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Estimated potential annual operating statement, showing the results of 1 year': operation on the basis of selling the entire available output of electricity from Norris-Wheeler-Wilson Dams, with the present installed capacity of 348,000 kilowatts, under existing Tennessee Valley Authority wholesale rate schedules

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NOTE-In addition to the charges indicated above there will be substantial additional costs which are not included.

1 Operating revenues were computed on the total available output of the three-dam systein operating at 60 percent system load factor, as follows:

Primary power (155,000 kilowatts).

Secondary power (available 75 percent or better) (58,000 kilowatts)_.

Less transformation and transmission losses, 10 percent

Salable output---

Kilowatt-hours 1, 357, 800, 000 381, 060, 000

1, 738, 860, 000 *173, 886, 000

1, 564, 974, 000

See paragraph (1) under "References" on p. 4951. In the fiscal year 1938 Tennessee Valley Authority revenue from the sale of 699.303,675 kilowatt-hours of power averaged 3.23 mills per kilowatt-hour. This average price was used in computing the estimated revenue, $5,054,866, given in the statement (1,564,974.000 kilowatt-hours 3.23 mills $5,054,866). Under present contracts this is too liberal an estimate of possible revenues. A detailed analysis of revenues is given in pt. II.

Operating expenses include power operating expenses amounting to $1,096,000 as re ported by the Tennessee Valley Authority for the fiscal year 1938, and $275,000 allocated water-control expense (40 percent of the $886,000 estimated water-control expenses reported by the Tennessee Valley Authority).

3 Taxes were figured at 5 percent on operating revenues in accordance with the requirement of sec. 13 of the Tennessee Valley Authority Act. [See paragraph (5) under "References" on p. 4951.]

Interest was computed at 3 percent per annum on the investment allocated to power as of June 30, 1938, and $400,000 working capital, which is 40 percent of a $1,000,000 nominal fund.

Depreciation was charged at the rate of 2 percent on the investment in dams, powerhours, and generating equipment allocated to power, and at 4 percent on the investment in transmission facilities, as of June 30, 1938. The straight-line method of depreciation was used. The average annual charge for depreciation amounts to 2.43 percent of the total allocated power investment.

NOTE. The investment in reservoirs and reservoir clearing was depreciated at the rate of 2 percent, amounting to: Annual charge: $549,955, on investment, including interest, during construction, at 3 percent; $299,033, on investment, excluding interest, during construction.

Development deficit: During the 5-year period of operation to June 30, 1938, the deficit resulting from Tennessee Valley Authority electricity operations amounted to $9,446,605 (on the basis of including interest during construction and organization ex

INTEREST, DEPRECIATION, AND TAX RATES USED BY THE TENNESSEE VALLEY AUTHORITY IN SUPPORT OF YARDSTICK RATES

In the computations submitted by the Tennessee Valley Authority to the Alabama Commission on March 5, 1934, in support of yardstick rate (4)* the following annual rates of taxes, depreciation, and interest are used: Taxes: 1.19 percent on the investment allocated to power. Depreciation: 2.62 percent on the investment allocated to power. Interest: 32 percent on the investment allocated to power.

In testifying before the House Appropriations Committee in 1936 (pp. 278 and 279 of pt. I of the hearing before subcommittee) Mr. Lilienthal used the following estimates of charges:

Taxes: 1 percent on the investment allocated to power.

Depreciation: 3 percent on the investment allocated to power.
Interest: 31⁄2 percent on the investment allocated to power.

It would be an unusual course for the Tennessee Valley Authority through the years to announce one basis for interest, depreciation, and taxes to the Congress, the President, and the public, and then to come before your committee with another set of assumptions far more favorable to its position.

Although the Tennessee Valley Authority, under its act, is not required to assume all of these costs, notably interest, and taxes in excess of 5 percent on revenues, these are nevertheless costs to the Federal Government. The extent to which Tennessee Valley Authority revenues derived from power sales fail to cover these costs represents the amount of subsidy the American taxpayers must contribute to the Tennessee Valley Authority yardstick power program.

THE CLAIM THAT THE TENNESSEE VALLEY AUTHORITY WILL PAY THE ENTIRE COST IN 30 YEARS

In a letter dated June 9, 1938, addressed to the President from the Tennessee Valley Authority, signed by Dr. Harcourt A. Morgan as chairman, transmitting a report on the investment of the Authority in the Wilson, Norris, and Wheeler projects pursuant to section 14 of the Tennessee Valley Authority Act, the following statement is made (3)*:

"It seems appropriate to indicate here the prospective revenues from the Authority's power operations under existing wholesale rate schedules as they relate to the allocation of investment submitted herewith by the Board. The Authority's engineers estimate, on a basis which appears reasonable to us, that the power revenues derived from the normal capacity of the three completed projects will be sufficient to cover all of the costs of operation, including depreciation and 3-percent interest on the investment allocated to power, and, in addition, to return in 30 years the entire investment allocated to navigation and flood control." [Italics supplied.]

pense), or $8,545,154 if these charges are excluded from the power investment. Amortizing this loss over a period of 25 years, the annual charge to power operations is $377,864 on the first basis or $341,806 on the second.

Additional investment and expense required: To market the power output of Wilson, Norris, and Wheeler Dams at rates sufficient to produce $5.054.866 in annual revenue would require an additional investment in present transmission facilities (as of June 30, 1938) of $3,000,000 or more. An increase in operating expenses for labor, etc., would also be necessary.

The depreciation and interest (at 3 percent) on this additional $3,000,000 investment amounts to $225,000 annually. To this should be added $75,000 for increased operating expenses, making a total annual charge of $300,000.

Additional taxes: This represents the difference between taxes computed at 1 percent of the investment and taxes which the Tennessee Valley Authority would ordinarily pay as 5 percent of gross revenue. For example, the investment, including interest during construction at 3 percent, is $76,108,672. The taxes, at 1 percent, would be $761,086. At 5 percent of gross revenue, taxes amounted to $252,743. Thus the additional taxes would be $761,086 minus $252,743, or $508,343.

In the fiscal year 1938, under the requirements of sec. 13 of the act, the Tennessee Valley Authority charged to power operations $93,247 for payments to the States of Alabama and Tennessee. Let it be granted that, in addition to covering this annual charge (5 percent of revenue to these States), 1 percent tax on the investment allocated to power would provide reimbursement to the Federal Treasury for services which are contributed to the Tennessee Valley Authority by branches of the Federal Government, the cost of which is not included in Tennessee Valley Authority power costs. These include services furnished by the Treasury Department, the Department of Justice, the Labor Department, the Comptroller General's Office, etc., and expenditures made by the Federal Government for Tennessee Valley Authority workmen's compensation liability, and property damage claims, and cost of other insurance protection which is not included in Tennessee Valley Authority power costs, but nevertheless is paid by the Federal Government. *Figure in parentheses refers to numbered paragraph under "References" on p. 4951.

This assurance is as improbable of fulfillment as those given by Mr. Lilienthal in his testimony before the committee.

At 3 percent interest, the estimated annual deficit from potential power operations is shown in the following statement:

Estimated potential annual operating statement showing the results of 1 year's operation on the basis of selling the entire available output of electricity from Norris, Wheeler, and Wilson Dams, with the present installed capacity of 348,000 kilowatts, under existing Tennessee Valley Authority wholesale rate schedules

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Partial list of additional costs or losses to the Government which must be incurred in securing the above estimated revenue:

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NOTE. In addition to the charges indicated above, there will be substantial additional costs which are not included.

EXPLANATORY NOTES.-See those given for the previous table on p. 4880, with the excep tion of footnote 4, "Interest," and footnote 6, "Development deficit," figured at the rate of 3 percent per annum in this statement; all other items were arrived at on the basis explained in these notes.

RESERVES FOR LOSS OF INCOME AND UNPROVIDED-FOR EXPENSES

Loss of income is to be expected from several sources. During periods of serious depression the total use of power in the region may be reduced 10 percent or more, and income will decrease accordingly. Never in the course of our history have such irregularities been evened out, and prudent management will provide for them with reserves. Also, as new power capacity is installed there is always a lag in selling that power, so that income does not suddenly reach its maximum. Prudent management will provide for such lag through adequate rates or through additional capitalization. The financial statement given here does not provide for any such losses in the future.

For 50 years there has been steady and uninterrupted decline in the cost of producing electric power and in the price that can be charged for it. Electric power generation and transmission today, in general, costs less than a quarter of what it cost 50 years ago, and generally less than half of what is cost 25 years ago. That decline in cost has continued right up to the present. Prospective developments in power generation and transmission are no less revolutionary than at any time in the past. For the Tennessee Valley Authority to assume that with a record of 50 years of steady decline in costs this progress will suddenly stop, and that prices will remain uniform for 50 years, until the heavy

Tennessee Valley Authority fixed charges can be repaid from its very low rates for power, is contrary to all past experience and to existing prospects. It is unsound business. If the past rate of decline in costs and prices continues, the prevailing prices for wholesale power 25 years from now may be half as much as at present, and may continue to decrease thereafter. Therefore, the income available for meeting fixed costs may be very greatly reduced.

The Tennessee Valley Authority cannot reduce its costs materially, because most of them are in fixed charges already incurred, or in labor, which tends constantly to higher wages. Its only protection against such reduction in income is a present level of rates sufficient to accumulate reserves against the time of reduced income, or Government subsidies. The estimates I have given make no provision for such reserves. Were such reserves included, the inadequacy of the present rates would be all the more evident.

In addition to reserves for loss of income, there should be additional reserves to meet unprovided-for expense. There is a movement under way, with bills introduced in Congress, to require the Tennessee Valley Authority to pay the capitalized cost of loss of local taxes on its reservoir lands. There also is under way such a movement as succeeded in the case of the New York Water Supply Commission, to require the Tennessee Valley Authority to pay indirect damages, as for loss of business in the region of the reservoirs. In addition, as highways and other improvements continue to develop, there will be extra expense for bridges and other structures due to the existence of the reservoirs. The Tennessee Valley Authority will be called on to meet these expenses.

Prudent management will maintain rates high enough to meet such costs as these, and other costs which cannot be foreseen but which experience indicates always do occur. No such reserves are provided for in the above estimates.

PART II. POWER OPERATIONS OF THE UNIFIED THREE-DAM SYSTEM

[Data used in this analysis, drawn directly from the various reports and official statements of the Tennessee Valley Authority and other official documents, have been accepted as presented by the Tennessee Valley Authority]

INVESTMENT

The allocated investment in the Wilson, Norris, and Wheeler projects charged to power ($49,360,179) (2)1 and in the total direct investment in power facilities to June 30, 1938, are shown in the following table:

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Interest during construction has been charged for each year during which construction was in progress on the total spent in previous years and for half the amount spent during that year for which the charge is being calculated. This method of estimating assumes that money for construction is borrowed day by day as needed, with no interest paid until the money is spent; whereas, in fact, the cost of interest is greater, because financing is done considerably in advance, and interest charges accumulate before the money is spent.

Interest during construction has been computed at the annual rate of 31⁄2 percent. This rate is below that which would have to be paid by a public

1 Figure in parentheses refers to numbered paragraph under "References" on p. 4951.

utility enterprise required to stand on its own feet as an independent undertaking. In three respects the 32-percent rate involves recognition of an indirect subsidy in the form of backing of the Federal Government as a whole for the Tennessee Valley Authority project: It represents, in general, tax-free borrowing; it represents the lower interest rate available when the Government credit insures against loss of bad investments, such as the $30,000,000 loss on the Wilson Dam project before Tennessee Valley Authority took it over; and it represents interest rate on the total investment, and not the low rate which can be secured on bonds when there is a cushion of preferred and common stock to take up possible losses and to protect the bonds. This rate, moreover, is low as a gage of the actual cost of money through the years in which the project, including Wilson Dam, has been under construction, even though it seemingly is justified in some measure by interest rates immediately effective in this period of unusual unemployment of both capital and labor. For these reasons, it must be pointed out that for the purpose of using Tennessee Valley Authority experience as a yardstick by which private construction and operation may be judged, a rate of 31⁄2 (4)1 percent on total capital is too low. Nevertheless, this is the rate which has been referred to at various times by Tennessee Valley Authority officials in discussions of the prospective earnings and charges of the power project, and it is accepted here as a minimum measure of what the interest rate would be without Government subsidy or the protection afforded by junior securities.

THE AUTHORITY DOES NOT PAY INTEREST

The books of the Tennessee Valley Authority do not include interest charges. Expenditures on this account are not made by the Authority. It is indisputable, however, that interest must be included in determining the actual amount of public funds invested. There is nothing imaginary or hypothetical about interest charges; such charges are a burden on the Public Treasury. In a period of deficit the Federal Government must sell more bonds to pay interest on outstanding bonds. Further, through the past 40 years of valuation practice in the utility field the necessity for the inclusion of interest paid or accrued during construction as a part of the investment in property has been consistently recognized by the Interstate Commerce Commission, the State commissions, and the courts. The fact that the Authority itself has not issued and sold bonds, although authorized to do so, does not justify the disregarding of the important factor of interest either in reporting construction cost or in computing operating expenses. The Tennessee Valley Authority power project must assume the actual burden of interest and retirement of Government bonds in the full amount, whether the actual disbursement be made by the Tennessee Valley Authority or by the Treasury Department.

The legitimacy of the inclusion of interest during construction has been acknowledged in the Tennessee Valley Authority report of the valuation committee on Wilson Dam. This committee recommended the exclusion of both interest during construction and workmen's compensation costs "unless and until such time as the Board or other appropriate authority determines this question consistently for both acquired properties and those built by the Authority (5).' In the recent Tennessee Valley Authority allocation report, moreover, there is definite recognition of the propriety of the interest charge:

"The committee on financial policy has concluded that an assumed interest during construction should not be calculated for inclusion in the project costs subject to allocation because the books of account should only show expenditures actually incurred. The present decision does not preclude a later redetermination of this question nor a setting up for comparative or other purposes of pro forma statements which include interest during construction and other similar items (5).1

The charges computed for interest during construction are minimum figures. In each case the minimum construction period consistent with the official data is used; in each case (with the exception of the computation in connection with the proposed major additional power installations at Wheeler Dam) interest during construction is completely cut off with the earliest reported date at which one or more generators were placed in operation, and no interest during construction is included on yearly additions and betterments thereafter.

1 Figure in parentheses refers to numbered paragraph under "References" on p. 4951.

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