they have to be replaced, especially in electric power. That is going to be true in the future. There are more revolutionary changes impending in electric power today, I think, than there have been in the past 25 years. So just replacements along the way is one item of depreciation.

Now, the other is obsolescence. In T. V. A. estimates of power income they make this assumption, and I might say that for 50 years we have had a constant decline in the cost of power. Fifty years ago power, either wholesale or retail, cost four times what it costs today, or more than four times. Twenty-five years ago it cost more than twice what it costs today, and there has been a constant decline in the cost of power for 50 years.

Now, it is contrary to all experience, it is contrary to the prospects at the time, to think that after 50 years of steady decline in the cost of power, that from now on for another 50 years power rates are going to stop declining, and stay flat until the T. V. A. can pay its bills. That is a very nice assumption, but there is just no soundness to it. As I say, for 50 years of constant decline, we have that as our past experience, looking ahead we see a continuation of that probability in very revolutionary changes in the art of power production, and the only reasonable basis of calculation is that there will be a continuation of the decline in the cost of power.

That means a decline in the price of power, because power is highly competitive. If a great industry can make power cheaper, it is going to make that cheaper than to buy it, and so the T. V. A. is going to have to follow down the price of power as it goes down. I think it is entirely probable that 25 years from now, power will cost not more than half of what it does today, and 50 years from now I think it is not entirely impossible that it will cost a quarter of what it does today.

So that the income that you will have with which to pay these charges is going to decline and for the T. V. A. to assume that after 50 years of continuous reduction in costs you are going to suddenly get a flat level of prices is just contrary to all experience and all prospects. And yet, there is no place in a set-up for such costs if you have already cut your rates down to the bare bone.

I have not put in any item of cost, in this, to make up the losses of such reduction in price of power and cost of power. Now, in estimating depreciation we have estimated on a straight line basis, and that is the only proper estimate, and if there is any question about it I would be glad to answer questions, but I don't want to waste my time unless there is some question about it.

We have an item of development deficit, which enters into this picture. During the 5-year period of operation to June 30, 1938, the deficit, the losses in operation of the T. V. A. power project, have been $9.445,000.

Now, in the manner of determining the cost of the power systems, it has been insisted upon by Mr. Lilienthal in his negotiations with the power companies, over and over again he said that he would not recognize intangibles; that is, he will buy used and useful property

at what he says is a fair depreciated price, only the physical property, but suppose that company has put in extra investments, to build up its load, there is a loss until that load gets built up.

Now, the loss for the T. V. A. up to the present, up to the first of last July, had been nine and a half million dollars. Under the way in which the T. V. A. tries to buy power systems, it would wipe that out, and it wouldn't consider that at all, and it would make the system stand that loss year by year in its rates; that is, it would have to charge enough to get enough money to pay its way year by year.

The T. V. A. doesn't do that, and I think it is probably all right that they didn't do it, but how are you going to pay that nine and a half million dollars? There are two or three ways of paying it. One is a way that is sometimes allowed by public-service commissions; that is, spread it over, say, 5 years, you can't put it into your capital structure, but they say, "We will let you spread it over a few years," and that is one way of doing it.

Another way would be to put it into the capital structure and charge interest on it and depreciation. The way we have estimated is less expensive than any of those. We have assumed that you spread it over 25 years, and charge no interest on it, and how a private concern would get that money without interest I don't know, but I just assumed that we would pay only 4 percent a year, and charge no interest, and spread that loss over 25 years, and that makes a charge of $377,000 a year, even on that mild basis.

In the matter of taxation, we estimated 1 percent on the investment, but we throw in these kinds of services to the construction program.

For instance, the cost to the Treasury Department of issuing bonds and collecting the money for the construction load of building these dams, in private industry that costs about 4 percent of the capital, to issue bonds and to make the collections along the way. The Treasury has all of those same costs; you may say it doesn't cost anything because the Treasury is there anyway, and you might say that about any part of the Treasury service, it is a cost to the Treasury, although it may be somewhat less than it would be to private concerns.

There is the Department of Justice, which I think has been helping in this situation here; it has some costs.

There is the Department of Labor, which we have drawn upon steadily.

There is the Comptroller General's Office, that it costs a large amount of money to keep us straight.

There is the matter of workmen's compensation. In a construction like building a dam, that work means compensation would be something like 112 or 2 percent of the pay roll. The T. V. A. doesn't pay that; some other department of the Government pays that, and the T. V. A. is free from that expense, and I think that it would equal about-we estimate, conservatively, one-half of 1 percent of the cost of the building of these things would be workmen's compensation. There are liability and property claims of various kinds, that the T. V. A. does not have to handle directly.

There is insurance against catastrophes and so forth during construction, that a private contractor would handle, and we didn't have to handle that. The Government takes that load off us.

All of those costs are real costs, and in the aggregate a private concern would figure that they would run up to something like between 5 and 10 percent. We have put those in at nothing, and I just assume they are covered in this 1 percent tax, and that is a very liberal assumption.

Now, in March 1934, the T. V. A. Power Division made a representation to the Alabama Power Commission, as to the basis of its yardstick rates-this was a formal, official announcement to the Alabama Power Commission, of how the T. V. A. arrived at its yardstick

rates.

For taxes, it stated that they estimated 1.19 percent on the investment allocated to power. That is pretty near 20 percent more than I have estimated here.

For depreciation, it estimated 2.62 percent of the cost allocated to power.

For interest it estimated 31⁄2 percent.

Those were the official T. V. A. estimates in presenting to the Alabama Power Commission the basis of its yardstick rates.

Then, in testifying before the Appropriations Committee of the House, in 1936, Mr. Lilienthal used the following estimate:

Taxes, 1 percent of the investment allocated to power-that is the same as I used.

Depreciation 3 percent on the investment allocated to power. Our average was 2 percent for the dams and 3 percent for the transmission lines makes an average of 2.45 percent. That we have figured, against his statement to the Appropriations Committee, that 3 percent was the proper figure; so we have underestimated there against his own estimates.

Interest at 32 percent was what he stated to the Appropriations Committee. Now, it would be unusual-an unusual course, for the T. V. A. through the years to announce to the public in its official statements one basis for interest, depreciation, and taxes, to announce those to the Congress and President and to public service commissions and to the public, and then to come before your committee with another set of assumptions on a more favorable basis.

Now, I have another estimate, following another bit of testimony to this committee-in a letter dated June 9, 1938, addressed to the President from the Tennessee Valley Authority, signed by Dr. Harcourt A. Morgan as chairman, transmitting a report on the investment of the Authority in the Wilson, Norris, and Wheeler projects, pursuant to section 14 of the Tennessee Valley Authority Act-that is this allocation report that we are talking about-in the letter transmitting that, the official letter from the T. V. A., comes this statement. I quote:

It seems appropriate to indicate here the prospective revenues from the Authority's power operations under existing wholesale rate schedules as they relate to the allocation of investments submitted herewith by the Board.

The Authority's engineers estimate on a basis which appears reasonable to us that the power revenues derived from the normal capacity of the three completed projects, will be sufficient to cover all of the costs of operation including depreciation and 3 percent interest on the investment allocated to power, and in addition to return in 30 years the entire investment allocated to navigation and flood control.

That is a statement made to the President and the Congress.

This assurance is as improbable of fulfillment as those given by Mr. Lilienthal in his testimony before the committee.

At 3 percent, interest rates, I have made up the same schedule of costs and income as in the former case, and taking the whole, overall picture, it is this:

Including interest on construction, the annual loss without any amortization of navigation and flood control, just the continuing cost of power, without helping those other departments at all, would be the loss would be $1,734,000 a year-if you include interest during the construction, and $1,374,000 if you exclude interest during construction. Then, in addition to those costs, are all of these other costs that I mentioned, which are not included, but which are real costs, such as reserves to take care of loss of income; loss of income is to be expected from several sources.

During periods of serious depression, the total use of power in this region may be reduced 10 percent or more.

When there is adequate installation, the depreciation will amount to more than that. The reason it isn't any more now is because power installation is rapidly growing in the country, and that natural growth tends to take up those depressions, whereas when power gets to a more stable situation, the depressions won't have that element of growth to take them up. Never in the course of our history have such irregularities of use been ironed out, and prudent management will provide for them in reserves. We have made no such provision. We have given the T. V. A. all of the benefit of that doubt.

Also, as new power capacities are installed, there is always a lag in selling that power. A power company must build ahead of its market, and in getting the market for that, there is that lag in the T. V. A. power use at the present time, and there always has been until the system is finished, so that income does not suddenly reach its maximum. We have provided for it reaching its maximum all the way along in these estimates, which is too favorable to the T. V. Å. Prudent management will provide for such lag through adequate rates or through additional capitalization.

For 50 years there has been steady and uninterrupted decline in the cost of producing electric power and in the price that can be charged for it. Electric-power generation and transmission today, in general, costs less than a quarter of what it cost 50 years ago, and generally less than half what it cost 25 years ago.

That decline in cost has continued right up to the present. Prospective developments in power generation and transmission are no less revolutionary than at any time in the past. For the T. V. A. to assume, with a record of 50 years of steady decline in costs, that this progress will suddenly stop, and that prices will remain uniform for 50 years, until the heavy T. V. A. fixed charges can be repaid from its initial very low rates for power, is contrary to all past experience and to existing prospects. It is unsound business.

If the past rate of decline in costs and prices continues, the prevailing prices for wholesale power 25 years from now may be half as much as at present and may continue to decrease thereafter. Therefore, the income available for meeting fixed costs may be very greatly reduced.

Now, you talk to an engineer today and say, "What are those de-. velopments coming on?" And he will say, "There is nothing very sure; it is only in the laboratory." That is what he would have said 50 years ago about the developments 10 years ago, and that is what he would have said 25 years ago about developments of today. It is those things that are not yet out of the laboratory that make that progress in power production. There are in prospect fundamental changes in power production that may be more revolutionary than anything we have seen for 40 years past.

Now, you ask, what do the utilities do in a case like that, how do they provide for it? They have always had a margin, a margin of income between costs and price; they have always had a margin of income over the cost, something they can have for a cushion. They have not figured very closely; there is a margin there for such contingencies.

Then I think also in one respect the Government and the utilities have been in a way united against the investor without his knowing it. The utilities want a good reputation with the investor, and they want to indicate to the public that these are stable investments, and the public wants low rates, and so they are willing to have a small depreciation reserve. They both work against the investor. If you take utility investments for the past 50 years, utility companies' gas. systems, streetcar systems, I think you will find that, while there have been many sins of the utility companies, they have been even more against the small investor than they have been against the public. A good part of the wealth has come out of the investor who was holding the bag when the margin of profit was squeezed out of the utility companies when it got to a point where it was not a good in

vestment.

Good management is bound to keep a cushion, a reserve, between the actual cost of power today, and what it may cost in the future to take up that slack. If that is not done you are on a basis of very unsound business.

Now, the T. V. A. cannot reduce its taxes as prices go down, because most of its costs are in fixed charges already incurred in these dams and reservoirs and power plants, and the rest of their cost is in labor, and labor has been going up just as prices for electricity have gone down for 50 years. Fifty years ago labor got less than a quarter of what it gets today, 25 years ago labor in the utilities got only 40 percent of what it gets today. But labor has been going up, while prices of electricity have been going down, and yet the two principal elements in T. V. A. power are fixed capital which you cannot change, and labor, which is on the way up. In that respect it is different from steam prices. So, you are almost certain to be crowded down in the margin of cost, and the set-up that makes no provision for such a change of situation is not a sound. set-up.

In addition to reserves for loss of income, there should be reserves to meet unprovided for expenses. Now, for instance, there is a movement under way, and there are bills in Congress to require the T. V. A. to capitalize the loss of taxes in the counties where this land is in the reservoirs, and to add that to our capital cost.

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