"Paragraph 5: According to the present wording, the peak load would be only 30,000 kilowatts after 1942, instead of the probable intended 35,000 kilowatts. "Paragraph 6: The schedule of energy charge after 1942 places the sale of run-of-stream secondary ahead of the sale of firm power. Is this intended? "Paragraph 9: Temporary excess amounts of power are to be billed at rates for interruptible power. The question of using the firm-power rate might be given consideration, owing to a possibility of continued usage by agreement. “Paragraph 10: As written, reference is to the use of full amount of contract demands for 50 percent of time. The meaning is probably intended to be for any combination giving that equivalent of energy. "Paragraph 10: It is presumably not intended to carry over more than 1 year a credit for excess use of energy. The statement could be made definite." A draft of the contract dated June 1, 1937, was submitted to the chairman and shortly thereafter presented to the Board for consideration and action. This draft, as the previous ones, permitted the Arkansas Power & Light Co. during periods when delivery of interruptible or run-of-stream secondary power was discontinued, to take firm power equal to the amount of the contract demand of firm power plus the contract demand of interruptible power less 5,000 kilowatts, and to pay $0.30 per kilowatt for the amount by which the measured demand exceeded the contract firm demand. In effect, the Arkansas Power & Light Co. by these provisions would be entitled to buy high-class or firm power at low-class or secondary-power prices during periods when the delivery of secondary power was discontinued on account of shortage of power, but the contract was so skillfully drawn that this fact possibly would be unnoticed by anyone but a specialist in the power field. Despite the fact that the engineers working under my direction had from the earliest draft (April 24, 1937) pointed out this defect and had repeatedly recommended its correction in successive drafts to the conferees working under Mr. Lilienthal's direction, this wholly indefensible concession had not been eliminated from the June 1, 1937 (last), draft submitted to the chairman and presented for consideration and action of the Board at a meeting held shortly thereafter. At this meeting I vigorously protested against this contract in the form presented. As pointed out above, the engineers working under my supervision had done everything in their power to eliminate this "joker." Mr. Lilienthal was well aware of their suggestions and recommendations concerning this matter. As a last resort I refused to approve the contract in the form presented, after every other effort had failed. This illustrates my so-called attempt to defeat the purpose of Congress and the Tennessee Valley Authority Act by obstructive tactics against the will of the majority of the Board. Mr. Lilienthal finally acquiesced in this change, and the contract was inadequately amended and finally approved by the Board on June 16, 1937. Mr. Lilienthal's recital of this incident at the White House conference held before the President stated (p. 22): 66 * Chairman Morgan stated at a Board meeting, that, reading the contract as a whole, it permitted too great flexibility to the company, thus, under some circumstances, permitting the purchaser firm power at the price of secondary power. In the judgment of the engineers who directly negotiated this contract, this criticism was not well taken, but in deference to the chairman's views, and since the provision suggested by him looked in the right direction, his suggestion was immedately adopted, and a provision was inserted as follows: “Except as provided in section 5 hereof, in periods of suspension of run-ofstream secondary power occurring after such power shall have been available for periods aggregating more than 15 months, Arkansas Co. shall not be entitled to take firm power at a demand in excess of the average of the 3 highest monthly firm peak demands occurring during the last 15 months when run-of-stream secondary power was available.'" Mr. Lililenthal says "his [the chairman's] suggestion was immediately adopted." This is not true. Repeated conferences between Mr. Lilienthal's staff and the engineers under the chairman's direction were fruitless. Then on two occasions one of Mr. Lilienthal's attorneys vigorously tried to persuade the chairman to yield his position. Only the chairman's flat refusal was seemingly effective. This protective provision relates only to periods of suspension of "run-ofstream secondary power." Therefore it can give no protection until after 1942. Of this, I was not aware until recently. Mr. Lilienthal failed to include in his testimony the peaking privilege clause in the contract which practically nullifies the effect of this, and therefore the real significance of this amendment was not disclosed to the President. It follows: "5. Peaking privilege.-During any period (within years in which Authority is obligated to deliver, and the Arkansas Co. to pay for, firm and interruptible or run-of-stream secondary power) when delivery of interruptible or run-ofstream secondary power is discontinued by Authority, Arkansas Co. may, at its option, refrain during its off-peak hours from taking any fraction of the firm power to which it is entitled, and Authority shall thereupon deliver an equivalent amount of energy to Arkansas Co. during Arkansas Co.'s on-peak hours; except that Authority does not undertake to deliver power during a period of discontinuance of interruptible power to a greater amount than the sum of the contract demand of firm power plus the contract demand of interruptible power less 5,000 kilowatts, and to deliver power during a period of suspension of run-of-stream secondary power in a greater amount than 40.000 kilowatts of demand, Arkansas Co. shall have the right, from time to time, upon not less than 24 hours' advance notice, to specify its off-peak and on-peak hours for the purpose of this section. "In any month in which Arkansas Co. shall so increase its demand above the firm demand, the Arkansas Co. shall pay Authority $0.30 per kilowatt per month for the amount by which the measured demand exceeds the contract firm demand." In effect, the contract entitled the Arkansas Co. to purchase and obliged the Authority to furnish firm power at secondary-power prices during periods in which delivery of interruptible and run-of-stream power was discontinued. The primed interruptible and run-of-stream secondary power used previously and subsequently by this process would thereby become firm power. To present such a contract to the Board for approval was unwise on the part of a director of the Tennessee Valley Authority in responsible charge of the sale of Government electric power. The proposed action was persisted in after it had been repeatedly and clearly pointed out by the chairman and his assistants, so it was not a matter of mere carelessness or oversight. EXHIBIT 1. ARKANSAS Co. CONTRACT APRIL 8, 1937. The BOARD OF DIRECTORS, The Board has been advised from time to time of the negotiations between officers of Ebasco Services, Inc., acting for the Arkansas Power & Light Co., and the Tennessee Valley Authority, looking toward the purchase and sale of a substantial block of power to be delivered, roughly, at the end of the new Tennessee Valley Authority line to Memphis. Conferences on engineering and rate matters have been carried forward vigorously, and I submit herewith an outline of a proposed contract between the Arkansas Co. and Tennessee Valley Authority. This outline has the approval and is recommended by Tennessee Valley Authority conferees, Messrs. Glaeser, Evans, Swidler, and Muir. I believe it represents a fair contract. if the remaining outstanding provisions can be agreed upon on a proper basis. The only important provisions not passed upon in this outline are (1) resale provisions, (2) reciprocal stand-by arrangements, and (3) cancelation privileges. The Arkansas Co. understands that resale provisions must be included in the contract, and they stated to our conferees yesterday that they would promptly submit a proposed schedule of reduced rates in Arkansas. Recommendations with respect to these proposed resale provisions will be made to the Board as promptly as possible. This contract is an important one for Tennessee Valley Authority, involving as it does a guaranteed minimum annual revenue of $600,000 (which will probably actually on the average amount to about $750,000) and jointly utilizing investments heretofore made for another purpose, namely, service to the city of Memphis. The Arkansas Co. is in need of an additional source of power and therefore I hope we may proceed to a determination of this matter as promptly as feasible. May I suggest early study of these terms, pending the bringing of the matter to the Board for oral discussion. Dictated by Mr. Lilienthal over the telephone. DAVID E. LILIENTHAL. (Copy to Messrs. J. B. Glandford, M. G. Glaeser, L. Evans, J. C. Swidler. E. J. Muir (2). EXHIBIT 2. ARKANSAS Co. CONTRACT APRIL 27, 1937. The BOARD OF DIRECTORS, JOSEPH C. SWIDLER, Chairman, New Contracts Committee. CONTRACT WITH ARKANSAS POWER & LIGHT CO. At Mr. Lilienthal's request, I am handing you herewith a copy of the tentative draft of power contract between the Authority and Arkansas Power & Light Co. This tentative draft, a copy of which has been sent to representatives of the company, is the result of conferences which were held in Chattanooga and in New York. This draft, however, introduces a definition of run-of-stream secondary power which has not been agreed to by the Arkansas Power & Light Co. Further conferences probably will be necessary to get this tentative draft in final form, but the present draft will inform the Board as to the present status of negotiations. Attachment. (See exhibit 3.) JOSEPH C. SWIDLER. EXHIBIT 3. ARKANSAS Co. CONTRACT TENNESSEE VALLEY AUTHORITY OFFICE MEMORANDUM To: Mr. Carl A. Bock, assistant chief engineer. Subject: Power contract with Arkansas Power & Light Co. Pursuant to your oral request of Mr. Barr, I am attaching hereto a copy of the latest draft of the proposed contract with the Arkansas Power & Light Co. The representatives of the company and of the Authority are in substantial agreement on the substance of the contract, but there is still a wide diversity of views on the form. This draft incorporates certain suggestions made by the Arkansas Co.'s representatives which we have not yet accepted. I regret that I do not have an extra copy of the latest draft of the contract with the Aluminum Co. available. However, a copy has been sent to Chairman Morgan together with an explanatory memorandum, and it may be that these will be available to you. If not, I shall be glad to secure for your use the Legal Division's file copies. You will note that in the Aluminum Co. contract, unlike the Arkansas Co. contract, there is substantially complete agreement as to form but no agreement on some of the most important matters of substance. (Signed) JAMES LAWRENCE FLY. Attachment. CC Dr. A. E. Morgan, BARTON M. JONES, L. S. HARMER. EXHIBIT 4. ARKANSAS Co. CONTRACT JUNE 1, 1937. NOTES ON DRAFT OF PROPOSED CONTRACT WITH ARKANSAS POWER & LIGHT CO., DATED MAY 10, 1937 A previous draft of this proposed contract, dated April 24, 1937, was examined by the writer and discussed with you about the end of April. I understand that you submitted comments on that draft at that time. Following are brief comments on the attached revised copy: 1. Practically all phrasing criticized in the previous draft remains as before. In several instances there is serious doubt as to the real meaning intended. 2. As an outstanding example of the above, it is provided in paragraph 4, page 3, that Authority will sell and company will take and pay for stipulated amounts of power, over fixed periods of time for firm, and variable periods for secondary. At the rates specified in paragraph 6, page 5, company's minimum bill for 1941 would be $946,000 and for 1942, $989,000. In paragraph 10, page 8, it is provided that they shall pay for only such power and energy as they may use, down to a minimum bill of $265,500 for 1941 or $349,500 in 1942. It is separately provided in paragraph 10 that if company uses less than half the energy stipulated in paragraph 4 it shall pay Authority 2 mills per kilowatt-hour for the deficiency below the 50 percent, unless it should be balanced by an excess over 50 percent the year before. These provisions seem distinctly contradictory. Careful rewording to avoid future disputes over the real meaning is advisable, especially since there are superimposed upon them in paragraphs 9 and 11 provisions for: (a) Company taking additional power through agreement with Authority, to be paid for at interruptible power rates. (b) Emergency exchange of power, to be paid for separately according to one of two specified plans to be selected by the party supplying the power. (c) Storage of energy by Authority in company's reservoirs, with later return of part thereof. 3. An exhibit B, referred to as "This arrangement," has been added. It seems to be a revision of the provisions of paragraph 11, page 9, to remain noneffective so long as the main agreement is in force, but to become effective by request of company if the main agreement is canceled. (See (f), paragraph 13.) But the opening paragraph of exhibit B states, on the contrary, that the "arrangement" shall continue in effect until the main agreement is canceled. Evidently a mistake. 4. In paragraph 5, page 4, a limit is imposed upon the peaking privilege when interruptible power is discontinued. After June 30, 1942, during times when run-of-stream secondary power is discontinued, no limit is imposed. Is this intentional? 5. In paragraph 6, page 5, it is provided that run-of-stream secondary power, when available, is the first power taken and paid for. After June 30, 1942, it is only that power which is in excess of 5,000 kilowatts which is paid for at firm power rates, unless secondary power use has been suspended. Is not this a reversal of the usual understanding of firm and secondary power? 6. See page 7, last sentence. Use of and payment for interruptible power being limited to the period previous to July 1, 1942, the rate for excess power used after that date is left in doubt. 7. In the sentence beginning on the ninth line from the bottom of page 8, there is something wrong. No method of arriving at the amount of money to be paid is given. The idea is incomplete. 8. Page 12, paragraph 13 (c). If Authority "terminates" the supply of runof-stream secondary power under this clause, might it not be liable to pay the $92.33 per day specified under the "suspension" clause on page 6, for the remainder of the contract period? 9. Page 13, paragraphs 13 (d) and (e). Under the provisions of these paragraphs it would seem possible for the company to buy cheap Tennessee Valley Power and resell it at any rates the State commission would allow, for a period of 2 years or more. 10. Page 13, last lines of paragraph 13 (d). This provision seems to allow an immediate cancelation. All other cancelation provisions specify a period of notice in years. LSH: ML. L. S. HARMER. THE FEDERAL POWER COMMISSION SURVEY OF TENNESSEE VALLEY AUTHORITY "YARDSTICK” COMMUNITIES Prepared by Arthur E. Morgan for the Joint Congressional Committee on the Investigation of the Tennessee Valley Authority, December 1938 Facts concerning the Federal Power Commission survey of Tennessee Valley Authority "yardstick" communities have been substantially misrepresented to the committee. On May 26, 1938, Mr. Lilienthal testified as follows: 3. A third major charge which Arthur Morgan has leveled against the administration of the power activities of the Authority is that the public representations of the results, the financial results of the sale of power by the Authority and its contractors, the municipalities and the farmers cooperatives, are not honest. Arthur Morgan here yesterday contended that the Authority furnishes surreptitious subsidies to public agencies that purchase power from the Authority at wholesale. "Last summer the Federal Power Commission completed a survey dealing with this very problem. The Commission selected for its study three wholesale customers of the Authority which they regarded as representative, namely Tupelo, Miss.; Athens, Ala.; and Alcorn County Electric Power Association. The Commission sent a staff of engineers into the field to inventory and appraise the physical property. An accounting study was made of the books and accounts of these three customers. The report in two yolumes is available to this committee, and will, I am sure, furnish a better basis of judgment as to the accuracy and honesty of our reports concerning the financial results in these communities than anything I could say or anything that Arthur Morgan has said. * [Italics supplied.] "This study shows that these public agencies have earned large net profits while meeting all costs, including taxes, and while selling power at rates among the lowest in the country" (p. 448 of transcript of hearings). It is interesting to note that the three projects are not representative of Tennessee Valley Authority "yardstick” operations. Of about 30 “yardstick" towns and associations served by the Tennessee Valley Authority for a year or more, Tupelo and Alcorn County had the best financial records of all, and Athens was among the best, as indicated by recent Tennessee Valley Authority reports. The best communities and not representative communities were reported on. It is my understanding that the communities to be reported on by the Federal Power Commission were proposed and recommended by the Tennessee Valley Authority, so that the expression "which they regarded as representative" is doubly misleading. [Italics supplied.] I was not taken into Mr. Lilienthal's confidence in connection with the Power Commission survey, and was not notified when the survey was undertaken. I therefore wrote to Chairman McNinch of the Power Commission, asking how information was gained in the study concerning Tennessee Valley Authority expenditures. I wish to quote the following from a letter of Chairman McNinch of the Federal Power Commission, dated June 24, 1937: "You also inquire (questions 12 and 13) whether the Commission accepted the figures as to certain expenditures as reported by officials of the Tennessee Valley Authority or whether a detailed examination of the accounts of the Authority were made. I am advised by our staff that, while they examined in detail the accounts of the local distribution systems under investigation, the figures which were furnished in writing by responsible officials of the Tennessee Valley Authority were accepted as stated. This is the attitude which the Commission would have its staff adopt with reference to any coordinate branch of the Government. I am advised, however, that the figures in question are in substantial accord with the totals set forth in the annual reports of the Authority which I understand were published with the approval of your Board. "Your other questions (numbers 1 to 9) related to promotional and other expenditures of the Tennessee Valley Authority which directly or indirectly may have benefited the three distribution systems under consideration, as well as other municipalities which may now or hereafter be served by Tennessee Valley Authority and in addition private utilities whose sales have been increased by the general activities of the Federal Government in the encouragement of increased use of electricity. Your questions are directed primarily to the extent to which such expenditures are or should be chargeable against the three systems covered by the report. This is, of course, a question which neither this Com |