr. BIDDLE. They said that they had not valued it yet because they were studying the allocation report, and had not come to the final valuation. Mr. TULLOSS. I don't know to what extent it was final or tentative, it was on the books and we were examining the books. Mr. BIDDLE. Didn't you think it important to determine whether it was final or tentative? Representative WOLVERTON. Was it in lead pencil or ink? Mr. TULLOSS. I am advised that this figure was used by them repeatedly in official documents, indicating that they were standing on that figure, until the time came for them to promulgate their annual report, and then they left it out. Mr. BIDDLE. Well, now that the allocation has been made, you would not question the amount at which Muscle Shoals property had been taken down, would you? Mr. TULLOSS. We revised our figures to agree with the final determination. Mr. BIDDLE. So that that would be entirely revised, and their allocation valuation would be now accepted. Mr. TULLOSS. This is a comment now that is no longer of value. It was current at that time. Chairman DONAHEY. We will now recess until 10 o'clock tomorrow morning. (Whereupon, at 4 p. m., the hearing was adjourned until Tuesday, November 29, 1938, at 10 a. m.) INVESTIGATION OF TENNESSEE VALLEY AUTHORITY TUESDAY, NOVEMBER 29, 1938 CONGRESS OF THE UNITED STATES, OF THE TENNESSEE VALLEY AUTHORITY, Senate Office Building, Washington, D. C. The committee met pursuant to adjournment in room 318, Senate Office Building, at 10 a. m. Present: Senator Vic Donahey, chairman; Representative James M. Mead, vice chairman; Senators Schwartz, Frazier, and Brown; Representatives Thomason, Barden, Wolverton, and Jenkins. TESTIMONY OF STUART B. TULLOSS-Resumed AUDIT REPORT FOR THE FISCAL YEAR 1934 Mr. BIDDLE. Have you got the audit there, the 1934 audit? Mr. BIDDLE. On page 84 is an item I wanted to ask you about. You state in the audit at page 84-and by the "audit," I mean the audit for the year ending June 30, 1934: DEPRECIATION POLICY RE MUSCLE SHOALS Despite the apparently excessive depreciated value at which the Muscle Shoals property was taken upon the books the Authority is not using the valuation basis for depreciation charges, but instead is basing depreciation on the earnings from the sale of power by charging 10 percent of the gross revenue to operations as depreciation, and accumulating the amount of such charges as a reserve for depreciation. Now, if you will look at the reply of T. V. A., in case you wish to refresh your recollection for the question, I think you will note that the T. V. A. states that 10 percent of gross revenue depreciation was a temporary and necessary expedient for internal operating purposes, so that the valuation study could be completed, and when the valuation study and allocation was completed then straight line or other depreciation was taken. Would you take any exception to that policy? Mr. TULLOss. No. Mr. BIDDLE. You think that was a proper way of calculating depreciation as a temporary expedient; it is very often done, isn't it? Mr. TULLOSS. I will modify my statement. When they had arrived at a basis, a proper basis for determining valuations and depreciations, we would not question it thereafter, but in this case we questioned it because they had stated the value of the property on one basis, and were showing depreciation on another, so we commented on that seeming disparity in procedure there. Mr. BIDDLE. You mean because they had taken a temporary valuation on Muscle Shoals you felt that a procedure which is proper and common practice as I understand it during construction periods, that is to take a percentage of depreciation on your actual earnings, was an improper procedure. Mr. TULLOSS. The comment that is made in the report here-I have not read it, and I don't know just what the official position of the Comptroller was in that respect, but at present it appears to me that there were two bases there instead of one. We had no reason to assume that they would do other than follow the valuation as placed on the books. This was an annual, actual basis, looking to the final settlement of the accounts upon completion of the audit for that fiscal year, and the report was necessarily in at the close of that fiscal year. We had no reason to believe that they would have a different basis in the next fiscal year, so it is merely a current comment, as I see it. Mr. BIDDLE. A comment; yes, Mr. TULLOSS. Yes. I see. Mr. BIDDLE. Now, there is one item I don't understand. Would the committee excuse me for a moment? A representative of Dr. Arthur Morgan is here and wishes to speak to me about the matter that I spoke to you about yesterday. (A short intermission was had.) COSTS OF NON-REVENUE-PRODUCING ACTIVITIES Mr. BIDDLE. Directing your attention to page 22, I am not very clear on a matter touched on there. In that "Profits and loss from operation", it shows a loss for the year of $113,034.26. Have you that figure? Wouldn't you like to have Mr. Bruk sit with you for convenience? Mr. TULLOSs. Yes. Mr. BIDDLE. The profit or loss from operations, $113,034.26, have you got that? Mr. TULLOss. Yes. Mr. BIDDLE. Is that figure taken from the summary statement of income and profit-and-loss statement shown on page 13? Will you turn to page 13 and see if that is your basic figure for carrying it out? Was that where it was taken from? Mr. TULLOSS. Yes, that is right. Mr. BIDDLE. Now, looking at that, I notice an item of $25 for organization expense and another of $7,356.81 for sales and promotion, and other expense. Now, they appear in the left-hand column. Why weren't they carried out in the totals. Mr. TULLOSS. Those two items were accidentally and erroneously included in the statement. They pertain to two other organizations. Mr. BIDDLE. You mean not T. V. A. at all? Mr. TULLOSS. Well, the T. V. A.-"See Electric Home and Farm Authority." They pertain to those two activities. Mr. BIDDLE. Now, were they incorrectly carried on page 13 or were they incorrectly omitted from page 22? Mr. TULLOSS. They were incorrectly put on page 13. FERTILIZER EXPENSE Mr. BIDDLE. Well, that explains that. Now, the profit-and-loss statement, there is an item of $8,909.54 general administrative expense, fertilizer. Have you got that? It is on the same page, isn't it? It is on page 22. Mr. TULLOSS. $8,909.54. Mr. BIDDLE. That is right. Have you got that? Mr. TULLOSs. Yes. Mr. BIDDLE. Another item of $256,900.15, maintenance, rehabilitation, and operation of permanent camps. Mr. TULLOSs. Yes. Mr. BIDDLE. Muscle Shoals. You have that? Mr. TULLOss. Yes. Mr. BIDDLE. A further item of $80,678.69, maintenance, rehabilitation, and operation of railroads and equipment. Have you got that? Mr. TULLOss. Yes. Mr. BIDDLE. Now, what do these items represent? Do they represent expenses incurred in connection with the power program or the fertilizer program or both? Mr. TULLOSS. This was known as the power account, but they included all three items. Mr. BIDDLE. This is known as the power account, but it included the fertilizer items? Mr. TULLOSs. Yes. Mr. BIDDLE. This is an operating statement, isn't it? Mr. TULLOSS. Yes; profit-and-loss statement with reference to the operations, yes. Mr. BIDDLE. A profit-and-loss statement, the profit being what is taken from power, is that right? That is substantially Mr. TULLOSS. All activities. Mr. BIDDLE. That is substantially the main one, is power, isn't it? Mr. TULLOSS. Well, at this time, I don't suppose there was any profit. Mr. BIDDLE. I don't mean net profit; let's say "revenue." The revenue was for power operations in chief, was it not? Mr. TULLOSS. I think the principal revenue was from power. Mr. BIDDLE. And yet you put a fertilizer expense against that, and then find what the net operating loss is. I was just wondering what your theory of it was. Mr. TULLOSS. That is not charged against power. Mr. BIDDLE. It is charged against the total, showing a total loss, the net loss being derived from an item of fertilizer operations, isn't it? Mr. TULLOSS. Yes; that is right. Mr. BIDDLE. That is right. In other words, you include your nonrevenue-producing investments with your revenue-producing investment, and work out what is then called an operating statement. Mr. TULLOSS. You mean by that the fertilizer is a non-revenueproducing investment? Mr. BIDDLE. Well, you include their non-revenue-producing investments as well as fertilizer. Is fertilizer an investment, revenueproducing investment? Mr. TULLOSS. It was so intended, as I understand it. Mr. BIDDLE. How much revenue was obtained from fertilizer that specific year, which this audit covers? Mr. TULLOSS. Not any. Mr. BIDDLE. Would you point to it? Mr. TULLOSs. Not any. Mr. BIDDLE. Not any. Then for that year at least it was hardly a revenue producer? Mr. TULLOSs. No. Mr. BIDDLE. I didn't know, I had thought perhaps the operating statement might be an attempt of your office to show the operation of the T. V. A. in power, but evidently I am wrong in that. Mr. TULLOss. No. Mr. BIDDLE. It is not? Mr. TULLOSS. No. This is their own books, this is taken from their own books. Mr. BIDDLE. Oh, there is no question about that. I don't for a moment question that your items are taken from the books of the T. V. A. I didn't question that fact a moment. TEMPORARY CONSTRUCTION EXPENSE Now, there is an item for school operation under the heading "Other operating expenses," including depreciation and dormitories, commissaries, camp maintenance, training, and the like. Is that an operating expense for a purely temporary camp, and activities on dam construction? Mr. TULLOSS. I think it includes that. It includes those, yes. Mr. BIDDLE. It includes camp construction at the construction site, and you are charging off, do I understand, you are charging against one year's operating expense the entire cost of the construction camp on a dam? Mr. TULLOSS. No. Mr. BIDDLE. How much of the cost of the construction camp did you charge against that year's operation? Mr. TULLOSS. The cost of the particular activity. The cafeteria was operated as a money-making business. Mr. BIDDLE. Well, now, I am talking about the construction camp particularly. Let's see, cafeteria, is that an operating item, $128,000? Mr. TULLOSS. An operating expense, yes. And the revenue is shown up under "Other operations," cafeteria $113,638.88, against an operating expense of $128,389.76. Mr. BIDDLE. The cafeteria being a revenue producer? Mr. TULLOSS. It produced that revenue. Mr. BIDDLE. Let's take the other. You have got the dormitories, commissaries, recreation halls, motion pictures, barber shops, vocational trades training, agricultural training, town of Norris, administration, camps, camp maintenance, and so forth. Are they all revenue producers? Mr. TULLOSS. Some of them are not. Part of the town operations-just a moment. The vocational trades training produced $2,104.66, and the operating costs were $42,747.79. Mr. BIDDLE. These are revenue producers, all of these, are they? |