On this basis the department of electricity (over this 32-year period) shared the cost of Tennessee Valley Authority administrative overhead activities, as shown in the following table:

1 Other activities-principally Tennessee Valley Authority construction of the integrated river control system.

2 Of the total Tennessee Valley Authority administrative overhead expense of $6.837,058, only 3.76 per cent, or $256,862, has been charged to the operating cost of Tennessee Valley Authority power.

3 The electricity department accounted for this charge of $705,664 by charging $448,802, or €3.6 1 ercent, of it to the cost of building transmission lines and facilities to take power to the market, thereby including it in capital investment. The balance, $256,862, was charged to the cost of Tennessee Valley Authority power generation and transmission.

The departmental overhead expenses of the electricity department (exclusive of the prorated share of Tennessee Valley Authority administrative and general expense shown above) follows:

Thirty-six and four-tenths percent or $382,523 of this overhead expense was charged to operating expenses, while more than 60 percent or $668,364 was capitalized.

Summary:

In summary, for this 32-year period the administrative and general expense overhead costs of the department of electricity were as follows:

1 This total of $1,756,551 was disposed of by charging $638,834 or 36.4 percent to the cost of power generation and transmission, and the balance, $1,117,717, or more than 60 percent, to capital accounts, where it becomes a deferred expense, no part of which to date has been charged to the cost of power. Thus, through the manner of treatment of overhead expenses as capital investment, the cost of Tennessee Valley Authority power has been confused and the public deprived of a fair basis of appraisal.

Tennessee Valley Authority "yardstick" power operations; that is, sales to municipalities and associations as well as temporary direct services, accounted for 27.6 percent of the total power revenues in this 32-year period. Using this percentage of revenue basis, only about $176,382, or about 24 percent of the combined administrative expenses for the Authority as a whole and the electricity department, was charged to the cost of "yardstick" poweror an average of $50,395 annually. This indicates the small extent to which the Tennessee Valley Authority "yardstick" program, which is such a prominent part of the Tennessee Valley Authority program, has shared the Authority's general overhead costs.

WATER-CONTROL OPERATIONS

Expenditures made by the Authority to June 30, 1938, for water-control activities to serve navigation, flood control, and power amounted to $1,368,922. No part of this cost is included in the cost of Tennessee Valley Authority power. In the independent offices appropriation bill, 1939, the following report of the cost of water-control operations is given:

The cost of employee housing at Muscle Shoals is not included in the above figures. This cost has been charged to national defense, maintenance of idle property. In the independent offices appropriation bill, 1939, the following cost is given:

This amount represents the net cost of maintaining idle property at Muscle Shoals, Ala., after deducting receipts from rents and other sources. It also includes the cost of maintaining idle nitrate plant properties, which on the basis of 1939 estimates amounts to between $70,000 and $80,000 annually. The balance of this expenditure largely represents employee housing costs chargeable to fertilizer and power production.

Using the same basis of allocation adopted by the Tennessee Valley Authority financial policy committee for assigning the common cost of Wilson, Norris, and Wheeler Dams to navigation, flood control, and power, the cost of water control is chargeable as shown in the following table:

Substantial expenditures have been made by the Authority for the promotion of rural electric load building. These are not included in the cost of Tennessee Valley Authority power.

The amount spent for this purpose is not known. Some indication as to the extent of certain of these current activities has been given by Mr. Lilienthal, in testifying as follows before the joint congressional committee on July 25, 1938 (transcript, pp. 1421-1423):

To have a complete picture of the Authority's work in the field of rural electrification the committee should know that the Authority itself in its division of agricultural industries maintains a small staff devoted to a program of rural-electrification research and education. It is composed of six agricultural engineers and one woman home electrification specialist. That is our only direct work, and that is the entire extent of that kind of work by the Tennessee Valley Authority. In addition, we have a program of cooperation with the State university extension services. As a feature of that cooperation, the Authority provides partial financial support of four agricultural engineers who are regularly employed as rural-electrification specialists on the extension service staffs of the land-grant colleges in Tennessee, Alabama, Georgia, and Mississippi. During the coming year three more will be added in Tennessee. This cooperation is based on definite contractual obligations on both sides, and I submit for the record copies of the contracts referred to.

"The rural-electrification specialists (1) hold training schools in rural electrification for farm and home extension agents; (2) address public meetings of farm men and women planning for electric service; (3) demonstrate electrical equipment; and (4) consult with farm families on the technical problems involved when plans to install rural electric equipment are under way, such as those you saw in north Georgia. On rare occasions representatives of the Authority give demonstrations upon the request and at the initiative of the extension service. The salaries of our seven staff members and the contributions made by Tennessee Valley Authority to the salaries of the extension workers are not charged in our accounts to our electric activities. They are not so charged. These rural-electrification specialists are not engaged primarily in a load-building campaign but in general educational work the objective of which is the improvement of the social and economic conditions of the farmers in the Valley area. Their activities benefit the electricity operations of Tennessee Valley Authority, of course, but no more and in fact not nearly as much as they benefit the private companies in the Tennessee Valley region, for I wish to emphasize the fact that this work in rural electrification to which Tennessee Valley Authority makes some financial contribution is carried on in a region much wider than the area served by the electric cooperatives purchasing power from Tennessee Valley Authority

* *

FINANCING

The cost of Tennessee Valley Authority power does not include any charge for interest and bad debt reserve on loans made by the Authority to "yardstick" distributors, although the interest earned on these loans has been credited to Tennessee Valley Authority power operations.

The generous use of the financial resources of the Federal Government by the Tennessee Valley Authority and other Federal agencies constitutes a substantial subsidy to the "yardstick" communities served or in prospect of being served by Tennessee Valley Authority. Throughout the country in areas served by either privately or publicly owned utilities, financing costs ordinarily would be paid by consumers of electricity. In the area served by Tennessee Valley Authority these costs are being paid, for the most part, by the American taxpayers.

Tennessee Valley Authority loans.-At the close of the fiscal year 1938, Tennessee Valley Authority loans to "yardstick" communities amounted to $2,304,866. More than 75 percent of these loans, $1,766,824, have been made to serve 12,817 customers. This is equivalent to $138 per customer.

The procedure followed in making these loans is somewhat as follows: The Tennessee Valley Authority acquires distribution properties through construction or purchase of existing lines, etc. These properties are turned over either to newly organized or to already established "yardstick" cities, towns, or cooperative associations on 20-year loan contracts bearing 3-percent interest a few contracts have been made calling for 4-percent interest.

The Tennessee Valley Authority furnishes the equity on which these loans are secured. In other words, if the operation proves unsuccessful Tennessee Valley Authority is privileged to take back its property and to stand the loss.

The community receives the profits from the operation and is obliged to serve its customers at Tennessee Valley Authority "yardstick" rates, pay interest on the loan, provide for amortization of the loan over a period of 20 years, and to subject the operation of its distribution system to Tennessee Valley Authority regulation.

Under the Tennessee Valley Authority "yardstick" program, about the only requirement needed to get into the electric distribution business is desire on the part of the community to serve itself. Tennessee Valley Authority through the generous use of Federal funds furnishes all other requirements, including finances, facilities, management, supervision, planning, and services. The profits, if any, go to the community.

Such operations are not "bankable" and represent real subsidies through the manipulation of Federal finances. The profits reported and widely publicized in "yardstick" propaganda under this scheme of Tennessee Valley Authority financing and servicing are in effect subsidies to these "yardstick" communities resulting from the generous use of Federal funds.

Rural Electrification Administration loans.-In those parts of Georgia, Tennessee, Mississippi, and Kentucky served by Tennessee Valley Authority, the Rural Electrification Administration reports loans totaling $5,343,000.

Public Works Administration loans and grants.-The Public Works Administration reports loans and grants for distribution systems to be served by Tennessee Valley Authority as follows:

Loans
Grants-

Total_

$6, 420, 000 7, 626, 685 14,046, 685

Summary of financial assistance.-A summary of some of the financial assistance given or made available by the Federal Government to residential and farm users of electricity served or to be served by Tennessee Valley Authority is given in the following table:

Much of this financial assistance represents generous subsidy in one form or another. The grants are outright subsidy. The low interest rate on loans, which is the rate on tax-free loans with no charge to cover the loss on projects which cannot repay those loans, is partly subsidy, while the overhead expense involved in securing this financial assistance amounts to a substantial element of subsidy.

DEPRECIATION AND INTEREST

Depreciation and interest charges assignable to power have not been reported by the Authority, nor included in the Tennessee Valley Authority cost of power. The total investment in the Tennessee Valley Authority "yardstick" power program, without interest during construction and organization and financing expense, is shown in the followig table:

Depreciation and interest charges assignable to the investment allocated to power as shown above, and chargeable to the cost of Tennessee Valley Authority power, are given in the following table:

In these computations depreciation has been conservatively provided for at the rate of 2 percent annually on powerhouses, generating equipment, and that part of the common cost of dams allocated to power, and at 4 percent on transmission facilities. Using these rates, the annual depreciation charge assignable to power costs amounts to less than 2.5 percent on the total investment allocated to power, whereas Tennessee Valley Authority used depreciation at the rate of 2.62 percent annually in the computations on which the yardstick rates were established.

Interest is included in these figures at the rate of 32 percent per annum. The Tennessee Valley Authority has consistently used this interest rate in support of the yardstick power program, as, for example, in the exhibit filed on March 5, 1934, with the Alabama Public Service Commission in support of the yardstick rates (16),' and in the exhibits furnished the House Committee on Appropriations in 1936, titled "Liquidation of investment through sale of power by Tennessee Valley Authority (17).”1

Interest is not a "hypothetical" cost. Although interest payments are not actually made by the Tennessee Valley Authority, this element of cost is incurred and must be paid by the Federal Government and therefore ultimately becomes a charge on the taxpayers of the United States. If interest cost is not recovered from Tennessee Valley Authority power operations, this important cost becomes a direct Federal subsidy to users of Tennessee Valley Authority power.

DEVELOPMENT PERIOD DEFICIT

In a memorandum dated March 24, 1936, to Mr. Basil Manly, vice chairman of the Federal Power Commission, concerning the basis of Tennessee Valley Authority wholesale rates, Mr. Lilienthal stated:

"It is unreasonable to anticipate that the volume of business will immediately be adequate to carry the full costs. In any business there is a development period, and we have taken this factor into account in our computations, particularly since we began operations with a huge plant on which we are accepting fixed charges."

During the 5-year period to June 30, 1938, the deficit resulting from Tennessee Valley Authority power operations amounted to about $8,545,154, excluding interest during construction, and organizing and financing expenses. To liquidate this development deficit over a reasonable period of not more than 25 years, the charge against future power revenues amounts to about $341,806 annually.

Writing in the Public Utilities Fortnightly of June 4, 1936, Mr. Lilienthal made this observation:

"As can be seen, under this law the Authority was faced with the problem of devising a price for electricity which would result in maximum use, and yet would return to the Federal Treasury all the costs of producing and distributing that energy.

"The cost of generating electricity forms only a small part of the total cost to the residential consumer or the farmer, ranging usually from about one-sixth to one-tenth. Tennessee Valley Authority prices for electricity at wholesale vary only a mill or two per kilowatt-hour (in some cases less than a mill) from the wholesale rates generally charged in this area. * (Is Tennessee Valley Authority really hurting private utilities?)

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