Unfortunately, there is a difference in memory in that respect. I very clearly remember both of those occasions, when I went to Mr. Lilienthal and told him I wanted to make this study so that I could justify my statements in public, and then immediately afterward I went to the accounting office and arranged for getting the pertinent information-I have correspondence with the T. V. A. accounting office on the subject and am using my correspondence with them in this study.

Later Mr. Lilienthal came to me at a meeting-at one of our T. V. A. Board meetings-after the meeting he asked me to discontinue; he said he was not worrying about 1 or 2 mills in cost; he was worrying about 2 or 3 cents that represented the difference in private power and T. V. A. power. Now, there is a difference in memory there, because Mr. Lilienthal says those conversations never took place, in substance. That is an embarrassing difference, but I indicate that to show that I was not unduly negligent. I started as far back as about February 1935 to try to qualify myself with a knowledge of the yardstick basis.

In 1936, Mr. Lilienthal arranged with the Federal Power Commission to have an engineering and accounting study made of the distribution systems of the city of Tupelo, Alcorn County, Miss., and Athens, Ala. The general outline of the study was made largely, or was largely suggested, by Mr. Lilienthal and his assistants and without consulting the Board. In fact, as chairman of the Board, I did not know that such a study was under way. The actual study was under way by the Federal Power Commission, and I did not know it until I saw a notice about it in the newspapers. I was not informed that the Power Commission was making this study about which I had been so concerned until I read about it in the newspapers.

Now, in that study the Federal Power Commission did not look into the T. V. A. records. I will have a statement on that, however, somewhat point by point on that Federal Power Commission study.

I can furnish to the committee an analysis of what happened in that Power Commission study. The fact is, when it came down to a study of the subsidies paid by T. V. A. to these communities, the Federal Power Commission did not go into the records. It simply took a letter, or two or three letters, from the T. V. A. It had some data, but the significant data was never received, and it made its estimates from over-all figures. The T. V. A. said about so many thousand dollars, and it took those figures as they were without going into the records, and so the Federal Power Commission's statement in that respect is only a repetition of the very statements of the T. V. A. that I have been criticizing. It did not go behind those statements. And the testimony given by Mr. Lilienthal sometime ago, saying that I had criticized the subsidies, but that the Federal Power Commission had made a study of that very matter that is not exactly accurate, because they did not go to the data itself; they just took the T. V. A. statements wholesale as to what were the facts. It is those very statements that I have criticized, and I will present to the committee a statement on that matter.

Now, in furnishing power to these yardstick communities, the total cost is made up of fixed charges on generating plants and equipment, substations, transformers, transmission, and distribution lines, and so

forth, and such costs as sale promotion, load building, and running expense, and I am going to list some of the important elements of cost to these yardstick communities which were entirely omitted by the T. V. A., and also omitted by the communities. The T. V. A. did not charge the communities for them and the communities did not include these costs in their financial statements.

First, less than 4 percent of the Authority's general administrative costs was charged to power at all, and none of that was charged to the yardstick communities, unless you include it in the wholesale cost of power, and I have shown and will show further that the wholesale cost of power to these yardstick communities, wholesale price of power, was altogether less than the cost, so that every time we sold a yardstick community a kilowatt of power we substantially gave it that power. We did not charge anything; the subsidies were, I think, in total greater than the cost we charged for the power.

Then there is the matter of litigation. It was testified before this committee that there had been $518,000 in litigation costs. None of that expense was charged to the power program, although most of it was due to the power program.

Then there has been very substantial expenditure for the promotion of rural electrification through grants to the land-grant colleges. T. V. A. makes grants to the land-grant colleges; the land-grant college organizations, through county agents, go around and promote the sale of power in T. V. A. "yardstick" communities, and that expense does not even show up in the T. V. A. power program. It shows up in the agricultural program, and no one ever shows it in the cost of power to these communities in their financial statements.

Then these communities have received liberal assistance from the T. V. A. and from other public organizations. Now, here is an interesting point, for instance the T. V. A. has loaned $2,304,000 to these yardstick communities. Nearly all of it is at 312 percent, two or three loans at 4, all of the others at 312 percent. The T. V. A. takes that from the Government in appropriations. The Government sells bonds for it. The T. V. A. loans it. All of the interest that comes back from that loan the T. V. A. reports as income, but it reports no interest on having borrowed that money. Last year that income was about $164,000 of interest, and yet in lending this money to the communities, the T. V. A. made no charge for that debt, makes no charge for carrying the loans. It is an outright gift, except just the bare interest rate of 32 percent.

In his testimony before this committee on July 25, Mr. Lilienthal made a statement as to promotional activities of the T. V. A., and he listed a very limited number of people who were employed for promotional activities. I think the list is much greater than that indicated.

Then there is the matter of financing. As I say, the T. V. A. in lending money to the communities does not charge anything for service, for bad debts, and so forth. If a yardstick community is getting in bad, the T. V. A. will take that system back, put it on its feet again, and get it going, and then hand it back, and there is no charge for that service. If the project goes wrong, the T. V. A. loses.

When the T. V. A. lends money at 312 percent, and some of these have borrowed money from other Federal agencies at 3 percent, they lend 100 percent of that money. If a utility wants to finance, even a

great utility, it will borrow half its financing on bonds, another quarter, say, on preferred stock at a slightly higher rate, and another quarter goes out as common stock that takes its chance.

Now, all that a yardstick community has to do to go into business is to say to the T. V. A., “We would like to go into business." Thereupon the T. V. A. plans its system or builds its system, organizes its system; it picks out a manager for the system, sets up the system in business. All of the loss during that development period the T. V. A. takes over because it owns it up to that time. That is true in some cases, at least. Then when it gets to running well, then the T. V. A. turns it over with no charge for that service. If the system then goes bad, T. V. A. takes it back, fixes it up, and gives it back to them again with no charge for the service of rehabilitation. This interest rate is just the bare low interest rate of 32 percent.

Now, what the T. V. A. is doing is not just selling power wholesale and lending money. The T. V. A. is serving as a holding company, an operating company, like the Alabama Power Co. or the Tennessee Electric Power Co., and it spends, I believe, as much time in each one of these communities as any representative of the Alabama Power Co. central organization spends in one of its representative communities. It sets up the books, inspects the books; if there is a tornado or other emergency, the T. V. A. puts in an emergency staff. It is practically taking the place of an operating company, and charging only-oh, it is giving the power away, I think, flat, giving the power away. And yet that is called the yardstick. That is somewhat in brief as to what is happening in the T. V. A. picture. Of course, no little organization like a yardstick community, with no securities, and with its situation where it has no property except what the T. V. A. has loaned it at 32 percent, what the T. V. A. has constructed and handed to it; no business concern could borrow money at that rate, with all of the risk absorbed by the lender. It is not a bankable project, as it has been called at times. If there are profits, the community gets it. If there are losses, T. V. A. takes it. The P. W. A. has made loans of $6,400,000, and outright grants of $7,600,000 to these communities that are to buy T. V. A. power in helping build a market for T. V. A. power. There may be a slight variation from that; it is the latest figure I have. I don't have all of the T. V. A. data,

Now, I have a summary of some of the financial assistance supplied. T. V. A. has loaned in these communities on these very favorable conditions, $2,300,000, the R. E. A. has loaned $5,300,000, the P. W. A. has loaned $6,400,000, and given grants of $7,600,000, making a total of $21,700,000 about, of money that has been put out under these very favorable circumstances with no security except the plant that was provided to the system. In a few instances the plant was already owned by the city and only additions were furnished.

Those, I say, are just facilities to supply service, and such conditions constitute an outright subsidy to these communities. There are five of the communities that were furnishing their own power before this time. They were charging relatively high rates. The difference in efficiency before and afterward is very largely the contribution of management, and so forth, made by the T. V. A.-that is, the T. V. A.

is furnishing the services of an operating company, a holding company, to these communities without cost.

As an instance of the sort of generous treatment, I might take the case of Tupelo. I will get to that in just a minute.

In a memorandum dated March 24, 1936, Mr. Lilienthal wrote to Mr. Basil Manly, vice chairman of the Federal Power Commission, as follows:

It is unreasonable to anticipate that a volume of business will immediately be adequate to carry the full costs. In any business there is a development period, and we have taken this factor into account in our computations, particularly since we began operations with a huge plant on which we are accepting the fixed charges.

Now, the loss on that in 5 years was something over $9,000,000. Now, further, in writing in the Public Utilities Fortnightly, issued June 4, 1936, Mr. Lilienthal made this observation:

As can be seen, under this law

that is the T. V. A. law—

the Authority was faced with the problem of devising a price for electricity which would result in maximum use, and yet would return to the Federal Treasury all of the costs of producing and distributing that energy. The cost of generating electricity forms only a small part of the total cost to the resi dential consumer or the farmer, ranging usually from about one-sixth to one-tenth.

That is, the wholesale cost is only one-sixth or one-tenth of the whole.

T. V. A. prices for electricity at wholesale vary only a mill or two per kilowatt-hour, in some cases even less than a mill, from the wholesale rates generally charged in this area.

I want you to get the significance of that. He says

generating costs form only a small part of the total cost, and T. V. A. prices for electricity at wholesale vary only a mill or two per kilowatt-hour from the wholesale rates in the area.

Now, I would like to draw your attention to what that would mean. That is, a difference of a mill or two.

An increase of 1 mill in the price of the power that T. V. A. sold, up to the beginning of the last fiscal year, would have meant an increase of income of $2,360,000..

It would have meant an increase in its rates of 36 percent; that is, an increase of 1 mill per kilowatt-hour would have increased the rate T. V. A. got for its power 36 percent.

Now, if it had increased to 2 mills-Mr. Lilienthal said that his rate was only a mill or two below that prevailing-if he had increased his price 2 mills, the difference would have been an increase of 73 percent in the price T. V. A. got for its power; all the power sold up to the 1st of last July. That shows how very significant a mill or two is; in fact, the T. V. A. up to the present time has gotten only about 3 mills for its power altogether, and so when you say "a mill or two" it does mean something.

Up to the present time the T. V. A. has only gotten 234 mills, that is the average price the T. V. A. sold, up to the 1st of last July, and so when he says, "it is only a mill or two below the market,' that just means making or breaking a utility company, because the

utility company sells only a small part of its power to residential users. It sells most of it to big consumers, and the big consumers make it possible to sell the small amount to the residential users. Up to the 1st of last July, of all of the power the T. V. A. has sold, less than 10 percent-less than 5 percent-went to residential users. Less than 5 percent of all of the power the T. V. A. has sold up to the 1st of last July went to residential users, and less than 10 percent went to these yardstick communities, including residential, commercial, and industrial customers, and more than 90 percent went to the big industrial users or T. V. A. used it itself, and in that big use, a fraction of a mill per kilowatt-hour-a quarter of a mill per kilowatt-hour-might mean the difference between getting a contract and not, and that is where this allocation is important. You see, if you could leave off half your capitalization, as Mr. Lilienthal emphasized doing, why it would enable you to cut under any competitor, it would enable you to sell power below anybody else, and of course all he would do would just be sell enough lower to get the business, but he could cut off a third of his whole cost, if he could have gone on a byproduct basis of selling power, because a fraction of a mill is a control in your wholesale prices, and the yardstick program can only exist, if at all, because these big consumers are taking the bulk of the power.

I must correct that-it is a little less than 20 percent was sold to municipalities, which would make a little less than 10 percent to residential users.

Now, there is the matter of power distribution costs. There are certain costs of supplying electric service-I might say that the figures I have been reading need correction; by Monday I will have a copy with me that has these corrections in it. There are certain costs of supplying electric service to the ultimate consumer, which are recognized as being proper distribution costs. These are the finances, organization, accounting, publicity, legal, engineering, and loadbuilding. Such services represent a substantial part of the total cost of distribution.

The Authority has furnished such services either entirely without cost, or substantially without cost, to yardstick cities, towns, and associations. The records of the yardstick distributors, the costs they record, do not contain items accounting for these contributed services. In T. V. A. records, the cost accounting of these services is so varied in the records of the electricity and agricultural departments, and in general T. V. A. overhead expenses, as successfully to prevent accurate determination of their cost.

When you go to try to find where they are, they are so buried, they are just not there; the members of the staff say that "they are too confused, we can't find them." You can only make an approach to them. There are many that never will be found in the way the accounts have been kept.

The public has been led to believe that almost the sole function of the T. V. A. in the power field is the sale of wholesale power. Such is not the case. Under the yardstick power program, the operations of the Authority are in fact very similar to those of a private holding company and an operating company combined. In addition.