2. A fair proportion of the cost of water-control operations. In 5 years $1,368,922 has been spent on these activities, no part of which has been charged to power.

3. T. V. A. claims to have expended $518,159 in defending its power program in the courts. None of this has been charged to power.

4. No share of T. V. A. grants to land-grant colleges for promotional efforts in behalf of rural electrification has been charged to its power cost.

5. The T. V. A. has made many loans to communities and associations distributing its power. Its accounts show a credit for the 5-year period to June 30, 1938, of $163,950 for interest payments received, but no corresponding charge for a bad-debt reserve on $2,304,866 outstanding loans receivable as of June 30, 1938.

6. No power charge reflects the cost of services contributed to the T. V. A. power program by other agencies of the Federal Government (financial, legal, and accounting services, and insurance protection, for example), nor the stimulation resulting from P. W. A. allotments totaling $14,046,685 and R. E. A. loans of $5,343,000 to develop markets for T. V. A. power.

POWER-DISTRIBUTION COSTS

The public has been led to believe that almost the sole function of the Tennessee Valley Authority is the production and sale of wholesale power. Such is not the case.

Under the yardstick program, yardstick communities have received substantial assistance from the Tennessee Valley Authority, which includes financing, organization, administration, accounting, publicity, legal, engineering, and loadbuilding activities. Such services, in normal power systems, are often performed by holding companies and represent a substantial part of the total cost of distribution.

No mention or suggestion of these activities is made in Tennessee Valley Authority publicity, which gives the impression that the margin between yardstick retail rates and the wholesale price paid to the Tennessee Valley Authority covers all proper costs and charges attributable to distribution.

PROPERTY ACQUISITION

One element of distortion affecting distribution costs is found in the liberal policy followed by the Tennessee Valley Authority in transferring to local distributors existing distribution facilities acquired by purchase or construction. It has been the general practice for the Tennessee Valley Authority, after acquiring a group of properties, to turn over productive facilities to local communities at very favorable prices and on generous terms of payment, while the Authority itself retained the comparatively unproductive parts of the property. The cost of these retained facilities has been buried in general Tennessee Valley Authority power capitalization. The Mississippi case illustrates this practice:

In 1934 the Tennessee Valley Authority purchased from the Mississippi Power Co., for $850.000, its facilities in northern Mississippi, including two steamgenerating plants, transmission lines, and distribution systems in a number of communities. As the Tennessee Valley Authority was to serve these communities, the steam plants were practically useless, except for a very doubtful need for stand-by service.

The distribution systems were subsequently turned over to municipal and cooperative distributors, but the two steam plants and other property were retained by the Tennessee Valley Authority.

The Mississippi acquisition also included a distribution system serving industrial customers within the city of Tupelo (which already served its own residential and commercial customers). During the year prior to the purchase, this industrial system had returned to the Mississippi Power Co. gross revenues of $43,158. It was turned over to the city of Tupelo, which operated it for 131⁄2 months without any payment or obligation, collecting during that period a gross revenue amounting to approximately $32,500. At the end of this period the line was sold to Tupelo for $9,482.

Thus it appears that the Tennessee Valley Authority allowed Tupelo to earn all the money it paid for this line before the sale was made.

NEW BUSINESS EXPENSE

Another way in which the Tennessee Valley Authority aids its wholesale customers without cost to them is by conducting manifold activities to increase the use of electric current in the homes and on the farms that they serve. While this activity reacts to the benefit of the Authority by increasing power sales, it is primarily an expense that should be charged to distribution. Failure to follow this procedure in the Tennessee Valley Authority area distorts the comparison between yardstick rates and those charged by other distributors.

While at least one phase of this promotion is accounted for as "Sales promotion expense" in Tennessee Valley Authority statements, much of it is done indirectly either by the Tennessee Valley Authority or by other agencies of the Federal Government and constitutes a concealed subsidy.

Taking into account only reported expenditures, the Authority's known contribution to yardstick communities over the past 3 years averaged $3.39 per residential customer per year for load-building purposes. During the same period the average revenue received per residential customer amounted to $6.57 per year. Thus the reported expenditures of the Tennessee Valley Authority for the promotion of residential load amounted to 51 percent of the revenue it received from this type of customer.

Looking at the same figures another way, the Tennessee Valley Authority spent, in the fiscal year 1937, $1.04 for known promotion expense for every dollar of increase in revenue from residential sales. For the fiscal year 1938 the figure was $0.87.

OTHER SERVICES CONTRIBUTED

Besides the services already discussed as being contributed to municipal and cooperative distributors of Tennessee Valley Authority power substantially without cost to these communities, the Authority has frequently rendered other types of assistance that are normally considered a part of and charged to the cost of distributing electricity. Meanwhile, the public has been given to believe that these yardstick community public-ownership projects are carrying all costs of distribution. Manifestly this is not the case.

Instances are cited from official Tennessee Valley Authority records showing that these contributed services cover a wide range and include organizing campaigns for public ownership, financial and legal assistance, accounting, engineering, publicity, and, in general, all services necessary to launch and maintain a community in the business of selling electricity.

YARDSTICK RATES ARE ELASTIC

From the point of view of the average consumer of electricity the Tennessee Valley Authority yardstick is the retail rate specified in Tennessee Valley Authority wholesale contracts as applicable to the consumers served. Few realize that the yardstick communities are permitted to impose upon their customers additional charges which effectively increase the amount paid per kilowatt-hour. These special charges fall into two categories—what is called a developmental surcharge, usually a 10-percent (sometimes 15 percent) increase in the monthly electric bill as computed at the yardstick rate, imposed upon all customers of a distributor except residential, and an amortization charge, an additional levy, over and above yardstick rates, of 1 cent per kilowatt-hour, with a minimum of 25 cents and a maximum of $1 per month.

These additional charges increase the effective rate paid by many consumers of Tennessee Valley Authority electricity well above the publicized yardstick rates. During the year ending June 30, 1938, the deevlopmental surcharge was imposed by 18 of the 21 municipalities distributing Tennessee Valley Authority power. Ten of these collected the amortization charge as well. For the same period 18 of the 19 cooperative distributors collected the developmental surcharge and all 19 the amortization charge.

WAGES IN YARDSTICK COMMUNITIES

One other factor responsible for the low distribution costs claimed by the yardstick communities is the low scale of wages paid. In Mississippi, for example, employees of yardstick communities receive, on the average, about one-third less than is paid Tennessee Valley Authority employees for work involving the same degree of responsibility, technical knowledge, and skill.

YARDSTICK COMMUNITIES IN MISSISSIPPI

At present the Tennessee Valley Authority is selling power wholesale in the Mississippi area to five municipalities (with populations varying from 2,200 to 6,500) and eight cooperative associations. These serve 11,809 residential, 3,278 commercial, and 49 industrial consumers in urban and rural areas. Five of the distributors were publicly owned before the Tennessee Valley Authority; all of these have received loans or grants from one or more of the following Federal agencies: Civil Works Administration, Public Works Administration, Rural Electrification Administration, or Tennessee Valley Authority. The others were either bought from power companies or built and turned over to their present operators by the Tennessee Valley Authority. As of June 30, 1938, the reported investment of the Tennessee Valley Authority in the area was $1,885,949.

In developing the area the Tennessee Valley Authority built feeder lines, substations, and other facilities with a capacity more than sufficient to serve any load to be expected immediately.

The result of operations in Mississippi may be summarized thus: Instead of a reported "profit" of $305,357 for the 3 years ending June 30, 1938, these 11 communities sustained a loss of $167,237-the amount by which income under the yardstick rates failed to meet known costs chargeable to power distribution. If actual costs not estimated for lack of sufficient data had been taken into account, the loss would have been materially greater.

POWER OPERATIONS OF THE UNIFIED SEVEN-DAM SYSTEM

Recognizing that a further test of the earning capacity of the Tennessee Valley Authority will come when the four additional dams now under construction, together with an adequate transmission system, are in service, Dr. Morgan turns his attention to that future time. According to the present Tennessee Valley Authority schedule, this will be in 1942.

The same methods previously applied to the present three-dam system are used for the seven-dam system. This indicates that the maximum potential income will fall short of meeting minimum annual operating expenses and charges by not less than $3,156,852.

THE FINAL BALANCE

Calculations which resolve all reasonable doubts in favor of the Tennessee Valley Authority indicate that, when all seven power dams go into service, the annual operating statement as of 1942 and thereafter at present Tennessee Valley Authority rates cannot be more favorable than the following:

Annual expenses per year..
Annual income per year----

Annual deficit per year--

$13, 076, 061

9, 919, 209 3, 156, 852

THE POWER OPERATIONS OF THE TENNESSEE VALLEY AUTHORITY A study submitted to the joint congressional committee on the investigation of the Tennessee Valley Authority by ARTHUR E. MORGAN, December 1938

INTRODUCTION

The Tennessee Valley Authority power project, made up of several plants operated as a single unit, is a complex undertaking, both in its engineering and financial structure and in its operation. A great variety of plausible assumptions can be made in discussing it. Some of these assumptions might relate to the original cost, the power capacity of the system, the value and market possibilities of the different classes of power, the operating expenses, probable requirements for renewals, replacements, and obsolescence, loss of income due to changes in the art and consequent reduction in rates, the loss to the Government through absence of taxes, subsidies by the Government through tax-free bonds and through the carrying of investment risks by the Government, and other elements concerning the project. Those various factors interact and add to the complex nature of the undertaking.

As an engineering project involving unified control of a large river system, the Tennessee Valley Authority power program is among the most far-reaching and complex ever undertaken. It has no precedent. This complexity, together with the fact that the project has been and is to be built with public money, make it less difficult to overlook or to conceal many items of actual cost, both in the investment and in operation. Nevertheless, the Tennessee Valley Authority power project has in it, either directly or indirectly, by way of burden upon the public, every kind of investment and every kind of operating cost necessary in any other hydroelectric project. It is not unique in that respect.

Three months ago statements were made by Mr. Lilienthal before this committee to the effect that the Tennessee Valley Authority power rates were adequate to meet all costs and to retire the investment. That statement was unequivocal. To date, so far as I know, the committee does not have the data supporting this claim. As one of the most important matters now before the committee, this claim demands a most careful analysis.

With the help of associates and assistants, I have made an analysis of the Tennessee Valley Authority power situation which I believe to be unduly favor able to the Tennessee Valley Authority power case. Actual results, in my opinion, will be far less favorable than the estimates I shall present. This analysis is prepared with the realization that some of the details may require correction when the latest statistical information from the Tennessee Valley Authority is available.

All figures of operations used (as well as most of the estimates) have been taken from official Tennessee Valley Authority sources. The study has been directed to the question of the actual result of power operations under present rates.

Where estimates are necessary, and in the case of debatable items such as depreciation, interest rates, necessary new construction of facilities, and similar items, the lowest reasonable figure has been used.

With respect to power investment, the allocation already fixed by the Tennessee Valley Board and submitted to Congress has been used.

Wherever there may be reasonable doubt about any debatable question, the doubt has been resolved in favor of the Tennessee Valley Authority. The data here submitted show:

1. That the estimates presented in a letter on the subject of allocation from the Tennessee Valley Authority, to the President, signed by Dr. H. A. Morgan as Chairman, are improbable of attainment. Mr. Lilienthal, before this committee, presented these estimates in substantially the same form, except that he spoke of the dams ex locks. These estimates were to the effect that the Tennessee Valley Authority power project, with the present rate structure, will pay all costs and expenses properly chargeable against operation, and, in addition, amortize the entire investment.

2. That the present wholesale rates are too low to accomplish what has been claimed by the two members of the T. V. A. Board. The statement that such rates are, if anything, too high is without any justification.

3. That the so-called "yardstick" rates, whether taken to be wholesale rates charged by T. V. A. or retail rates charged by municipalities and coopera tives to consumers, are not "yardstick" rates at all. The use of the term "yardstick" rates for the reports given out is wholly false and misleading. 4. That under the present T. V. A. wholesale "yardstick" rates, the revenue from Norris, Wheeler, and Wilson Dams will be inadequate to cover the fixed charges and running expenses chargeable to power.

5. That with the completion of the dams now under construction the situ ation will not be improved. The completion of these dams, making a sevendam system, and the sale, at present rates, of the electricity generated by all seven dams will serve only to increase the inevitable deficit.

PART I. THE PROSPECT FOR LIQUIDATION OF TENNESSEE VALLEY AUTHORITY POWER INVESTMENT UNDER THE TENNESSEE VALLEY AUTHORITY WHOLESALE "YARDSTICK" RATES

In his testimony before the Joint Congressional Committee investigating the Tennessee Valley Authority, on July 25, 1938, Mr. Lilienthal said (transcript, p. 1300):

"Wholesale rates were fixed on a conservative basis. They are clearly too high, based upon the allocation which the Board and the President have finally approved.

"They are so high that except for the navigation facilities, except for the facilities exclusively devoted to navigation, namely, locks, if you take Wilson Dam ex-locks, Wheeler Dam ex-locks, and Norris Dam and treat those three as a power project, the revenue from those three projects will pay not the allocated portion of common costs that we have finally determined upon, but 100 percent of it.

"They will pay every dime of those three dams treated as 100 percent common property, except for the navigation locks.

"Let me repeat that because I want to be sure we understand each other." Mr. Lilienthal then clarified his previous testimony in these words (transcript, p. 1300):

* The best proof that we fixed these rates conservatively is found in this situation. If we take the total investment in Norris Dam, including flood control, including its navigation benefits, and water control downstream, if we take the total investment in Wheeler Dam except for the locks, if we take the total investment in Wilson Dam except for the locks, that the rates now being charged will produce revenues which will carry the direct costs, and the fixed charges and amortize that investment 100 percent, of course treating it as a power project." [Italics supplied.]

Qualifying these remarks, Mr. Lilienthal explained that his statement was based on operating Wilson, Norris, and Wheeler Dams solely for power production. Such a basis of operation of the T. V. A. dams and reservoirs solely as a power project is exactly the opposite of what the T. V. A. Board and the T. V. A. legal staff have claimed before the courts in the process of litigation, and would be directly in violation of the law, which requires that, in the construction and operation of T. V. A. dams, navigation and flood control be given precedence over power production. Therefore, such an assumption is completely out of order in this inquiry. Yet Mr. Lilienthal did suggest such a basis in his statement to the committee. His testimony continues (transcript, p. 1301):

"In this 100 percent-in this statement I have just made about how conservative these rates are, we have treated this as a power project, and considering that 40,000 kilowatts (additional power) is available. But except for that, which is only a fair qualification, you get some idea of the liquidation possibility under these rates."

The fact is that if fixed and operating costs of the three-dam system as constructed and properly operated are included, not on the entire cost, but only on the investment allocated to power as determined by the T. V. A., with a fair share of allocated operating expenses, the liquidation of the investment in these three dams under the established T. V. A. rates is not a promising possibility.

An estimate of income and expense of this system has been made on the following basis:

1. That the entire available primary and high-grade secondary power of the Norris-Wheeler-Wilson system of multi-purpose projects, operating at 60 percent system load factor, with the present installed capacity of 348,000 kilowatts, with the reservoirs operated primarily for flood control and navigation, can be sold regardless of depressions and other fluctuations in general business conditions. In actual operating practice this is not at all likely of accomplishment. Not only is the price level for electric energy subject to decline, but there are wide fluctuations in demand corresponding with the general condition of business activity.

2. That depreciation and interest on only that part of the investment allocated to power and used in the generation, transmission, etc. of power are charged against power. Aside from the payment of interest at a fair rate on the sums invested by the Federal Government, it is important that depreciation shall be charged in sufficient amount to provide adequate reserves for renewals, replacements, obsolescence, and such contingencies that arise in the normal course of operation.

3. That all direct operating costs are charged, together with a fair allocation of common T. V. A. operating expenses but without taking into account several other actual costs which must be incurred.