T. V. A. documents, and we have a vast amount of supporting data here, which if I had been asked, "Where did you get this statement?" I would have referred to Congressional Appropriation Committee reports, to T. V. A. financial reports, T. V. A. public reports, and we have spent 6 months with our little staff, working this up, and each statement that I have made is supported by documents or other data, chiefly T. V. A. official records or office data. There is a brief key on page 182 of this larger book but that is only a brief key to the major references. In addition, there are many other references, which we have keyed in one or two copies, to books of ours, where we have keyed back to references that are other keys to other references, so that you could build up our whole story; so that in that table, if you will, there is supporting data for the statements made in this. Represenative WOLVERTON. Would that data be available to any member of the committee who might wish to make a further study of your study? Dr. A. E. MORGAN. Yes, sir. Representative WOLVERTON. Well Dr. A. E. MORGAN. But we have only one set; the one copy. Representative WOLVERTON. In order that there may be no misunderstanding, then, I understand, Mr. Chairman, that all of this data that I have referred to, as having been presented to the committee by Dr. Morgan, excepting the supporting data to which he has just referred, is to be made a part of the record? Chairman DONAHEY. And the data is open to the committee. Dr. A. E. MORGAN. There are several of these which I didn't have enough copies to give you one, and those are to be a part of the record. Representative WOLVERTON. In addition to what I have mentioned? Dr. A. E. MORGAN. Yes, sir. Representative WOLVERTON. What I am trying to do is get everything into the record that Dr. Morgan has to say on the subject. Chairman DONAHEY. Everything will go in. It is so ordered. Did you advise me about how much time you should need? Representative WOLVERTON. I assume that our counsel will examine first, and if he is Chairman DONAHEY. He desires no time and has so stated. Representative WOLVERTON. And nobody else desires any, is that right? Chairman DONAHEY. Do you desire time? Representative WOLVERTON. If the rest of them don't, I don't. (No response.) Chairman DONAHEY. The witness may be excused, and thank you for your contribution. Representative WOLVERTON. The reason that I am unable to do what I would like to do is the fact that we haven't had all of this material before us, until the present moment, and that precludes any intelligent cross-examination of the material. Dr. A. E. MORGAN. I regret that the material wasn't ready, but when I was told that it would be 3 weeks Representative WOLVERTON. I am not criticising you, because I think that you have done an admirable job, and given the informa tion that this committee needs in its investigation. Of course, if you had been given time to deliver it all to the committee, then there would be no excuse for us not cross-examining you on it. Dr. A. E. MORGAN. When I understood that there was to be 3 weeks more, I planned on bringing my study to a focus in time, but when that was cut down to about a week I hadn't brought it to a focus yet, and if I had 2 months more I would have used all but a couple of weeks in getting ready, because there is a vast amount of work that could be done, and I could have reduced this size by a third by another month, by further boiling it down. Senator DAVIS. Would it be possible after I have had an opportunity to study this record, and if I desire to ask Dr. Morgan a few questions, would it be possible to call him back again? Chairman DONAHEY. As a member of the committee you have a perfect right to desire any witness brought forth that you would like, and I thought that that was understood by all members of the committee. That is at any time, any member of this committee, in his own right; each member of the committee is a sovereign in his own right, to have the right to call any witness at any time, for any specific purpose or testimony. (The documents referred to by Dr. A. E. Morgan are as follows:) A SUMMARY OF THE POWER OPERATIONS OF THE TENNESSEE VALLEY AUTHORITY A study submitted by Arthur E. Morgan to the Joint Congressional Committee on the Investigation of the Tennessee Valley Authority, December 1938 LIQUIDATION OF TENNESSEE VALLEY AUTHORITY POWER INVESTMENT UNDER THE TENNESSEE VALLEY AUTHORITY WHOLESALE YARDSTICK RATES It has been stated both by Director Lilienthal and Director H. A. Morgan that under present wholesale rates income from power will be sufficient not only to defray costs of operation, but also to repay the money expended during the construction period. Arthur E. Morgan challenges that statement. Assuming the sale of the entire possible output of the Wilson-Norris-Wheeler system at present rates, Dr. Morgan demonstrates that the theoretical maximum of possible revenue thus computed (a maximum which, for practical reasons, is impossible of full realization, will not be sufficient to carry annual fixed and operating costs fairly chargeable to power production). These costs, it is pointed out, cannot be evaded. If they are not met from power revenues they must inevitably fall upon the taxpayers of the country. Mr. Lilienthal qualified his statement by explaining that his computations were based upon the operation of the three dams solely for the maximum production of power, without regard to other objectives in the T. V. A. program of unified development. The effect of this assumption would be to add 40,000 kilowatts to the potential (but not real) power output of the system and thus to increase prospective power revenues. Operation under this assumption would be in direct violation of the T. V. A. Act, which specifically directs the subordination of power to flood control and navigation. Dr. Morgan protests the validity of a rate computation based upon operation of T. V. A. property which would be not only illegal but would leave the Tennessee Valley and the cities below unprotected from the very floods from which the T. V. A. dams are supposed to protect them. Other additional costs or losses to the Government which Dr. Morgan points out would be incurred in securing the above income are depreciation and interest on an additional $3,000,000 investment in transmission facilities needed to insure the sale of the maximum available output of the three-dam system. These additional fixed charges would amount to $225,000. Also, $75,000 additional operating expenses would be required. Additional taxes in the amount of $508,343 represent a loss to the Government. Normally 1 percent of the investment is a fair minimum annual tax expense for a private utility. The difference between this and the 5 percent of gross revenue which the T. V. A. now pays in taxes accounts for the additional taxes. Adding these additional costs to the deficit already existing, the actual loss would be $2,187,998 per year. In this analysis by Dr. Morgan, every effort has been made to give the T. V. A. the benefit of all reasonable doubts. Substituting a 3-percent for the 32-percent rate, the significant figures are these: Expenses-Income- Deficit__ 1 Unchanged. Per year $6,000, 094 5,054, 866 945, 228 As in his first operating statement, Dr. Morgan again computes fixed charges and operating expenses on additional transmission investment of $3,000,000 needed to carry the available power to market. With interest at 3 percent, depreciation at 4 percent, and operating expense of $75,000 this total additional cost is $285,000. Additional taxes which are a loss to the Government are computed at $503,967. These additional costs increase the deficit of $945,228 to $1,734,195 per year. All of which means that, even with substantial subsidies from public money ignored, the power revenues from these three dams cannot possibly meet expenses and carrying costs. Dr. Morgan takes up, one by one, the items entering into an accurate statement of T. V. A. power costs and revenues as applied to the three-dam system now in service (Wilson, Norris, and Wheeler Dams and appurtenant transmis sion lines). He points out two actual and important items of expense not now assumed by T. V. A.: (1) Interest during construction, and (2) organization financing, legal, and other administrative costs. Interest during construction has been computed at 32 percent-a figure used by Mr. Lilienthal and one under rather than over a reasonable rate. The figure of 4 percent of construction cost has been taken as the measure of the other costs. In normal, well-managed practice an accurate estimate of these costs would be nearer to 10 percent. The actual construction cost of Wilson Dam and facilities was $46,591,156, but this was written down to $31,248,002. This figure does not, however, include interest during construction, calculated at $1,951,868. Nor does it include organizing, financing, and other services which, at 4 percent of construction cost plus interest during construction, comes to $1,327,994. Adding these amounts gives a total investment in Wilson Dam (after write-off) of $34,527,864. Corresponding total investments are calculated at $36,167,628 for Norris Dam and $36,294,374 for Wheeler Dam, a total of $106,989,866 for all three structures. The total in T. V. A.'s allocation report is $97,690,434. In the same manner Dr. Morgan calculates the total investment of T. V. A. in transmission lines, substations, and so forth, at $18,208,088 as of June 30, 1938. This figure is conservative in that it omits interest during construction and organization expenses on about $3,800,000 of uncompleted work. Total operating expenses charged by T. V. A. to its electrical department and so reported do not include many items of expense applicable to the production of power. Among these are water-control operations-obviously a large part of the annual cost of power and including such items as water-control planning, malaria control and sanitation, land management, and employee housing. These items should be charged to power production. This has not been done by the T. V. A. Therefore (following the T. V. A. allocation to power of the cost of the dams), 40 percent of the amounts reported by the T. V. A. as expended for water control operations is charged to power operations. No part of the housing at Wilson Dam is charged to power, since a substantial part of this cost is due to the nitrate plant at that point. This omission obviously favors the power account. As to general administrative expenses-T. V. A. reports assign only slightly over 10 percent of such costs to power-production operations and construction of transmission lines, etc., which is not at all adequate. Dr. Morgan, however, does not increase this proportion. As to expenses of other Federal agencies-which are a material contribution of public money, no compensating charge is made. Such a charge should be made. It is noted that the market for T. V. A. power has been substantially stimulated, without cost to the Authority, by P. W. A. loans and grants in the T. V. A. area aggregating $14,046,685, by R. E. A. allotments totaling $5,343,000 and by a widespread program of Government publicity paid for by public money. As to depreciation-2 percent per year is charged on dams and generators and 4 percent on other electrical equipment. These are as low as can reasonably be assumed on the basis of experience and authoritative opinion. As to taxes-the T. V. A. is charged only with the taxes specified in the T. V. A. Act: Five percent of the power revenue sold in Alabama and Tennessee. The T. V. A. does not pay social-security taxes, excise taxes, State or Federal gasoline taxes, license fees, etc. Taxes paid by private utilities range from 12 to 15 percent of gross operating revenues, as compared with the 5 percent paid by T. V. A. As to interest-Dr. Morgan assumes that power should carry the burden of interest on the investment in completed property devoted to power production. The 3-percent rate used in his calculations is probably less than would be paid by private or even by municipal power plants, where the entire cost is met by securities or where there is no tax exemption and no other insurance against risk of loss. As to working capital-it is shown that any going enterprise must maintain a cash fund to meet current expenses. Under section 26 of the T. V. A. Act the Authority is directed to maintain a continuing fund of $1,000,000 (in addition to such other funds as the directors may determine) and this figure is used. Interest must be paid on this money, as on any other capital; this analysis assumes 32 percent interest on 40 percent of the fund as a charge to power. As to development cost-during the load-building period of T. V. A. there has been a large deficit-more than $9,000,000. Dr. Morgan proposes to spread the repayment of this amount over a 25-year period, which means an annual charge of $377,864. REVENUES Potential revenues from the three-dam system are determined by two factorsthe amount of power that can be produced and sold, and the rates charged for this power. Including interdepartmental sales the average rate per kilowatt-hour for all primary and secondary power sold to June 30, 1938, has shown wide variation from a low of 2.11 mills in 1934 to a high of 5.59 in 1935. The 5-year average is 2.73 mills, and the 1938 average 3.23 mills. In view of existing contracts for large quantities of secondary power at low rates it is probable that the average kilowatt-hour rate realized in the immediate future will be somewhat lower than the 1938 figure. A DEFICIT IS INESCAPABLE The present annual capacity of Wilson, Norris, and Wheeler Dams is 1,564,974,000 kilowatt-hours, after deducting only 10 percent for loss in transmission (a very conservative figure). Even if the 1938 average return should be realized and all available power sold at this average rate the maximum return which could be anticipated would be $5,055,000. Annual operating expenses and charges, computed in accordance with the previous discussion, would aggregate at least $6,434,520, leaving an annual deficit of not less than $1,380,000. It must be noted that these figures do not include various cost items that must be met, either from power revenues or by some form of subsidy. One of these is the cost of building and operating additional transmission facilities to take this power to available markets; another is some form of compensation to the Federal Government for services rendered to the T. V. A. power program by other Federal agencies. Were these items to be included, the minimum annual loss would be increased to at least $2,188,000. THE RETAIL "YARDSTICK" POWER PROGRAM In this part of his statement Dr. Morgan examines the carefully dramatized concept, so deeply impressed upon the public mind by frequent official statements, that retail "yardstick" rates now in effect within the T. V. A. area constitute a true measure of the cost of electricity and are a fair guide to what residential consumers should pay for electric service. It is obvious that the validity of this concept depends upon the assumption that the "yardstick" rates take into account all items of cost entering into the production of power and its delivery to the consumer and any failure to include such items destroys the comparison. If the evaded charge falls on the Government it constitutes a subsidy. Careful computation of known items of cost in the production, transmission, and distribution of T. V. A. power reveals that the "yardstick" rate fails to cover many expenses that should be covered by it. Some of these can be evaluated in terms of dollars; others cannot because of inadequate records. It is further revealed that many customers supposedly served at the "yardstick" rate actually pay a higher effective rate because of other charges added to their monthly bills. In the year ending June 30, 1938, only 3 of the 40 municipal and cooperative distributors of T. V. A. power failed to charge at least part of their customers one or more of these surcharges. A detailed analysis from such data as is available has been made of a section of T. V. A. territory-that part of Mississippi served through 11 communities and associations purchasing wholesale power from T. V. A. There it was found that, had only the known measurable items of expense and the revenue under "yardstick" rates been taken into consideration, the 11 distributors would have incurred a net loss of $167,237 in the past 3 years instead of the $305,357 claimed as "profit" in reports to the public. And this figure takes into account only those subsidies and costs for which fairly definite estimates could be secured. It does not include other contributions of public money by way of subsidy which are surely made, but the amount of which cannot be reduced to dollars from available data. THE "YARDSTICK" CONCEPT T. V. A. publicity has repeatedly emphasized that the Authority's program is designed to provide a true measure of the cost of power production and distribution, and that the retail rate charged by municipal and cooperative distributors supplied by it could be substantially equaled by other electric systems were abnormal profits eliminated. Implicit in the "yardstick" theory there must be two assumptions: 1. That T. V. A. power shall not be subsidized; 2. That all costs shall be reported, accounted for, and included in the rate. Since early in 1935 Dr. Morgan has tried repeatedly to get factual data to support the T. V. A. rate structure. His efforts have been obstructed. It is significant that not until after Congress had voted to investigate the Authority and after the investigating committee had begun its hearings, did the T. V. A. finally allocate the costs of Wilson, Norris, and Wheeler Dams as regards navigation, flood control, and power production. Prior to this allocation and with out knowing its capital investment T. V. A. had entered into large industrial contracts extending over 20 years without knowledge of its own costs. POWER PRODUCTION COSTS In order to produce and deliver electric power to wholesale customers the T. V. A., like any other enterprise, necessarily incurs certain definite expenses which fall into two general classes: (1) Fixed charges on the investment in generating plants and equipment, substations, transformers, transmission lines and related equipment; (2) money expended to operate these facilities (including administrative costs) and for sales promotion, load building, etc. Cost items that have been incurred on account of the T. V. A. power program, but that are either omitted or given inadequate consideration in its accounting, include the following: 1. A fair proportion of the general overhead expenses of the Authority. Less than 4 percent of this has been charged to power production operations-a manifestly inadequate share. |