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Valley Authority power sold in Mississippi was $387,203, with a revenue of $233,349. Therefore, the loss from the year's operation in Mississippi was $153,854, which is equal to a loss of 3.6 mills for every kilowatt-hour sold by the Tennessee Valley Authority in the State of Mississippi. This figure takes into account only the known costs. Many expenditures by the Tennessee Valley Authority for the power program are not recorded, and, therefore, this report is much more favorable to the Tennessee Valley Authority "yardstick" program than it would be if full and fair records had been kept.

Taking the Tennessee Valley Authority power operations in Mississippi as a whole for the 3 years studied, the accumulated loss to the Federal Government, including only those costs which are recorded or are fairly clear and definite, is $240,389, or over 2.2 mills on every kilowatt-hour sold during the last 3 years. This is a direct subsidy-a gift from the taxpayers of America to the 15,136 electric customers of the "yardstick" communities in Mississippi. [See pt. V, exhibit F (this statement), for the allocation of this loss of public money on Tennessee Valley Authority power sales.]

As stated above, the investment in power facilities has been taken as allocated by the Tennessee Valley Authority. If, however, there had been included interest during construction, organization expense, insurance, etc., which are actual costs to the Government, the investment would be much higher and more representative of the actual expenses of both publicly and privately owned generating systems, and a more nearly fair comparison could be made. With these expenses shouldered by the Federal Government as they are now, the result is an additional substantial contribution or subsidy, which creates the appearance of a lower cost of power. There are still further subsidies, many of which are hidden, and only a complete audit of the records and accounts of the Tennessee Valley Authority books and a fair allocation of costs, as well as an audit of the books of the "yardstick" communities, will reveal them. Some of these subsidies will be discussed later in this presentation. In the aggregate the amount of these unrecorded subsidies is very substantial. If all the contributed services could be determined and properly charged, the complete inadequacy of the Tennessee Valley Authority "yardstick" would be evident.

COMPARATIVE ANALYSIS OF "YARDSTICK" COMMUNITIES IN MISSISSIPPI

From the comparative tables in part V, exhibit G (this statement), it will be observed that many of these "yardstick" communities in Mississippi report lower operating costs than representative publicly owned power system in other parts of the United States.

Aside from the low price these "yardstick" communities paid for Tennessee Valley Authority power, the other low operating costs can be accounted for only by delayed maintenance, deferred charges against operations, low depreciation rates, low investment expense because of grants and low valuations, service contributions by other city departments, uncompensated work done by Tennessee Valley Authority and other Federal agencies, and low wages of employees.

There is a similarity of many of the functions of electric-plant operation, regardless of where located. The cost of these will differ only as they are affected by such items as those referred to the rate of use and the cost of power, supplies, etc.

With the introduction of Tennessee Valley Authority power and the low wholesale rates, the only cost affected in those cities operating municipal systems before the Tennessee Valley Authority came on the scene is the power cost. All other unit costs of operation, such as distribution, utilization, etc., should remain the same, except as influenced by contributed services and by increased use.

MAINTENANCE

Proper operation of an electric utility requires that the plant and system be maintained in good repair. This is essential in giving continuous service. To defer maintenance is a dangerous practice. Unfortunately this is a common abuse in public operations.

In the early days of operation many public plants permit repairs to accumulate, for when a plant is new maintenance appears unimportant. If rates are

too low, earnings from new systems will not be sufficient to permit an adequate amount of repair work, and since maintenance and repair is a charge against operation there is a temptation to delay it. To allow it to accumulate is an expensive policy, for very soon poor service will result, and the accumulated expense will have to be met in a comparatively short space of time. Unless this deferred maintenance is actually estimated and recorded financial reports to that extent are inaccurate, and funds will not be available when deferred maintenance is undertaken. It is possible to judge a well-maintained system by the amount of money consistently spent on repairs.

Constant inspection is essential to good electric service. It is by this method that timely discovery is made of needed repairs such as broken insulators, broken eross arms, damaged or failing hardware, and poles loosened in the ground. Other maintenance needs that should have prompt and persistent attention are tree trimming, so as to give proper wire clearance; correction of sagging wires, loosened guys, and anchors; and improperly supported transformers.

DEPRECIATION

One of the most important items of cost in electric-plant operations is depreciation. This account is established to provide for the actual loss of value in electric property from age, wear and tear, service inadequacy, obsolescence, lack of utility, etc.

Depreciation is a proper expense and a charge against operations. It must be sufficient to serve the purpose for which it is intended. There is a tendency in public operations to treat this item of expense rather lightly, and to fail to consistently set aside adequate funds for repairs and replacements. Of course, the temptation to delay depreciation is obvious, because it permits an appearance of lower operating costs and of higher net profits.

In the storm area of the South, where frequent tornadoes destroy many thousands of dollars worth of property annually, it is particularly important that adequate depreciation reserves be established and maintained.

Public-utility commissions regulating the operations of privately owned power systems require that depreciation reserves be set up regularly out of earnings, and that the rate of depreciation be sufficient to provide for loss in value of property.

ANALYSIS OF ANNUAL REPORTS MADE TO THE TENNESSEE VALLEY AUTHORITY BY ELEVEN "YARDSTICK" COMMUNITIES IN MISSISSIPPI

In the following analyses, in addition to the subsidies which have been directly deducted from the net incomes as reported by these "yardstick" communities and shown previously, further possible deductions are indicated. These deductions are based on findings which have resulted from an examination of the annual reports to the Tennessee Valley Authority of these 11 "yardstick" communities for the fiscal years 1936, 1937, and 1938.

The examination has revealed many irregularities, apparent errors, and omissions in the reporting of costs. These findings are based on actual figures as reported by the communities, and indicate what might be revealed by a detailed audit of the records and operations of these Tennessee Valley Authority “yardstick" communities.

AMORY

The city of Amory, Miss., began taking Tennessee Valley Authority power in September 1934, having operated its own generating plant and distribution system for many years before Tennessee Valley Authority.

All of the city's power requirements are furnished by the Tennessee Valley Authority under a 20-year contract. The Authority provides the substation facilities and makes delivery on the low side, which means assuming the transformation losses and carrying charges on substation investment.

As in other "yardstick" towns in Mississippi, the rates before Tennessee Valley Authority were very high, so the reduction in cost of service with the introduction of Tennessee Valley Authority rates was as much as 47 percent.

Additions are made to the regular rates in the form of a 15-percent surcharge on all customers except residential. This addition is made to maintain the revenue in the development period, yet the surcharge is placed on that class of customers which receives little or no benefit from the load-building effort, and is a subsidy to the widely advertised residential rates.

During the past 3 years the city has continuously held approximately $20,000 in Electric Home and Farm Authority contracts, which indicates the volume of appliance sales the Federal Government is financing for the city's customers.

Exhibit A, part V, of this presentation indicates in detail the charges made to show the results of operation by true application of the Tennessee Valley Authority "yardstick" rates. If all definitely known costs of operation which the rate should support are charged as operating expense, and only revenues from rates included, the reports for the last 3 years would have been as follows: 1936, a loss of $3,088 instead of a net income of $4,529; 1937, a loss of $8,077 instead of a net income of $278; 1938, a loss of $7,146 instead of a net income of $5,892.

The first part of the following table gives the results of the city's operation if expenses had been charged when incurred.

In 1937 for some reason the city made a charge against surplus to cover rent and a portion of salaries of mayor and aldermen for the period of September 2, 1934, to June 30, 1936. This is an adjustment of $1,650 and should be charged to operation in prior years. By holding this charge back, then making it against surplus in 1937, it never does get into operating expense. The deferring of this item may have been done to permit making a more favorable showing in prior years.

In October 1936 the city signed a new contract with Tennessee Valley Authority, revising the valuation of the city's electric system. This was done to include a standby generating plant which is no longer in use. Apparently in the earlier days of operation, when revenue was at a minimum, the expenses of operation were kept down by refraining from including all of the electric property; then, when revenue increased, it was added to the property record.

The addition of this generating plant increased the plant property by approximately $22,000. The city was permitted retroactively to collect taxes and interest on the increased equity. All this expense the city charged to surplus in 1937. Apparently no effort was made to adjust for this in prior years.

Additional depreciation must be charged against previous years because of this added plant investment. Since interest and taxes were applied retroactively, depreciation also should be; hence the adjustment of $2,027.

The city's composite rate of depreciation is 3.39 percent for 1938. This is too low. It should be maintained, at least, at 4 percent. Therefore, $890 has been added to 1938 operations to adjust for this delinquency.

If a complete and detailed audit were made of the books, not only of this "yardstick" town but of all the “yardstick" towns, there is little doubt that there would be discovered many items of expense that should have been charged to operation but which were withheld and later charged to surplus. Such record keeping by a private utility subject to Commission regulation would not be tolerated.

The second part of this table indicates the results that would have been reported to the public if adjustments made in the first portion of the table were added to net losses shown in exhibit A, part V, this statement.

In the third portion of this table is shown the current financial position of the city's electric department. The ratio of assets to liabilities is approximately 1 to 1.5. If the operation were in sound financial condition current assets should exceed current liabilities by at least 2 to 1.

City of Amory, electricity department—net income adjustments based on findings of examination of city's annual reports to Tennessee Valley Authority, years 1935-38

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EFFECT OF ABOVE ADJUSTMENTS IF ADDED TO ADJUSTED NET LOSS PER EXHIBIT A, PT. V

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Source: Annual reports of city of Amory electricity department to Tennessee Valley Authority for 1936-38.

HOLLY SPRINGS

The city of Holly Springs, Miss., has operated its own electric system for a number of years. In May 1936 it discontinued operating its own generating plant and began using Tennessee Valley Authority power. Since it had furnished service to the citizens of the community at high rates, the adoption of Tennessee Valley Authority rates resulted in a substantial reduction in electric bills to customers.

Electric power is delivered by the Tennessee Valley Authority on the low side of the Authority's substation. The Tennessee Valley Authority thus assumes the transformation losses and also carries the investment in transformers.

The Rural Electrification Administration has loaned the city $71,000 for extensions to its system to serve rural areas immediately adjacent to the city. This loan is for 20 years with interest at approximately 3 percent.

Electric Home and Farm Authority contracts in the amount of $24,222 were held by the city in 1938. This is money loaned to the customers of the city by the Federal Government for the purchasing of electric appliances.

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