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Mr. Tulloss. Shall I read the whole reply?
Representative THOMASON. I didn't want to interrupt Mr. Wolverton.
Mr. Tulloss. This is page 325 of the reply of Tennessee Valley Authority.
Representative WOLVERTON. And the date of it, please?
Mr. Tulloss. It was submitted by letter of December 12, 1935, which was received in the General Accounting Office December 18, 1935.
Representative WOLVERTON. That was approximately 2 years after they had taken back the property. The lease was terminated in December 1933.
Mr. OWEN. Yes, sir, that is true.
In addition to these comments there is on page 80 another statement calling attention to the item of $50,159.96, used in reconditioning the Sheffield steam plant. The following is quoted from an opinion from the general solicitor to the Comptroller with regard to the expense of reconditioning the Sheffield steam plant, "Upon page 80 of the annual report of the audit of the Comptroller General, attention is called to the item"
Senator SCHWART2. Are you quoting now?
Mr. Tulloss. I am quoting again, the second quotation, although it is not marked in quotations here.
Upon page 80 of the annual report of the audit of the Comptroller General attention is called to the item of $50,159.96 expended up to June 30, 1934, in reconditioning the Sheffield steam plant. It is pointed out that under the contract dated November 17, 1921, between the War Department and the Alabama Power Co., the steam plant was leased to the Power Co., and that the lease contained the usual covenants to maintain the property in good order and condition, and to redeliver same in the same good order and condition as when received, excepting reasonable wear and tear, and acts of God.
The Comptroller General points out that under ordinary circumstances it was the duty of the Power Co. to pay the expenses of reconditioning, and that the Authority is therefore under a duty to collect the same from the Power Co. So far as the criticism contained in the report is concerned the complete answer would seem to be that there are serious legal questions involved as to the liability of the Power Co., and that this division has been working upon the problem of a final settlement of this account for several months.
We have in the files a complete statement of plant repairs made by us at the time the plant was delivered to us, and there will be no difficulty in establishing that the amounts expended were reasonably necessary in order to place the plant in satisfactory operating condition.
The difficulty with respect to the liability of the Power Co. arises from the transactions between the Power Co. and the War Department prior to the creation of the Authority. While our files are very incomplete, none of the original documents being contained therein, we understand that from 1927 on the steam plant was leased upon a year-to-year basis.
The contention can and probably will be made that upon the expiration of each year's lease there was in effect an accord and satisfaction as to the liability for repairs and that the duty to place in repair did not extend continuously over the entire time of possession by the Alabama Power Co., but terminated and was renewed with each successive leasing.
The Power Co. has consistently denied liability, and under the circumstances it is absurd to attempt to charge the Authority with responsibility for not collecting the amount expended for reconditioning. Negotiations are still under way looking toward a possible settlement, and litigation may be necessary.
That is the end of the quotation.
Representative WOLVERTON. Without any further explanation in 1937 or 1938 the claim was written off.
Mr. TULLOSs. In 1938.
Mr. OWEN. As for the fiscal year 1938 the claim was written off the books and I restored it in our annual audit.
Mr. BIDDLE. You say there was no explanation I think of the write-off?
Mr. Owen. No, the write-off did not contain a definite explanation, and I had to hunt around. I had the item from the previous report and I had to look around for awhile to find what became of it. Apparently the explanation was not clear. They just wrote it off.
Mr. BIDDLE. You made no inquiry to determine why it was written off?
Mr. OWEN. Not further than just a casual inquiry, because I had previously taken up the item year by year, and I decided that the same reason applied, unless there was something apparent there, that the same reason should apply for that year.
Mr. BIDDLE. You don't know what negotiations took place in those several years with respect to the claim, I presume?
Mr. Ówen. No; I wouldn't say that I did go to the legal department about it.
Senator SCHWARTZ. You say they made no definite explanation?
Mr. OWEN. No; I took the books of account. Usually with the general voucher they give some definite reason, or else they give no reason and let it go. In this particular case there was no change of attitude from the books of account and the records of the corporation.
Senator SCHWARTZ. You didn't talk to them as to the explanation?
Mr. Owen. I talked to the bookkeeper, but I did not go to the legal department to see just how they were following it up, because I was in Chattanooga and the legal department was in Knoxville.
Senator SCHWARTZ. Do you recall what the bookkeeper stated about it, if you didn't speak to anybody else?
Mr. OWEN. He was a little bit upset that I had picked that item up again, and apparently it, I would judge when an item is put in that place with no explanation, that it was a possible attempt to slide over it. That is the way I considered it, with the explanation of the various journal entries.
Senator SCHWARTZ. Let's waive his being upset and sliding. I asked you if he offered any explanation?
Mr. OWEN. Oh, yes; he said that was the same item, and they had decided to write it off, rather than to carry it on.
Senator SCHWARTZ. Did he offer any explanation as to why they decided to write it off?
Mr. OWEN. No; he had been instructed to write it off. Mr. BIDDLE. Did he suggest to you that the legal department advised them?
Mr. OWEN. No.
Mr. BIDDLE (continuing). That the item was uncollectible, did he suggest that to you?
Mr. OWEN. No; he didn't.
Mr. OWEN. I asked him, and he said he had been advised to write it off.
Senator SCHWARTZ. That is all the explanation he gave to you?
Mr. OWEN. I restored it on the basis of the explanation he had given on the records of the corporation. If he had a reason to write it off, he should have put it in the records.
Representative WOLVERTON. If they had just waited another year they would have had a good reason.
Mr. OWEN. Yes.
Representative WOLVERTON. The statute of limitations would have run.
Mr. BIDDLE. Does the statute run against the Government?
Senator SCHWARTZ. I was just going to say the statute of limitations does not run against the Government.
Representative WOLVERTON. In view of some of the testimony that was given with reference to the Berry claim and some of the others down there, I didn't know that they even observed the statute of limitations. I see now they don't.
Senator SCHWARTZ. Of course I am not responsible for your observation, but the fact is as a general proposition that the statute does not run against the Government.
Representative WOLVERTON. I suppose the T. V. A. is the Government?
Senator SCHWARTZ. That has been assumed here right along.
Representative WOLVERTON. I have seen it assumed both ways during this hearing.
Chairman DonaHEY. You may proceed.
Representative WOLVERTON. There is certainly nothing to stop the Government from collecting the $50,000, or at least trying to.
DISTRIBUTION OF OVERHEAD EXPENSE
Now, will you turn to page 85?
Representative WOLVERTON. I note there a statement reading as follows:
Construction work has been charged with labor, materials, and depreciation of equipment, based on engineers' estimates, but not with general administrative overhead.
Will you elaborate on that statement hy informing us the basis of your criticism?
Mr. MATCHETT. At that time the Authority had not decided upon rates for distribution for the administrative overhead charges, and had accumulated those in one account.
Representative WOLVERTON. Have they since adopted a method by which they charge general administrative overhead to the different activities?
Mr. MATCHETT. They have.
Representative WOLVERTON. In what proportion do they charge it, and to what activities?
Mr. MATCHETT. At times it was distributed on the basis of payroll labor charges, which resulted in overcharges to some activities and undercharges to others.
Representative WOLVERTON. I couldn't hear that.
Mr. MATCHETT. Was distributed on the basis of pay-roll charges which resulted in overcharges to some activities and undercharges to others.
Representative WOLVERTON. Will you explain that in detail?
Mr. MATCHETT. For instance, construction of a dam which carries a large pay roll, bore a very large part of this administrative expense, and the power activities bore but very little of it, and that was not in relation to the charges that were incurred.
For instance, the Legal Division's activities, a considerable time had been spent on the power end and very little on the construction activities, and the same may be said of one or two of the other divisions.
Representative WOLVERTON. Well, you speak of general administrative overhead. What do you have in mind under that term?
Mr. MATCHETT. The expense of the Board of Directors, expense of the Legal Division, expense of the treasurer's office, and the entire general office in Knoxville.
Representative WOLVERTON. How much does that general administrative overhead run annually?
Mr. MATCHETT. At that time, about $1,000,000 a year.
Mr. OWEN. Why, it is increasing, I think the last year was about a million and a quarter. I say "about,” I don't have the exact figures.
Representative WOLVERTON. Is there a general percentage that runs each year by which charges are made to the different activities?
Mr. OWEN. Yes, sir.
Representative WOLVERTON. About what percentage of the administrative overhead is charged to the different activities?
Mr. MATCHETT. In 1935 it was a flat 10 percent.
Mr. MATCHETT. Ten percent on the basis of the total pay-roll charges. For instance, if there was $100,000 pay roll, $10,000 administrative expense charged.
Mr. BIDDLE. To what?
Mr. Matchett. To any particular division, or any particular activity.
Representative WOLVERTON. That rule is the one that prevails at the present time?
Mr. MATCHETT. That is customary in public accounting.
Mr. BIDDLE. I am not very clear. May I ask him a question to clarify it?
Do you say any particular activity or division? Now I am not clear myself. Isn't the 10 percent of the administration cost charged against an administrative department without respect to whether the charge is made against power, flood control, or any other activity of of the T. V. A.?
Mr. MATCHETT. At that time there was no consideration of flood control and navigation. It was all construction or power, or certain operating activities.
Mr. BIDDLE. My point is that the 10 percent, if I am clear, is charged against a department, is it not?
Mr. MATCHETT. Yes, speaking of departments, I mean power division as one, fertilizer division as one, and Muscle Shoals as one, and Wheeler Dam as one. You might classify them as projects or departments.
Mr. BIDDLE. And some of those divisions would have various functions?
Mr. MATCHETT. They would, and it would be distributed within the division.
Mr. BIDDLE. Distributed within the division?
Representative WOLVERTON. Does the General Accounting Office criticize that method because it gives an undue prominence to construction work which is not necessarily reflected in overhead expenses, is that correct?
Mr. MATCHETT. That is true.
Representative WOLVERTON. And by the same rule, it denies to power, as I understand your answer, its proportionate part of the administrative overhead because the pay roll is low in the production of power,
Mr. MATCHETT. That is correct.
Representative Thomason. I thought that you said it was nothing unusual, about that practice?
Mr. MATCHETT. It is not unusual to distribute overhead on the basis of pay-roll labor, but it must be determined first that that is a fair method of distributing the administrative expense.
Representative THOMASON. I just wanted to understand that.
Mr. MATCHETT. Analysis should have been made of each division's charges, and the expense distributed on the basis of time spent, for instance, by the Board of Directors, and say in the treasurer's office, on the basis of the vouchers handled, and the legal division, on the basis of the time spent for each activity.
Mr. BIDDLE. When the 10 percent was redistributed in the departments, wasn't that exactly what was done, the study made of the legal services with respect to power and the time sheets considered ? That was the testimony in the record, and I want to know whether you remember that.
Mr. MATCHETT. I don't think so.
Mr. OWEN. The 10 percent flat charge on labor has no relation to any other determination. They take the total labor and divide by the 10 percent.
Mr. BIDDLE. I don't think that you got the drift of the question. It was redistributed according to function.
Mr. Owen. That is true in the service departments before it gets into the overhead. For instance, you take a stenographic section within the overhead, stenographic section will take the hours spent for each part of the general administrative, and the telephones, they