Representative JENKINS. Doctor, I don't quite understand what you mean by the "byproduct basis."

Dr. A. E. MORGAN. By the byproduct basis I mean this, that in charging the cost, a part of the cost of these projects to power, a part to flood control, and a part to navigation, Mr. Lilienthal's theory was that these were navigation and flood-control dams, and not power dams, and therefore that power should be charged with nothing except with these extra costs.

For instance, at Norris Dam, it would be charged with only $4,000,000 of the whole cost of Norris Dam. That was his byproduct theory. And that would include the items here in this allocation report, which show just what these excess costs for power alone are.

Representative JENKINS. Isn't this the basic reason for that, that he knows the whole projects cannot be constitutional except upon that theory, the construction of the whole project cannot be constitutional unless they stick to navigation and flood control, and power must be a byproduct.

Dr. A. E. MORGAN. I don't agree with that, that is not my opinion. I happen to believe it is not Mr. O'Brian's opinion, who was our associate counsel. I talked it over with him at length, and I think that the theory that he presented to the Supreme Court is sound. I hope it will be sustained, I think it ought to be sustained.

Representative JENKINS. Well, that is the theory though in the Eighteen Power Companies case of the 18 power companies? Dr. A. E. MORGAN. I beg your pardon.

Representative JENKINS. That is the theory of the 18 power companies in contesting that case.

Dr. A. E. MORGAN. I think they are wrong. I have no business expressing it.

Representative JENKINS. I know you do, and I know Mr. Lilienthal does too. I think that is Mr. Lilienthal's reason for making that

statement.

Dr. A. E. MORGAN. I must beg your pardon for suggesting I have any opinion on a legal matter, but it is.

Representative JENKINS. I think you have got a pretty good one. Representative WOLVERTON. Maybe it is the wish, father of the thought.

Dr. A. E. MORGAN. I think I am getting aside from the track. I ought not to be expressing myself on that.

But here, in the allocation report adopted by the T. V. A. Board in June 1938, are the costs of Norris Dam that would have been allocated to power under Mr. Lilienthal's proposal; powerhouses and control buildings, including intake sections of dams. Now, there is no intake sections of dams. Now, there is no intake section of dam at Norris, and that would be cut out. It would be the powerhouse and control buildings, intake gates, water wheels, turbines, generators, accessory electrical equipment, miscellaneous power-plant equipment.

Now, that is all that he would have charged to power out of the Norris Dam, nothing for the dam, nothing for the reservoirs, and it was that allocation that as chief counsel he advised the Board they were under obligations to accept.

115943-39-pt. 11-19

Representative JENKINS. Just one question. If Norris Dam didn't have any power facilities, its cost would not be one-third its present cost, would it?

Dr. A. E. MORGAN. Oh, yes, yes.

Representative JENKINS. Well, about what would it be?

Dr. A. E. MORGAN. I think the allocation committee estimates $4,500,000 for its power facilities. I am of the opinion that that dead storage should be added, making about $10,000,000 as the part that is there for the purpose of

Mr. BIDDLE (interrupting). I thought you only added $3,000,000.
Dr. A. E. MORGAN. $3,000,000.

Mr. BIDDLE. And the additional 5; that would not make 10.
Dr. A. E. MORGAN. If it was power alone.

Mr. BIDDLE. I know, but you have to deduct the 5,000,000 from the common costs.

Dr. A. E. MORGAN. You are talking about something else.
Mr. BIDDLE. No; I'm not.

Dr. A. E. MORGAN. He asked how much was the cost of power alone. I was not saying how much would be added to the allocation cost, but only what was valuable for power alone.

Mr. BIDDLE. I know, but if you are going to add part of the common cost to power alone, you have to deduct that common cost.

Dr. A. E. MORGAN. We are not talking about allocation now, we are talking about the part that is for power alone.

Mr. BIDDLE. Well, go ahead.

Dr. A. E. MORGAN. Now, I would like to read a little bit, not much, as I go along, but I can get my thought quicker by reading certain parts.

Now, taking the three-dam system and taking what we call the incremental cost, that is the cost that is used solely to power, which Mr. Lilienthal advised the Board was all that could be charged against power, taking the report of this allocation committee as submitted to the President and Congress by the T. V. A. Board, taking their own estimates of what that would be, the byproduct cost, or that incremental cost of power investment would have been only $24,000,000 as against $49,000,000 that actually was allocated by this allocation report.

That is, if Mr. Lilienthal's advice on the matter and instructions to the Board, if I had not opposed this, there would have been charged against power from this three-dam system less than half as much of the total cost as was actually allocated, only $24,000,000 instead of $49,000,000. That would have been the result of accepting Mr. Lilienthal's theory of byproduct allocation, and I bring this up because that has been one of the points of conflict all along.

Mr. Lilienthal repeatedly tried to get our Board to commit itself, and if we had committed ourselves to the byproduct theory, then he would have been willing to accept an allocation quickly. There would have been no long discussion about how difficult it was, he would have accepted that quickly. It was only when I refused it and objected to that that it became a very difficult problem, so that we could not have an allocation until most of the power was sold. In interest and depreciation charges alone, such an allocation of capital investment would have reduced the apparent annual expense

by more than $1,300,000. That is, in reporting to the public and the Congress, our annual costs would have shown $1,300,000 less than they do with the allocation report as it is. There would have been that much less apparent cost. That is, the fair cost of power investment as shown by the allocation finally adopted by the T. V. A. in June 1938 is about twice as great as would be shown by an allocation on the byproduct theory.

That is a very great difference in the cost of power. That difference is a measure of the fair cost of power investment which would have been a concealed subsidy if the T. V. A. had been committed to the byproduct theory. That is, if we could have cut off half of our capital, all of the carrying charges on that capital would not have. shown up in profit statements made to the Congress and to public, there would have been that much of a subsidy by the Federal Government to the power program.

As Mr. Lilienthal quoted in the letter to Senator McNary-that is quoted on page 1204 of the testimony:

All are agreed that the conclusions are of particular importance as it is expected that the principles employed will be used in the cost allocation of all dams constructed by the Tennessee Valley Authority and may affect dams constructed outside the valley.

That is, he was recognizing that such an allocation would be the basis of a national power policy.

Mr. BIDDLE. And that rates would be based on that eventually? Dr. A. E. MORGAN. That rates could be based upon that, or if you had any profit it would show as profit and not as cost. I say that would have been a hidden subsidy to that extent; in the T. V. A. it would have been a hidden subsidy of over half of the capitalized

cost.

Now, the policy of entering on a great dam-building program over the United States primarily because of a dominant interest in power, and especially in the Tennessee Valley, and then in cost accounting treating power only as a byproduct, charging against power only the cost of powerhouses and generators and none of the cost of dams and reservoirs would destroy any prospect of fair and honest accounting of the cost of power and would be misleading to the public.

Mr. BIDDLE. Were none of the costs of dams and reservoirs allocated to power, Dr. Morgan?

Dr. A. E. MORGAN. Not under his theory.

Mr. BIDDLE. I am talking about the allocation.

Dr. A. E. MORGAN. I am speaking of the allocation he tried to force upon the Board. If the work of this committee should have no other result than to prevent the adoption of this false and unfair byproduct theory of allocation, and if accurate power accounting should result, the efforts and expenditures of this committee will have been justified. A national power policy is at issue. That allocation on a byproduct basis was fought for, and I fought against it until after this committee was appointed, and until after I had testified before this committee that the byproduct power theory was being forced upon the T. V. A.; only then did the T. V. A. come forward with an honest allocation of cost.

Senator SCHWARTZ. Do I understand from that that it is your opinion now that the present allocation cost is an honest one?

Dr. A. E. MORGAN. Largely; I think so. I think with these points that I made, in pointing out these errors in it to the extent of possibly $4,000,000, with that modification, in general I think this is a sound, honest approach to allocation, and I think that the process used in general is a sound approach, except for this, instead of following through a method of allocation that was open and aboveboard and stating that method, the report finally comes to the conclusion, "We use no method, and we just used our judgment." I don't think that was quite clear. I think it confused the issue, so it could not be criticized. It is difficult to criticize an allocation where the method is not disclosed.

Mr. BIDDLE. The methods are stated in the allocation report, and the report says that in the ultimate analysis the question is one of judgment. Would you dispute those two things?

Dr. A. E. MORGAN. But the

Mr. BIDDLE. It describes at great length the various systems, does it not?

Dr. A. E. MORGAN. Yes, and then they state, "We didn't use any of those, just used judgment."

Mr. BIDDLE. Used all of them, it says.

Dr. A. E. MORGAN. But the fact is it is pretty nearly one method of allocation.

Mr. BIDDLE. What would you use except judgment in a final determination? You would use judgment based on the various con

siderations?

Dr. A. E. MORGAN. I would disclose the basis of my judgment and not hide it.

Mr. BIDDLE. There are 30 pages in which they go into the bases they considered.

Dr. A. E. MORGAN. Then they didn't use any, they say. It was hidden.

Mr. BIDDLE. How is it hidden?

Dr. A. E. MORGAN. They say, "We didn't use any.'

Mr. BIDDLE. Would you criticize the 25 pages of discussion of the systems that they had considered carefully in arriving at their judgment?

Dr. A. E. MORGAN. Very doubtful.

Chairman DONAHEY. We will recess until 1 o'clock.

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

AFTERNOON SESSION, SATURDAY, DECEMBER 3, 1938

(The hearing reconvened at 1 o'clock.)

Chairman DONAHEY. We will proceed, and I wish to make a statement on behalf of the committee.

It has been determined that Dr. Morgan shall occupy 2 hours this afternoon, in presenting matters to the committee that he has in mind, and then shall come Monday morning at 9 o'clock and be given another hour, and at that time it will be determined the time necessary for questioning the witness. So you may proceed, without interruption. Representative WOLVERTON. That is the understanding, then, Mr. Chairman, that Dr. Morgan is to proceed uninterrupted.

Chairman DONAHEY. That is my understanding.

TESTIMONY OF ARTHUR E. MORGAN-Resumed

The witness on the stand at the time of adjournment was recalled and testified as follows:

Dr. A. E. MORGAN. I would like to say that, with a small staff, I have been at work now for about 6 months trying to prepare a statement for the committee that would give as clear a picture as possible of the power situation, and I have tried to boil that down to the smallest possible space, and I think that it covers matters that are of vital moment to the committee, and I don't know whether I can cover them within that length of time.

Chairman DONAHEY. You may file, in addition to the time allotted to you, any additional exhibits.

Ďr. A. Ě. MORGAN. I don't know whether I can cover the ground in that time or not.

Chairman DONAHEY. That is the decision of the committee at this time, and we will take that up Monday morning.

Dr. A. E. MORGAN. Now, before I go ahead, there are a couple of statements that I would like to make with reference to my testimony this morning.

The first is in relation to the flood-control capacity for Norris Dam, and the power capacity. It is physically possible to largely empty Norris Dam by means of the sluice gates, but the dams were designed with what was called a minimum draw-down, leaving half a million acre-feet below that, which was thought to be used for power head. If that were eliminated, it would require a recalculation of power capacities, and would make the power estimates that have been presented all along inaccurate; and, therefore, I think it is entirely right to charge all of that to power.

There is one other statement: I was asked a question about this matter of allocation, about the allocation that I presented to the Board, the one finally adopted.

The point in that was not who offered that allocation at all; it was simply the matter that within the time allowed by Congress, an allocation report was prepared and was ready, and could have been submitted at that time-that is, substantially like the one that was finally submitted-and I believe that the intervening time was an unnecessary delay in that allocation; that was the point that I wanted to make.

Well, now, with the limited time, I am going to read some things, and speak extemporaneously at other times, because I can save time that way.

Chairman DONAHEY. You may proceed.

Dr. A. E. MORGAN. First, with reference to the power operations of the Tennessee Valley, in general, I will have copies of this Monday; if my testimony had been postponed to Monday I would have had them available, but I am reading from a rough draft now.

EXPLANATION OF STUDY RE EXTENT TO WHICH AUTHORITY POWER REVENUES WILL COVER COSTS

The T. V. A. power project, made up of several plants operated as a single unit, is a complex undertaking, both in its engineering and financial structure and in its operation. A great variety of plausible assumptions can be made in discussing it. Some of these