the T. V. A. furnishes the supervisory and regulatory services, usually performed by State utility commissions. The so-called "yardstick community projects" which purchase power from the T. V. A. are promoted, organized, served, and directed by the Authority, very much as power distribution in individual towns is organized and administered by a private utility company. That service is a subsidy, almost entirely, and yet, through speeches and press releases, special publications prepared and distributed by the T. V. A. publicity department and in its reports to Congress, the impression is given that the yardstick distribution operation includes all costs. To quote again, Mr. Lilienthal in an article entitled "T. V. A. Points Ahead," which appeared in the Christian Century, October 7, 1936, said: So far as the so-called T. V. A. municipalities are concerned, the margin between the wholesale rate charged by the T. V. A. and the retail rate charged by the municipalities to their customers has proved adequate to cover all costs and charges. Many communities, such as Athens, Tupelo, and Alcorn County have established remarkable financial records of profits which have enabled them in 2 years to reduce rates further as well as to pile up reserves and pay off a part of their debt. This is characteristic of the general pattern followed in T. V. A. yardstick publicity and representations. No mention or suggestion is made of the services contributed by the T. V. A. and not included in the cost of yardstick distributors. However, emphasis is given to the assertion that the margin between T. V. A. wholesale and retail rates is adequate to cover all costs and charges, and that many communities have established remarkable financial records of profits. The impression which evidently is intended, and which the public gets, is that all proper costs and charge of distribution are included in these yardstick community operations. To fail to inform the public of these elements of retail cost, or to omit them from recorded records, public records, or to greatly underestimate them, is definitely to mislead the public. Now, the next heading is that of "Electric Property Acquisition." The T. V. A. has taken a very liberal policy in supplying yardstick communities with their equipment, and where there was an unproductive piece of property, the T. V. A. would keep it, often, sometimes at least; where there was a very productive piece of property, the T. V. A. would sell it to the community; so that if there were gains the community made them, and if there were losses, the T. V. A. took them and that policy has run through; and it would require quite a careful, or a much more thorough analysis of T. V. A. records than I have been able to make to find more than sample cases of that sort. Chairman DONAHEY. Would this be a convenient time to recess until Monday morning? Dr. A. E. MORGAN. YES. Chairman DONAHEY. The committee will stand in recess. Mr. BIDDLE. What time, Mr. Chairman? Chairman DONAHEY. Until 9 o'clock Monday morning. (Whereupon, at 3 p. m., the committee adjourned until 9 a. m., Monday, December 5, 1938.) INVESTIGATION OF TENNESSEE VALLEY AUTHORITY MONDAY, DECEMBER 5, 1938 CONGRESS OF THE UNITED STATES, OF THE TENNESSEE VALLEY AUTHORITY, Senate Office Building, Washington, D. C. The committee met, pursuant to adjournment, in room 357, Senate Office Building, at 9:30 a. m. Present: Senator Vic Donahey, chairman, Senator Schwartz, Senator Frazier, Senator Davis, and Representative Wolverton. Chairman DONAHEY. The witness may proceed. TESTIMONY OF ARTHUR E. MORGAN-Resumed The witness on the stand at the time of recess resumed the stand and testified further as follows: Dr. A. E. MORGAN. Saturday I mentioned some testimony which I wished to have included in the record, as I would not have time to give it verbally, and I will now list some of those papers that I wish to have included in the record. The first is a paper entitled "The Power Operations of the Tennessee Valley Authority," and is part 1. (The material is later identified and included in the record in full.) The next is bound together as parts 2, 3, and 4. I will mention in detail now only part 4. That is the power operation of the unified seven-dam system. I have worked out the cost and income for that in the same manner as for the three-dam system. The seven dams include the three now in operation, Pickwick just coming into operation, and the three others under construction. The probabilities of earnings and expenses there are worked out in the same way as for the three-dam system. I will give one or two total results. The annual expenses of that operation-supposing that the entire amount of potential power is generated and sold, both primary and secondary-annual expense would be $13,076,000. The annual income, presuming that all of the power would be sold on a 60 percent load-factor basis and that the price at which it would be sold would be equal to that of the present prices that the T. V. A. is gettingalthough as a matter of fact the probabilities are those prices will be reduced in the future because of the nature of contracts the annual maximum possibilities in our income, annual income, would be $9,919,000, making an annual deficit, an annual loss in operations on that seven-dam system, of $3,157,000. 4851 That is on the assumption of selling all of the power and leaving out a considerable number of expenses, which in my opinion should be included, much as was the case with the three-dam system. (The material is later identified and included in the record in full.) Then there is No. 5, which is a set of tables, in which detailed computations are given, particularly about the yardstick communities, but also some other data. Along with part 5, to be added to it, is a single sheet or table entitled, "Sales of electricity by Tennessee Valley Authority for the 5-year period, June 30, 1933, to June 30, 1938." That was finished too late to be bound, and is simply a part of part 5. Then there is a memorandum for the committee on water-control operations of Norris Reservoir. I testified Saturday that the recommendations of the water-control organization had not always been followed by the electrical division. I have included some evidence on that point, prepared over the week end. Then there has been a discussion of allocation, which I read part of Saturday. The entire statement is included. Then there is the matter of litigation. It has been claimed that the T. V. A. has lost large sums of money because of litigation. It is my opinion that the T. V. A. power program has been carried on in a spirit and with a preference of conflict and litigation, rather than by agreement, and that under the T. V. A. policy litigation was inevitable, that there were opportunities of working things out in a way that would have given the T. V. A. a much better chance to carry through its program. Those opportunities were not followed up as they might have been. My statement with reference to that is included in one of these parts, and there are outlined in detail the efforts I made at the beginning of the T. V. A. to have an approach to this that would obviate litigation, and how there was a definite preference, as I believe, for penetration and disruption and conflict, rather than for trying to work out an orderly program. Then, during the course of this hearing, there have been a number of statements made to which I have had no opportunity as yet to reply. For instance, concerning the Arkansas Power & Light Co. contract, it would take me half an hour to go into that decently at all, and so on various matters that I did not have time to touch on, I have a relatively brief statement covering them. (The material is later identified and included in the record in full.1) Then there has been introduced in testimony a statement that the Federal Power Commission made a study which the testimony indicated was a proper appraisal of the yardstick program. I say that the Federal Power Commission never made any study of the detailed records of the T. V. A. It simply took T. V. A.'s wholesale statement as to over-all costs that ought to be charged, and it did not go into T. V. A. records. And so the Federal Power Commission only repeats T. V. A. statements, the same ones that I have criticized. It did not explore those statements; it only took them and incorporated them into its report. This statement gives evidence on that particular matter. 1 See p. 4871 et seq. Then Senator Davis asked for a table on P. W. A. loans. I have included that, as far as I can get it. We have asked the P. W. A. for a statement on its loans, and we have not been able to get them all. The records sent us are a year or more behind time, but we have presented what we have been able to get. (The statement is as follows:) Public Works Administration allotments to municipalities in the Tennessee Valley Authority region for construction of electric generation or distribution systems [Lists of projects under the supervision of the chief project engineer's office, Chattanooga, Source: Hearings on the independent offices appropriation bill for 1939, p. 1009. Then there is one other small memorandum that I want to include when I get to it, in my testimony. Saturday I was discussing the yardstick program, as we mean yardstick when we discuss the T. V. A. selling power wholesale to municipalities and cooperatives, that sell it again at retail. That is what is commonly called the yardstick program. Now, that study was made parallel with the study I have been discussing, and the assumptions made in this statement on the yardstick committees are somewhat different in these respects: First, we assume, as publicity statements have assumed, that each year of the T. V. A. operations was a year of operation by itself, standing on its own feet, and not deferring losses. We made that assumption. Another assumption is that the investment on which charges were computed had not included interest during construction or a charge for organizing and financing expense. There is a definite charge that we have not taken into account. Then there is the matter of current reservoir control operations of the T. V. A. That amounts to a quarter million dollars a year That was left out of the study. Then no interest was charged on a working capital fund and the investment in dams. I use what is found in the financial policy committee's report on allocation. That is the same in both. These differences are, for the most part, to make this study correspond to the data in the T. V. A.'s records. I wanted to bring that to your attention. The one matter that might be under discussion is that we have considered each year of the T. V. A. was standing on its own feet as an operating unit. If I had had time I would have made another study on exactly the same basis as the first part. I think it would have shown even a greater loss for these yardstick communities, but I have not had time to make that second study. WHOLESALE YARDSTICK RATES Now, I will go ahead with the testimony where I have left off. I want to say something on T. V. A. wholesale yardstick rates. One of the primary concerns of the Congress in passing the T. V. A. Acti was to make sure that the total cost of generation, transmission, and distribution of electricity be determined completely as well as accurately. Section 14 of the T. V. A. Act provides that, for the purpose of accumulating data useful to the Congress in formulating legislative policy, and useful as well to the Federal Power Commission and other Federal and State agencies, and to the public-I quote the act: The Board shall keep complete accounts of its costs of generation, transmission, and distribution of electric energy, and shall keep a complete account of the total cost of generating and transmission facilities constructed or otherwise acquired by the corporation. Those are the terms of the act. And I hold that under those terms the T. V. A. has a legal responsibility to include all costs and not to hide or omit any of them. That requirement means that every item going into the cost of acquisition or construction of facilities and every item going into the cost of generating, transmission, and distribution of electric current shall be taken into account-that nothing in the way of a direct or indirect subsidy or contribution of public funds may be omitted. The public as well as the T. V. A. Board realized that fact. Mr. Lilienthal, following the announcement of T. V. A. rates, said—I quote: The wholesale electric rates which the Authority announced yesterday, while strikingly low, cover all costs of furnishing service. In addition, provision has been made for items of cost not actually incurred (by Tennessee Valley Authority), such as taxes and interest, but which were, nevertheless, in * |