Depreciation. The straight-line depreciation rates used, 2 percent on dams and related structures, and 4 percent on transmission facilities, are as low as can reasonably be assumed on the basis of experience and authoritative opinion. A reasonable depreciation charge cannot be computed solely on the basis of maximum physical life. Among the factors to be covered by the depreciation allowance, according to the Federal Power Commission, are wear and tear, decay, action of the elements, inadequacy, obsolescence, changes in the art, changes in the demand, and requirements of public authorities. According to the classification prescribed by the Commission, moreover, the depreciation allow ance must be adequate to cover all complete structural units which are replaced; only minor items or parts of units renewed are to be handled through maintenance. Depreciation reserves should not be confused with reserves necessary to protect against loss of current income and to meet expenses not provided for. The straight-line method of depreciation computation used has been adopted almost universally in business practice, including the field of Federal and State income-tax administration. The method has also been vigorously endorsed by the Interstate Commerce Commission and from time to time by State publicservice commissions. A clear opinion on the subject is that issued by the Public Service Commission of Wisconsin in 1933. The following is quoted from the foreword (11) :1 "This report emphasizes straight-line depreciation. We believe that deprecia tion is consumption of property in service; hence it is a cost of operation occurring throughout the service life of property and not a cost incurred solely at the date of retirement of property. "On this premise, in our opinion, the straight-line method of providing for depreciation should be the ultimate aim of commission policy * In speaking of the so-called sinking-fund method, on page 26 of the same report, the following sound and pertinent comment is made: * in the case of long-lived property such as dams and reservoirs, a substantial error results (from using the sinking-fund method) in the amount of accrual charged to operating expenses unless estimates of service life are accurate because a relatively large proportion of the total amount of depreciation is derived from interest accumulations during the period immediately preceding retirement Taxes.-Taxes were charged in accordance with the Tennessee Valley Authority Act, as amended, section 13, requiring the Tennessee Valley Authority to pay the States of Alabama and Tennessee 5 percent of the revenue received from power generated in those States. This is the only tax Tennessee Valley Authority is required to pay. Taxes paid by privately owned electric utilities range from 12 to 15 percent of gross operating revenues as compared with the 5 percent paid by Tennessee Valley Authority. Interest. The periodic interest charge used is at the rate of 3% percent, applied to the average investment in completed property. This rate is no doubt less than that which would be required, even in the case of a publicly owned and operated utility, if the sole security were the revenues of such utility as opposed to the pledging of the resources and credit standing of the Federal Government. Working capital.-The amount of effective working capital required for oper ation can be measured in terms of the average balances of cash, receivables, supplies, and other current items. No satisfactory figures were obtainable for determining the amount of working capital required. However, the act specifies (section 26) that the Authority shall retain to itself a continuing fund of $1,000,000 to defray emergency expenses and to insure continuous operation. Forty percent of this amount, $400,000, has been taken as a nominal measure of the working capital required in connection with power production. Interest at the rate of 32 percent per annum on this working capital was charged to power. Development cost.-In addition to the actual investment in power facilities a considerable development cost has been incurred to July 1, 1938, in the form of expenditures for "research and development" and operating debit balances or deficits (excess of expenses and charges over revenues) during the period of load building. This development cost should either be capitalized as an element of investment or should be segregated as a special deferred item to be amortized over a reasonable period of years by annual charges to operations. In any 1 Figure in parentheses refers to numbered paragraph under "References" on p. 4951. event the future revenues must be sufficient to absorb this additional burden if the project is to justify itself as a self-sustaining activity. The amount of development cost or loss accumulated through the fiscal years 1933-38 is shown in the following table: Showing the operating deficit and development cost resulting from Tennessee Valley Authority power operations to June 30, 1938 1 Operating expenses: Included in Tennessee Valley Authority power costs; reported in Tennessee Valley Authority Annual Report. 1936 (p. 127), 1937 (p. 107), and Department of Operations, Monthly Report, June 1938 (p. 57). 2 Miscellaneous expenses. Same as (1) above. Water-control expenses: Not included in Tennessee Valley Authority power costs; allocated to power at same rate as allocation of costs approved by Tennessee Valley Authority in June 1938, on a basis of 40 percent of the total cost of water-control operations reported in Independent offices appropriation bill for 1939 (p. 1018). 4 Working capital; not included in Tennessee Valley Authority power costs; Sec. 26 of act provides $1,000,000 working capital; on basis of allocation of cost approved by the Tennessee Valley Authority, 40 percent of this amount $400,000) is assigned to power and charged interest at 3% percent per annum. Taxes: Included in Tennessee Valley Authority power costs. Source of figures same as (1) above. Depreciation: Not included in Tennessee Valley Authority power costs; computed on average yearly allocated power investment at the annual rates of 2 percent on dams and related structures and 4 percent on transmission facilities. Interest: Not included in Tennessee Valley Authority power costs; computed on average yearly allocated power investment at the rate of 31⁄2 percent per annum. Interest earned: From the amount of interest earned and reported in the sources mentioned in (1) above, the interest at 3% percent per annum on outstanding loan contracts receivable was deducted to arrive at this figure-the net interest earned. Other income: Reported in Tennessee Valley Authority sources given in (1) above. 10 Operating revenues: Includes revenues from sales of electricity to outside customers and to other Tennessee Valley Authority activities (fertilizer and construction) together with rentals, etc.-reported in same source as (1) above. 11 Research and development expense: Not included in Tennesssee Valley Authority power costs; reported in same source as (1) above (1938 amount estimated). Through the period ending June 30, 1938, the Tennessee Valley Authority electricity program operated at an annual net deficit or development cost ranging from $670,155 in 1934 to $3.668.580 in 1938, or a total of approximately $9,446.605 for the 5-year period. This is figured conservatively and does not include additional amounts for items of Tennessee Valley Authority expense which have either been inadequately charged to the electricity program or omitted entirely. Assuming that this accumulated deficit is to be amortized, and taking 25 years as a reasonable period over which to spread this cost, the annual charge against future revenues amounts to $377,864. Summary. On the assumption that the Wilson-Norris-Wheeler power system must be self-sustaining and self-liquidating and on a sound financial basis, the annual revenues from power sales must be adequate to cover all of the operating expenses and related charges as outlined above; current operating costs applicable to power production and incurred directly by Tennessee Valley Authority; an allocated share of water control operating expenses; depreciation at reasonable rates; taxes at least to the extent required by the act; interest at the minimum rate of 3% percent on the power investment and working capital; and a reasonably prompt amortization of development expense and loss. Also, those revenues must provide reserves against loss of income due to reduced cost and price of competitive power in future years, and expenses unprovided for. REVENUES A schedule of rates has been adopted by the Tennessee Valley Authority, contracts have been entered into for the sale of power, and it has been officially represented to the Congress and to the country at large that under these rates and contracts power sales will be shortly at a level adequate to meet all costs of operation, including interest and depreciation, and amortization of all or substantially all nonpower elements. What are the facts in this connection? Do the present or prospective revenues under existing rates warrant such claims? As might be expected, the revenues received for the fiscal years 1933-38, a period primarily characterized by construction and development, have not been sufficient to cover periodic charges, and a substantial development loss or cost has accumulated. Of the revenues reported to date, moreover, a considerable percentage is made up of interdepartmental sales-sales by one branch of the Authority to another. For the fiscal year 1938, for example, interdepartmental sales amounted to more than one-fifth of the total reported revenues. The power load for dam construction is, of course, temporary, available fortunately when the Tennessee Valley Authority needs an initial load and until a permanent load is secured, but it cannot be considered in estimating future revenues. The reported power revenues to June 30, 1938, including interdepartmental sales, are as follows: Including interdepartmental sales, the average rate per kilowatt-hour for all primary and secondary power sold in the fiscal year 1938 was 3.23 mills, as shown by the following tabulation (12) :* *Figure in parentheses refers to numbered paragraph under "References" on p. 4951. POTENTIAL REVENUE OF THREE-DAM SYSTEM The enterprise cannot be judged conclusively on the basis of the volume of revenue attained by June 30, 1938; it is necessary also to examine prospects for the future. The present capacity of Wilson, Norris, and Wheeler Dams operating at 60 percent system load factor (as provided in Tennessee Valley Authority allocation report) is shown in the following table (13) :1 Dependable peak_ Net primary power- Net secondary power (available 75 percent of time)_. Killowatts 258, 000 155, 000 58,000 Amounting to 1,564,974,000 kilowatt-hours salable output annually, after deducting 10 percent for transformation and transmission losses, station use, etc. A liberal estimate of the future revenues of this system, as it now stands, and under existing rates and types of contracts, is that which assumes the sale of this entire available marketable output at the average price per kilowatt-hour earned in 1938-323 mills. The maximum revenue which can be anticipated from the present system is $5,054,866, if there is no revision of the existing structure of rates and contracts. The average revenue per kilowatt-hour realized in the immediate future, under existing rates and contracts, will be somewhat less than the revenue realized in 1938. NOTE.-The available primary and high-grade secondary power of the Norris, Wheeler, Wilson system with the present installed capacity of 348,000 kilowatts, operating the reservoirs primarily for flood control and navigation and at 60 percent system load factor is estimated at 1,357,800,000 kilowatt-hours firm power and 381,060,000 kilowatt-hours secondary power available 75 percent. Transformation and transmission losses of approximately 10 percent will reduce the amount of energy available for sale to 1,222,020,000 kilowatt-hours firm power and 342,954,000 kilowatt-hours secondary power, or a total of 1,564,974,000. Mr. Lilienthal's estimate of $5,582,000 revenue from the total output of Norris, Wheeler, and Wilson Dams (transcript, pp. 1725-1730) is based on revenue of 4 mills per kilowatt-hour for primary power and 2 mills for secondary power (transcript, p. 1741). Under present contracts this is too liberal an estimate of possible revenues, as indicated in this estimate of 1939 power sales based on contract requirements. EARNING POSSIBILITIES Viewed as a unified system, it is of interest to consider what the earning possibilities of Wilson, Norris, and Wheeler Dams would be when projected under the most favorable conditions of operation. 1 Figure in parentheses refers to numbered paragraph under "References" on p. 4951. OPERATING EXPENSES AND CHARGES Based on reported operating expenses for the fiscal year 1938, together with depreciation and interest charges on the basis of the investment allocated to power, plus interest during construction and organization and financing expenses as previously discussed, the annual operating expenses and charges would be as follows: 1 Allocated on basis of 40 percent of total water-control expense. $1,096, 000 275,000 252, 743 1,842, 809 2,576, 104 14,000 377, 864 6, 434, 520 2 Allocated on basis of 40 percent of working capital (sec. 26, Tennessee Valley Authority Act). POTENTIAL REVENUE If the maximum available capacity output of the three-dam system were sold at the average rate per kilowatt-hour realized in 1938 (entirely too liberal an assumption, as explained earlier in this discussion), and with transmission and transformer losses of only 10 percent (also too liberal an estimate), the potential annual power revenue from Wilson, Norris, and Wheeler Dams would amount to $5,054,866 (1,564,974,000 kilowatt-hours of available capacity output, at 3.23 mills). THE RESULTS Under these conditions, all too favorable, the annual results of operation are shown in the following table: Total operating expenses and charges-- Annual deficit__. EXPENSES AND CHARGES NOT INCLUDED $6,434, 520 5, 054, 866 1, 379, 654 No amount has been included in the foregoing statement for increased cost of operation due particularly to increased transmission expenses, for labor, etc., and depreciation and interest on additional investment of from $3,000,000 to $5,000,000 that would be required to market the available capacity output of these three dams at the average rate of 3.23 mills. Conservatively figured this additional expense would amount to approximately $300,000 annually. Neither has there been included in these charges additional (equivalent) tax payments to reimburse the Federal Treasury for services furnished by other branches of the Federal Government without cost to Tennessee Valley Authority. On the basis of 1 percent on the investment allocated to power, and by deducting the amount already charged for taxes, this would amount to an additional charge of approximately $508,344 annually. THE RESULTS WITH THESE CHARGES INCLUDED With some of these charges included, the annual operating deficit under present contracts (most of which are for a period of 20 years), using the Tennessee Valley Authority “yardstick” wholesale-rate schedule, is shown as follows: Annual deficit (as shown above)-- $1,379, 654 Additional transmission expense, depreciation, and interest for additional market (required market output). Additional taxes (and for reimbursing Federal Government for services and expenses furnished Tennessee Valley Authority) --- 300,000 508,344 Total annual deficit.. 2, 187, 998 |