Now, we have made long-time power commitments, and contracts, and we have set our rates at a very low level, and yet I suspect that every single Congressman, Republican or Democrat or anything else from the T. V. A. area, will back every bill that comes in to put that cost on the T. V. A. and make up the lost taxes in these counties.

There is another item of cost there, and that is there is pressure on the T. V. A. today to pay what we might call indirect damages. We cut off the area of a town, take Dayton, Tenn. (above Chickamauga Dam). You have cut off two-thirds or three-fourths of the market area of Dayton. You wonder why there is going to be a town there hereafter. It is one of the casualties of a great development. Now, there is pressure coming in to indemnify the businessmen there for the loss of business.

That is not a forceful suggestion at all. Up in New York State, in building the New York water-supply works, the legislature passed legislation, and authorized the payment of such damages. A few years passed and large amounts of those damages were claimed, and they had to be paid. They were added to the cost of the project.

Then the T. V. A. has built bridges across arms of the reservoir here. Those bridges have a limited life, and they are going to have to be replaced. That will come in the depreciation of reservoir properties.

There are those kinds of costs, and you cannot tell for certain what they will be.

If you look back today at extra costs, we see occurrences, like a tornado, for instance, up on the coast of New England, which occurred a few weeks ago. We had a tornado that cost many millions of dollars and the utilities there did not have tornado insurance in their costs. It came as something that they didn't expect. It is always something that you don't expect, but it comes. The set-up that does not provide substantial reserves for those unexpected losses does not represent good business. T. V. A. has not provided them. We have not made any provision for them in this set-up, and in that respect this set-up is altogether too favorable to the T. V. A.

Now, I have outlined a statement on the wholesale power opera tions of the T. V. A., and if it would be acceptable to you, I would rather have questions asked on that without having to go along to the fag end of the afternoon and get into a wholly different subject. It depends on what you think about it.

Chairman DONAHEY. You have been allotted so much time. You may use that time.

Dr. A. E. MORGAN. I need all the time and more, too.

Chairman DONAHEY. Then you had better proceed.

Dr. A. E. MORGAN. All right. I am going to offer just roughly the basis for making these estimates that I have given you. I am not going to read much of it. I will have copies for you Monday, and I would like that to go in the record, if I may.

Chairman DONAHEY. It will be so ordered.

Dr. A. E. MORGAN. In the investment in this three-dam system, we have a total investment of $76,000,000, which is the same as shown in the allocation report, with the addition of interest during construction, and organization and financing. Now, in the construction process-I was mixed up a little while ago on that.

In the process of operation of our system, we have thrown into taxes all costs sustained by the Government and not by T. V. A. In the construction of the system, however, we have added 4 percent on the cost to carry services, supplied by the Government, that is, to carry the handling of bonds, workmen's compensation liability, and so forth. In operation those are all thrown in without any credit. In construction we added 4 percent to that cost. I don't think I will go into detail on that, because I cannot afford to take the time. It will be pretty well discussed in this statement and otherwise you can ask me questions if you want to.

In the same way, on interest during construction, I have a discussion of that here that I will not go into personally now. I have listed the kinds of services supplied by the Federal Government that are included in that 4 percent.

The financial services of the Treasury Department. That alone in a private concern would amount to about 4 percent. There are the legal services, the services of the Comptroller General, workmen's compensation, public liability, War Department expenditures prior to T. V. A. that amounted to between a half percent and 1 percent alone. That is, they spent between a half million and a million dollars in preparing surveys and borings, and so forth, at the dam sites which we inherited, so that there is an additional cost there that does not enter into any T. V. A. books.

The T. V. A. does not pay social security taxes. The Government will pay those sometime when these people come up for old-age relief, but the T. V. A. does not include any social security taxes. Excise taxes-that is 3 percent of the cost of power sold for residence and commercial use-T. V. A. pays none of that.

There is a contribution of States to the State unemployment funds; T. V. A. pays none of that. There are State gasoline taxes, licenses, license fees, and so forth. The automobile fees alone, gasoline and the licenses, and so forth, that the T. V. A. saves amount to something like a hundred thousand dollars a year.

Then on the Wilson Dam power plant, the total cost of that to the Government, if we include interest during construction and organization expenses, the total cost of that was $53,000,000. There is $46,000,000 that was labor cost, $46,500,000; then if you add interest during construction on the basis that the T. V. A. engineers have estimated it and recorded it, it is $4,328,000, and these organizing expenses, $2,000,000, making a total of $52,956,000, substantially 53 million dollars.

Now, when the T. V. A. took that over, it finally took it over at $31,000,000, but in estimating the cost of the Wilson Dam we have included it at $34,000,000, by adding interest during construction on the depreciated amount, and organizing expenses on the depreciated amount. But the T. V. A. depreciated the Wilson Dam in one way or another substantially $30,000,000 in taking it over. That much was written off of the actual cost to the Government.

The total investment in the three systems, including interest during construction and organization expense, is about $107,000,000, and that was allocated in just the proportions of the allocation report.

Then there is the matter of general administrative expense charged to power. Everybody knows how dominant power has been in the T. V. A. operations. The T. V. A. has charged most of its overhead to construction. I have no criticism on that, but explaining it on the basis of what this power costs, the cost has been postponed to capital investment that may not show up until later years.

Only 4 percent of the general T. V. A. overhead was charged to the operation of the T. V. A. power system. In my opinion that is altogether too small to represent actualities. When we consider the large part that the operation of the T. V. A. power system took in the T. V. A. work, I think that allocating only 4 percent of overhead to power operations is entirely too small. Only 10 percent was allocated to T. V. A. power operations and to the power department

construction as well.

Then there is another kind of Government subsidy. The other Government departments have shared the cost of the electric program. For instance, the P. W. A. made loans and grants in that territory of $14,000,000, building up a market for T. V. A. power. Of that about $7,000,000 was an outright gift. The R. E. A. also has helped.

Senator DAVIS. Can you give us the items, a full itemized statement of the number of loans that were made?

Dr. A. E. MORGAN. I can give you the general data on it. I will get that for you Monday.

Senator DAVIS. All right.

Dr. A. E. MORGAN. Some of this I want to check over before I release it. I had to leave before it was quite done. I might say about a week ago I tried to find out from counsel when I would appear here and I was told you were booked up solid for 3 weeks, and I therefore sort of planned my time to be ready at that time. And then when it shortened up I had to adjust myself a little quickly. I am going to pass over as much as possible of this. I want to check it over before I release it.

Now, I am going to take up next the matter of the yardstick power program. I want first to make it clear that when I say that the T. V. A. has claimed that in these yardstick communities, the yardstick communities were paying the whole cost, that I am not doing any violence to T. V. A.'s statements. I want to quote just a few statements illustrative of what claims have been made by the T. V. A. about the yardstick program. By this I mean the program of the T. V. A. selling wholesale power to the communities, and the communities reselling that power.

I will begin back in 1933. Mr. Lilienthal, addressing the Chattanooga Rotary Club on September 28, 1933, said-I quote:

It is pretty well recognized that regulation has not been entirely adequate to protect the public interest, and so to supplement regulation Congress has provided for a measure of public operation on a limited scale. This public operation is to serve as a yardstick by which to measure the fairness of electric rates.

In the same speech he said:

The Tennessee Valley Authority program is not a taxpayers' subsidy. It is a business undertaking.

Now, no phase of the T. V. A. undertaking has been so publicly dramatized and deeply impressed upon the public mind as the socalled yardstick power program, whereby T. V. A. sells power at wholesale prices to cities, towns, and cooperative associations under a contract which prescribes the resale yardstick rates at which the power will be resold to the ultimate consumer.

T. V. A. publicity during the past 5 years has impressed upon the American public that without subsidy from the Federal Government T. V. A. residential yardstick resale rates charged by towns, cities, and cooperative associations served by the T. V. A. produces sufficient revenue to cover the entire cost of service, and that the rates are a fair guide to what residential consumers throughout the country should pay for electric service in the home.

Now, other members of the Authority have taken the same position. For instance, speaking over a Nation-wide network on September 26, 1934, Dr. Harcourt A. Morgan said-I quote:

You know that the development of this electric power is to be a sort of yardstick with which to determine whether the rates charged in other parts of the country are fair and as low as they reasonably can be.

That is a T. V. A. release, Knoxville, September 24.

Then the present manager, then coordinator, Mr. Blandford, expressed himself in the same way in a radio broadcast on July 31, 1934. He said-I quote:

A dam is not an isolated structure or operating unit, but part of a unified development of a water system, with power produced at half the cost of unorganized development, and with valuable byproducts in flood control and in navigation.

Director David E. Lilienthal is buying power systems at fair prices and building lines where they do not now exist. He is accounting for his operations with full consideration for interest, depreciation, amortization, and taxes, and thereby establishing a yardstick for the Nation.

This is a T. V. A. release, August 1, 1934.

Then T. V. A. has published bulletins giving expression to the same point of view. I quote from page 3 of a bulletin entitled "T. V. A. Electricity Rates, a Statement of Facts," that has been published, issued by the T. V. A. Information Service, and widely distributed for public consumption.

Mr. BIDDLE. What is the date on that?

Dr. A. E. MORGAN. There is no date on it. It is used up to the present. I quote from that:

The Tennessee Valley Authority announced the wholesale and retail rates at which it would dispose of surplus power from Wilson Dam in September 1933. These rates were set up on the principle that consumers of electricity must pay all of the costs of furnishing that electricity without any contribution from taxpayers. These rates have been prescribed as a yardstick with which to measure and compare rates charged by private utilities.

Then again, addressing the Memphis Rotary Club in October 1933, Mr. Lilienthal said:

First of all, we kept in mind that the consumers of Muscle Shoals power must pay all the costs; in short, the power program of the Authority is not to be subsidized by the taxpayers.

That is a T. V. A. release October 17, 1933.

Before the House Military Affairs Committee in 1935, Mr. Lilienthal testified, and the testimony is scattered so I shall have to summarize it here rather than quote a long part.

He testified that the T. V. A. reduced rates approximately 50 percent without any loss to the Federal Government, and that profits to yardstick communities as high as 38 cents on the dollar were realized. This signifies real achievement, he stated. It also implies that unreasonable profits were obtained prior to T. V. A., and furthermore that public operation under direct supervision of the Federal Government is far more satisfactory than Federal or State regulation of privately and publicly owned utilities.

The picture of the T. V. A. yardstick power program given to the American public can be summed up as follows:

As to subsidy, T. V. A. power would not be subsidized by the taxpayer. As to costs, all costs of service would be included. Under T. V. A. yardstick rates consumers would be required to pay the entire cost of electric service.

As to the yardstick the T. V. A. power program would serve as a yardstick by which to measure the fairness of electric rates of both publicly and privately owned utilities throughout the country.

Now, I have never criticized the experimental development of power by the Government, even if a subsidy were involved. I have not criticized that at any time. What I have criticized is providing power with subsidies and then saying to the public that you are providing it without subsidies, that the consumer is paying the

whole cost.

My criticism of the T. V. A. power program all the way along in this respect is not that we ought not to have had a place to try out, to see what low rates would do, and so forth, but to do that and then say those rates are covering all of the costs and they become a yardstick of what other people ought to charge, when that is not so; that has been my criticism, and I would like that distinction to be made clear. I am not criticizing a Government experiment to see what we can do; I am criticizing the statement that this is paying the whole cost when it is not.

Now, since in early 1935, I might say up to that time, or for some time, I took the statements from the T. V. A. power department and repeated them in public, took them at their face value and repeated them as my own. Then I began to be disturbed about it, and after some months I spoke to Mr. Lilienthal. I said, "I am repeating your statements about the yardstick," I said; "I feel that for me to continue to do that, to continue to give that support, I need to personally know the facts, and therefore I want to undertake a study for myself, so that I personally know the facts."

I started to do that. I found a great deal of difficulty in getting the facts. After some months Mr. Lilienthal came to me and he said he wished that I would discontinue that study because he was going to ask the Federal Power Commission to make the study, or they were going to make a study rather, and then we would know all about it, and he made some remarks along that line.

And upon his saying that, I discontinued my inquiry until after the Federal Power Commission's preliminary report had come in.