To recover all annual operating expenses and charges applicable to power production the available capacity output of Wilson, Norris, and Wheeler Dams would have to be sold at the average rate of 4.6 mills per kilowatt-hour. To obtain this increase in revenue would require an average increase in the present Tennessee Valley Authority "yardstick" wholesale rates of more than 42 percent. The Congress and the public have been grossly misled by the promises and claims made by the Tennessee Valley Authority concerning "yardstick" wholesale rates, as the following discussion clearly indicates.

THE TENNESSEE VALLEY AUTHORITY "YARDSTICK" WHOLESALE RATES

One of the primary concerns of the Congress in passing the Tennessee Valley Authority Act 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 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 * 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 * *" [Italics supplied.]

This means that every item going into the cost of acquisition or construction of facilities and every item going into the cost of generating, transmitting, and distributing electric current shall be taken into account. Nothing in the way of direct or indirect subsidy or contribution of public funds may be omitted.

The public as well as the Tennessee Valley Authority Board realized that fact. Mr. Lilienthal, following the announcement of Tennessee Valley Authority rates, said:

"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, included in order to make fair comparison with privately operated utilities for 'yardstick' purposes" (Tennessee Valley Authority release, Washington, September 15, 1933, p. 1).

Again, in a speech at Chattanooga on December 29, 1935, Mr. Lilienthal referred to Tennessee Valley Authority's rate-fixing mandate in these words:

"The component costs of producing and distributing electricity were to be recorded in such a way that they would form a useful and challenging basis of comparison-a yardstick of comparison—with costs in private and public operations in various parts of the country (Tennessee Valley Authority release, Knoxville, December 30, 1935, p. 7).

* *

On September 15, 1933, Tennessee Valley Authority wholesale rates were publicly announced. For the purpose of establishing these rates a rate base of $21,448,806 was taken as the cost of Wilson Dam and steam plant allocable to power and $5,000,000 added for the transmission facilities required to market the power, making a total rate base of $26,448,806.

Against this rate base the following annual charges were made (4) :1

This is a reasonable "yardstick" of cost, which includes not only the costs incurred by Tennessee Valley Authority but in addition an amount for taxes in excess of the requirements of the act. In defending itself against the claims of private utilities that the "yardstick" rates did not include sufficient taxes,

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

the Tennessee Valley Authority published and widely distributed a pamphlet (14),' from which the following is taken:

"The Tennessee Valley Authority Act requires that 5 percent of gross sales of power be paid to the State where Tennessee Valley Authority power is generated as a compensation for loss of tax revenue.

*

"To keep the 'yardstick' absolutely fair, however, the Tennessee Valley Authority sets aside an additional 71⁄2 percent of its gross revenue, making a total of 122 percent from the generation and transmission of power in lieu of taxes." [Italics supplied.]

SIMILAR REPRESENTATIONS WERE MADE TO CONGRESS

The fact is that although the Tennessee Valley Authority "yardstick" wholesale rates have been represented to the Congress and the public as being sufficient to yield minimum revenues equivalent to about 9.4 percent annually on the investment allocated to power, the potential annual revenue from the threedam system, $5,054,866, amounts to less than 6.6 percent of the investment allocated to power as of June 30, 1938. Not only is this revenue insufficient to meet annual operating expenses and charges, but it is approximately 30 percent less than the announced minimum revenue requirements on which the "yardstick" rates were based, and on which public comparisons have been drawn with public and private operations.

PART III. THE "YARDSTICK" POWER PROGRAM

"NOT A TAXPAYERS' SUBSIDY"

Tennessee Valley Authority Director David E. Lilienthal, addressing the Chattanooga Rotary Club on September 28, 1933, said:

6** * * It is pretty well recognized that regulation has not been entirely adequate to protect the public interest, and so to supplement regulation, Congress has provided for a measure of public operation on a limited scale. public operation is to serve as a yardstick by which to measure the fairness of electric rates *

In this same speech Mr. Lilienthal also said:

This

"The Tennessee Valley Authority power program is not a taxpayers' subsidy. It is a business undertaking" (Tennessee Valley Authority release, Washington and Knoxville, September 28, 1933, pp. 5 and 3).

A FAIR RESIDENTIAL GUIDE

No phase of the Tennessee Valley Authority undertaking has been so publicly dramatized and deeply impressed upon the public mind as the so-called "yardstick" power program, whereby Tennessee Valley Authority sells power at wholesale prices to cities, towns, and cooperative associations under a contract which prescribes the resale "yardstick" rates at which the power will be resold to the ultimate consumer.

Tennessee Valley Authority publicity during the past 5 years has impressed upon the American public that without subsidy from the Federal Government, Tennessee Valley Authority residential "yardstick" retail rates charged by towns, cities, and cooperative associations served by Tennessee Valley Authority produce sufficient revenue to cover the entire cost of service and are a fair guide to what residential consumers throughout the country should pay for electric service in the home.

"YARDSTICK" OF COMPARISON

Speaking over a Nation-wide radio network on September 26, 1934, Dr. Harcourt A. Morgan said:

*

** You know that the development of this electric power is to be a sort of 'yardstick' with which to determine whether the rates charged in other parts of the country are fair and as low as they reasonably can be (Tennessee Valley Authority Release, Knoxville, September 27, 1934, p. 6.) Tennessee Valley Authority (then) coordinator, John B. Blandford, made

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

this interesting observation over a National Broadcasting Co. radio broadcast on July 31, 1934: * A dam is not an isolated structure or operating unit, but part of a unified development of a water system with power produced at half the cost of unorganized development and with valuable byproducts in flood control and navigation

* *

"Director David E. Lilienthal is buying power systems at fair prices and building lines where they do not now exist. He is accounting for his operations with full consideration for interest, depreciation, amortization, and taxes, and thereby establishing a 'yardstick' for the Nation Valley Authority release, Knoxville, August 1, 1934, p. 3.)

CONSUMERS MUST PAY ALL COSTS

(Tennessee

Tennessee Valley Authority Electricty Rates, a Statement of Facts, a pamphlet issued by the Tennessee Valley Authority information division and widely distributed for public consumption, states on page 3:

"The Tennessee Valley Authority announced the wholesale and retail rates at which it would dispose of suprplus power from Wilson Dam, in September 1933. These rates were set up on the principle that consumers of electricity must pay all the costs of furnishing that electricity without any contribution from taxpayers. It is these rates which have been described as a 'yardstick' with which to measure and compare the rates charged by private utilities." [Italics supplied.]

Addressing the Memphis Rotary Club on October 17, 1933, Mr. David E. Lilienthal said:

"First of all, we kept in mind that the consumers of Muscle Shoals power must pay all the costs. In short, the power program of the Authority is not to be subsidized by the taxpayer * (Tennessee Valley Authority release, Washington, October 17, 1933, p. 5). [Italics supplied.]

"YARDSTICK” ACHIEVEMENT

Before the House Military Affairs Committee in 1935 Mr. Lilienthal testified that the Tennessee Valley Authority reduced rates approximately 50 percent without any loss to the Federal Government and with profits to "yardstick" communities as high as 38 cents on the dollar (15).' This signifies real achievement. It also implies that unreasonable profits were obtained prior to Tennessee Valley Authority; and, furthermore, that public operation under direct supervision of the Federal Government is far more satisfactory than Federal and State regulation of privately and publicly owned utilities.

THE PICTURE

The picture of the Tennessee Valley Authority "yardstick" power program given to the American public can be summed up as follows:

As to subsidy.-Tennessee Valley Authority power would not be subsidized by the taxpayer.

As to costs. All costs of service would be included. Under Tennessee Valley Authority "yardstick" rates consumers would be required to pay the entire cost of electric service.

As to "yardstick."-The Tennessee Valley Authority power program would serve as a "yardstick" by which to measure the fairness of electric rates of both publicly and privately owned utilities throughout the country.

APPRAISAL NEEDED

Since early in 1935 I have insisted that a thorough appraisal be made of the Tennessee Valley Authority "yardstick" program. We needed to know where we stood and where we were going. The fragmentary information available did not supply this need. It did not support the claims being made for the Tennessee Valley Authority power program. In fairness to the Board, it was not only the right but the duty of each member to have a thorough working knowledge and

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

understanding of this program and the supporting facts. Policy decisions and expenditure authorizations could not be acted upon with any degree of sound judgment without the factual evidence to support those actions.

APPRAISAL OBSTRUCTED

Efforts to appraise the "yardstick" power program were obstructed and delayed. Of most importance in the determination of Tennessee Valley Authority power costs is the allocation of costs between the various purposes served by the dams in the Tennessee River. Mr. Lilienthal, in 1933, was assigned that task. Because of his delay, not only was the Board, unsupported in this important responsibility, but the mandate of Congress was not carried out in due time. It is significant that a conclusion on allocation was speedily decided upon only after Congress acted to investigate the Authority. Now for the first time after 5 years can Tennessee Valley Authority power costs be ascertained— a rather long period for the public to wait for an accounting.

In 1936 Mr. Lilienthal arranged with the Federal Power Commission to have an engineering and accounting study made of three "yardstick" distribution systems-the city of Tupelo, Miss.; the Alcorn County Electric Power Associa tion, Miss.; and the city of Athens, Ala. The general outline of the study to be made was largely suggested by Mr. Lilienthal without consultation with the Board, and without informing the chairman when the survey was undertaken, The report submitted by the Commission's accountants and engineers deals almost entirely with the local management of only three "yardstick" communities. As an appraisal of the Tennessee Valley Authority "yardstick" power program, it is neither comprehensive nor adequate.

TENNESSEE VALLEY AUTHORITY POWER COSTS ARE NOT KNOWN

In appraising the Tennessee Valley Authority "yardstick" program, the first essential is that all costs be included, accounted for, and so reported. This has never been done despite the fact that the bulk of Tennessee Valley Authority power has been sold on 20-year contracts at rates established in 1933. These rates were based on the estimated cost of Wilson Dam power.

The Tennessee Valley Authority has carried on a widespread campaign of propaganda challenging comparison of the Tennessee Valley Authority “yardstick" rates for electric service in the home with the rates charged by privately and publicly owned utilities throughout the country. The actual cost of Tennes see Valley Authority power as compared with the rates at which it is sold under long-term contracts is an issue of major importance to the public.

THE TENNESSEE VALLEY AUTHORITY "YARDSTICK" POWER PRODUCTION COSTS

In producing and distributing electricity the total cost involved is made up of fixed charges on generating plant and equipment, substations, transformers, transmission and distribution lines, etc.; and such costs as sales promotion, load building, and running expenses.

Following are some of the important elements of cost which have been entirely omitted or only partly included in the cost of Tennessee Valley Authority wholesale power.

1. Less than 4 percent of the Authority's general administrative cost-the cost of legal, accounting, publicity, and similar activities-has been included in Tennessee Valley Authority power production costs in the 3-year period from July 1, 1934, to December 31, 1937. This appears to be too small an apportionment of this expense, considering the emphasis that has been given to "yardstick" power in the Tennessee Valley Authority program.

2. During the last 5 years $1,368,922 has been spent by Tennessee Valley Authority for water-control planning, malaria control, reservoir maintenance, employee housing, and similar water-control operations allocable to navigation, flood control, and power. No part of this cost has been charged or included in Tennessee Valley Authority power costs.

3. Although the reported Tennessee Valley Authority expenditures for litigation in connection with the power phase of the Authority's program amounted to $518,159, no part of this cost appears to have been charged against Tennessee Valley Authority power activities.

4. The Tennessee Valley Authority has made substantial expenditures for the promotion of rural electrification through grants to the land-grant colleges in the Tennessee Valley States. No part of this cost has been charged to the Tennessee Valley Authority power program.

5. Liberal financial assistance has been given by Tennessee Valley Authority and other Federal agencies to "yardstick" distributors of power, the cost of which is not included in the cost of Tennessee Valley Authority wholesale power. It is significant to note that in reporting electricity operations a credit amounting to $163,950 to June 30, 1938, is taken for interest on loans made by Tennessee Valley Authority, yet no corresponding charge has been made for interest and bad-debt reserve on outstanding loans receivable, amounting to $2,304,866 as of June 30, 1938.

6. No amount is included in Tennessee Valley Authority power costs for reimbursing the Federal Treasury for services contributed to the Tennessee Valley Authority by other branches of the Federal Government-the Treasury Department, the Department of Justice, the Comptroller General's Office, etc.-nor for insurance protection such as workmen's compensation, liability, and property damage.

7. Depreciation and interest charges on the investment in generating and transmission facilities amount to about 69 percent of the total cost of Tennessee Valley Authority wholesale power; however, these charges have not been included in the reported costs of Tennessee Valley Authority power generation and transmission.

ADMINISTRATIVE AND GENERAL EXPENSES

The cost of Tennessee Valley Authority activities having to do with the general administration of the Tennessee Valley Authority are charged to administration and general expense. Charged to this account are the offices of the board of directors and the general manager, the finance, personnel, legal, procurement, office management, and information departments, and the Tennessee Valley Authority offices maintained in Washington, Chattanooga, etc.

Tennessee Valley Authority administrative and general overhead expenses for the 32-year period beginning July 1, 1934, and ending December 31, 1937, are shown in the following table:

Of the total $6,837,058, only 10.32 percent, or $705,664 was allocated and charged to the electricity department. The balance, amounting to $6,131,394 or 89.68 percent, was allocated and charged to other Tennessee Valley Authority activities, largely Tennessee Valley Authority dam construction. The amounts charged to the electricity department during this period follow: