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 fol lowing 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 considerations?

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.

Dr. 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

assumptions might relate to the original cost, the power capacity of the system, the value and market possibilities of the different classes of power, the operating expenses, probable requirements for renewals, replacements, and obsolescence, loss of income due to changes in the art, and consequently reduction in rates, the loss to the Government through absence of taxes, subsidies by the Government through tax-free bonds, and through the carrying of the investment risk by the Government. All of these and other elements are subject to various assumptions.

As an engineering project involving unified control of a large river system, the T. V. A. power program is among the most farreaching and complex of undertakings.. It has no precedent. This complexity, together with the fact that the project has been and is to be built with public money, make it less difficult to overlook or conceal many items of actual cost, both in the investment and in operation.

Nevertheless, the T. V. A. power project has in it, either directly or indirectly, by way of burden on the public, every kind of investment and every kind of operating cost necessary in any other hydroelectric project. It is not unique in that respect.

Three months ago statements were made by Mr. Lilienthal before this committee to the effect that the T. V. A. power rates were adequate to meet all costs and to retire the investment. That statement was unequivocal. To date, so far as I know, the committee does not have the data supporting that claim. As one of the most important matters now before the committee, that claim requires analysis.

With the help of a small staff, I have made an analysis of the T. V. A. power situation, which I believe to be unduly favorable to the T. V. A. power case, as I have tried to give or throw doubts in favor of the T. V. A. in this analysis. Actual results, in my opinion, will be far less favorable than estimates I shall present.

This analysis is prepared with a realization that some of the details may require corrections, when full statistical information is available, and I have some notes on the basis of the assumptions, and so forth, that could be better read than spoken, and I will provide the committee with copies of that on Monday, and I will save the time of reading it.

The data that I shall submit show that, first, the estimates presented in a letter on the subject of allocation from the T. V. A. to the President, signed by Dr. H. A. Morgan as chairman, are wholly improbable of attainment. Also, Mr. Lilienthal, before this committee, presented these estimates substantially in the same form, except that he spoke of the dams without locks. These estimates were to the effect that the T. V. A. power project, with the present rate structure, will pay all costs and expenses properly chargeable against operation, and in addition will amortize the entire project. Again I shall show that the present wholesale rates are too low to accomplish what has been claimed by the two members of the Board. The statement that such rates are, if anything, too high is without any justification. Third, that the so-called yardstick rates-that is, to the local communities, where T. V. A. sells power wholesale, to be retailed by the communities-those yardstick rates, whether taken to be wholesale rates charged by the T. V. A. or retail rates charged by municipalities and cooperatives to consumers, are not, yardstick rates at all.

1

The use of the term "yardstick rates" for the reports given out is wholly false and misleading.

Fourth, that under the present T. V. A. wholesale "yardstick" rates, the revenue from Norris, Wheeler, and Wilson Dams will be inadequate to cover the fixed charges and running expenses chargeable to power.

Fifth, that with the completion of the dams now under construction the situation will not be improved. The completion of these dams, making a seven-dam system, and the sale at present rates of electric energy generated by all seven dams will serve only to increase the inevitable deficit.

Now, the testimony of Mr. Lilienthal to which I referred is found on page 1300 of the transcript, as follows:

Wholesale rates were fixed on a conservative basis. They are clearly too high, based upon the allocation which the Board and the President have finally approved.

They are so high that except for the navigation facilities, except for the facilities exclusively devoted to navigation, namely, locks, if you take Wilson Dam ex locks, Wheeler Dam ex locks, and Norris Dam and treat these three as a power project, the revenue from those three projects will pay, not the allocated portion of common costs that we have finally determined upon, but 100 percent of it.

They will pay every dime of those three dams treated as 100 percent common property, except for the navigation locks.

Let me repeat that, because I want to be sure we understand each other.

And then he says:

The best proof that we fixed these rates conservatively is found in this situation. If we take the total investment in Norris Dam, including flood control, including its navigation benefits, and water-control downstream; if we take the total investment in Wheeler Dam except for the locks; if we take the total investment in Wilson Dam except for the locks, that the rates now being charged will produce revenues which will carry the direct costs, and the fixed charges, and amortize that investment 100 percent, of course treating it as a power project.

Now, qualifying these remarks, Mr. Lilienthal then said that his statement was based on operating Wilson, Norris, and Wheeler Dams, solely for power production. Such a basis of operation of the T. V. A. dams and reservoirs solely for power is exactly the opposite of what the T. V. A. Board and the legal staff have claimed before the courts in the process of the litigation and would be directly in violation of the law, which requires that in the construction and operation of the T. V. A. dams, navigation and flood control be given precedence over power production.

Therefore, such an assumption is completely out of order in this inquiry. We are not inquiring what this T. V. A. system would produce if it was a power system alone, but what it would produce treated as it is under the law, and under practice. and under the claims of the T. V. A. counsel. Yet Mr. Lilienthal did suggest such a basis in his statement to the committee. His testimony continues: In this 100 percent-in this statement I have just made about how conservative these rates are, we have treated this as a power project, and considering that 40,000 kilowatts additional power is available. But except for that, which is only a fair qualification, you get some idea of the liquidation possibility under these rates.

Now, the fact is that if the fixed and operating costs of the threedam systems, as constructed and properly operated, are included, not on the entire cost of the dams but only on the investment allocated