A difference of 1 or 2 mills per kilowatt-hour in the wholesale price of electricity is of greater importance than Mr. Lilienthal's statement implies. If, during this 5-year period, Tennessee Valley Authority rates had been established at 1 or 2 mills higher per kilowatt-hour, the results would have been somewhat as follows: 1. Would have returned additional revenue amounting to about. 2. Would have reduced the development period deficit from $8,545,154 to about.. 3. Would have had the effect of increasing the average rate received for Tennessee Valley Authority power (2.73 mills) about.. NOTE.-Above computations are based on total Tennessee Valley Authority kilowatt-hour sales, 2,364,864,277, for the 5-year period ended June 30, 1938. TENNESSEE VALLEY AUTHORITY "YARDSTICK" POWER-DISTRIBUTION COSTS There are certain costs of supplying electric service to the ultimate consumer which are recognized as being proper distribution costs. These include financing, organization, administration, accounting, publicity, legal, engineering, and load-building expenses. Such services represent a substantial part of the total cost of distribution, especially in new undertakings, when rapid load building is imperative. The Authority has furnished such services without cost to "yardstick" cities, towns, and associations. The records of "yardstick" distributors do not include any accounting for these contributed services. In Tennessee Valley Authority records the costs of these services are so buried in the records of the electricity and agricultural departments, and in Tennessee Valley Authority overhead expenses, as successfully to prevent accurate determination of their cost. The public has been led to believe that almost the sole function of the Tennessee Valley Authority in the power field is the sale of wholesale power. Such is not the case. Under the "yardstick" power program the operations of the Authority are in fact very similar to those of a private utility holding company and operating company. In addition the Tennessee Valley Authority furnishes the supervisory and regulatory services usually performed by State utility commissions. The so-called "yardstick" community power projects, which purchase power from the Tennessee Valley Authority, are promoted, organized, served, and directed by the Authority very much as power distribution in individual towns and cities is organized and administered by a private utility company. Through speeches, press releases, special publications prepared and distributed by the Tennessee Valley Authority publicity department, and in reports to Congress, the impression given is that "yardstick" distribution operations include all costs. Mr. Lilienthal, in an article, The T. V. A. Points Ahead, which appeared in the Christian Century, October 7, 1936, stated: "So far as the so-called Tennessee Valley Authority municipalities are concerned, the margin between the wholesale rate charged by Tennessee Valley Authority and the retail rate charged by the municipalities to their customers has proved adequate to cover all costs and charges. Many communities, such as Athens, Tupelo, and Alcorn County, have established remarkable financial records of profit which have enabled them in 2 years to reduce rates further as well as to pile up reserves and pay off a part of their debt." This is characteristic of the general pattern followed in Tennessee Valley Authority "yardstick" publicity and representations. No mention or suggestion is made of the services contributed by Tennessee Valley Authority and not included in the costs of "yardstick" distributors. However, emphasis is given to the assertion that the margin between the Tennessee Valley Authority wholesale and retail rates is adequate to cover all costs and charges, and that "many communities have established remarkable financial records of profit ་་ *." The impression, which evidently is intended and which the public gets, is that all proper costs and charges of distribution are included in these "yard stick" community operations. To fail to inform the public of these elements of retail cost, or to omit them from recorded costs, or to greatly underestimate them, is definitely to deceive or mislead the public. ELECTRIC PROPERTY ACQUISITION Through the extensive use of the financial resources of the Federal Government, "yardstick" markets for Tennessee Valley Authority power have been acquired either through construction or by the purchase of existing transmission and distribution facilities. An exceedingly liberal policy has been followed in respect to transferring these properties from Tennessee Valley Authority to local public ownership. The following case serves to illustrate this practice, which constitutes a form of subsidy which has not been publicly disclosed. In 1934 the Tennessee Valley Authority purchased the properties of the Mississippi Power Co. in northern Mississippi for $850,000. The distribution systems included in this purchase were subsequently turned over to municipal and cooperative wholesale customers of the Tennessee Valley Authority on the basis of 20-year 32-percent interest-bearing loan contracts. Two stand-by steam plants included in this purchase, which were practically useless under the new regime, one located at Tupelo, and the other at Corinth, Miss., were not sold to the city of Tupelo and the Alcorn Power Association along with the distribution facilities acquired from the Mississippi Power Co. These plants, the cost of which represented a real part of the cost of acquiring these systems, were kept and maintained by Tennessee Valley Authority, although they are of no value other than to fill a very doubtful need for stand-by service in these particular "yardstick" communities. In striking contrast is the case of lines serving industrial customers in Tupelo. Prior to Tennessee Valley Authority, the city of Tupelo, Miss., owned and operated the electric distribution system serving residential and commercial customers in the city. Wholesale power for residential and commercial use was purchased by Tupelo from the Mississippi Power Co.; however, the private company itself directly served Tupelo industrial customers. The distribution facilities serving these industrial customers were included in the property purchased by Tennessee Valley Authority from the Mississippi Power Co., and were ultimately sold by the Tennessee Valley Authority to Tupelo for $9,482. However, Tupelo was allowed to operate these lines for 132 months prior to purchasing them. In other words, the city was given the use of these facilities from February 7, 1934, to March 15, 1935, without any payment or obligation, receiving during this period gross revenues amounting to approximately $32,500, which, on the basis of earnings reported for the fiscal year 1935, amounted to a profit of about $10,000. From February 1934 to the end of the fiscal year 1936, gross revenues to Tupelo from industrial customers, served through these facilities acquired from Tennessee Valley Authority for $9,482, amounted to approximately $74,538, from which the city realized a profit of $22,227 based on the ratio of earnings reported for this period. Thus the Tennessee Valley Authority made a bargain sale to Tupelo for $9,482, from which Tupelo made an estimated profit of $22.227 in less than 3 years. The physical value of the property purchased by Tennessee Valley Authority from the Mississippi Power Co. is not known. The items of property included in the purchase, although listed, were not priced in the contract. During the year prior to Tennessee Valley Authority, the Mississippi Power Co. received $43,158 gross operating revenues from Tupelo industrial customers. (It is not likely that the power company, in selling its properties to the Tennessee Valley Authority, disposed of property capable of producing this revenue for merely the depreciated physical value of the property, $9,482.) The purchase price of $850,000 paid by Tennessee Valley Authority to the Mississippi Power Co. for the whole system in northeast Mississippi must have included some "going business value," yet in disposing of portions of these properties to "yardstick" communities this element of acquisition cost was not charged, but was absorbed by Tennessee Valley Authority. This case illustrates one of the forms of subsidy practiced under the socalled "yardstick" program, by which properties acquired by the Tennessee Valley Authority which is not profitable or might otherwise prove burdensome to "yardstick" community operations is absorbed by Tennessee Valley Authority, while the profitable property is disposed of by the Tennessee Valley Authority to the "yardstick" communities on generous terms and at extremely favorable prices. In dealing with the "yardstick" communities in a way which would tend to make a favorable showing for Tennessee Valley Authority retail "yardstick" rates, the Tennessee Valley Authority turned over to the "yardstick" communities all the productive properties and kept the unproductive properties itseif, burying the cost of these unproductive properties in general Tennessee Valley Authority power capitalization. Subsidies of this nature have not been disclosed by Tennessee Valley Authority; on the contrary, such public representations as the following have been made (18):1 How have these municipalities fared in buying Tennessee Valley Authority power at about 6 mills and reselling it at yardstick rates which reduce the cost of electricity to their citizens from 40 to 60 percent They have been able to meet all the costs of operation, taxes, amortization, depreciation, interest on investment, in fact every legitimate charge faced by a private utility and still return from 20 to 25 percent of all gross revenue to surplus. This has been true of all municipalities distributing Tennessee Valley Authority power. As an example we may take Tupelo, Miss. At the end of the first year of operation this city had met all charges including a large tax payment and still was able to show a profit of $24,875, or almost 20 percent net profit on the investment in property and plant. In Alcorn County, Miss., including the city of Corinth, where Tennessee Valley Authority power is retailed by a nonprofit county-wide cooperative association, a surplus, after all charges, is accumulating at a rate that will permit this association to retire the entire cost of its original distributing facilities within a period of less than 4 years." NEW BUSINESS EXPENSES From the outset Tennessee Valley Authority has made expenditures for loadbuilding activities in the so-called "yardstick" communities for the express purpose of increasing the use of electric current in the homes and on the farms served by wholesale customers of the Authority. Expenditures for at least one phase of these load-building activities is accounted for under "Sales-promotion expenses" and is charged to electricity operating expenses. Over a period of years the success of "yardstick" residential rates in communities served by Tennessee Valley Authority has been widely publicized throughout the country. To substantiate these claims and discredit the rates charged by both privately and publicly owned utilities serving areas in the Tennessee Valley and elsewhere, statements of operations have been presented to show that public ownership served by Tennessee Valley Authority and under Tennessee Valley Authority direction not only pays all costs and benefits its residential consumers through low "yardstick” rates but at the same time makes substantial earnings in the process. The justification given by Tennessee Valley Authority for new business and commercial expenditures reported and accounted for follows (T. V. A. Annual Report, 1937, p. 17): "Activities have been carried on by the Authority for the express purpose of increasing the use of electric current in the homes and on the farms served by wholesale customers of the Authority. The benefit of this expense which is part of the wholesale cost of power, accrues both to the retail distributor and to Tennessee Valley Authority, the wholesaler." Such expenditures were made primarily for purposes designed to increase the residential consumption of electricity. The prevailing experience in utility operation, both private and public, is that less than 25 percent of new business expense is assignable to commercial and industrial consumers. On the basis of reported Tennessee Valley Authority expenditures for the promotion of new business dur 1 Figure in parentheses refers to numbered paragraph under "References" on p. 4951. ing the last 3 years, the distribution of this cost between residential and other classes of consumers is shown in the following table: The following analysis reflects the results of new business promotional expenses incurred by Tennessee Valley Authority in terms of cost per residential customer, and revenue to Tennessee Valley Authority per kilowatt-hour after deducting this expense. Residential sales yield 24 mills (average) per kilowatt-hour for 3-year periodAfter deducting new business and commercial expenses reported by Tennessee Valley Authority New business and commercial expenses (incurred by Tennessee Annual Tennessee Valley Authority gross revenue per residen- Annual Tennessee Valley Authority revenue per residential cutomer (after deducting commercial and new business expense). Percent new business and commercial expense to Tennessee ennessee Valley Authority revenue per kilowatt-hour.. The Authority's known contribution to "yardstick" communities averaged during the last 3 years about $3.39 per residential customer per year for loadbuilding purposes. The average revenue received by the Authority from residential consumers during this period amounted to about $6.57 per residential customer per year. In other words, the Tennessee Valley Authority contributed about 51 percent of its revenues from residential sales to promote the increased use of electricity in the homes and on the farms served by "yardstick" distributors of Tennessee Valley Authority power. This constitutes a substantial subsidy to the "yardstick" residential rates as well as the operating costs of "yardstick" communities. Even this statement ignores many direct and indirect contributions of Tennessee Valley Authority and other public funds used for securing new residential customers, which amount to a substantial subsidy for this class of business. For every dollar increase in revenue received by Tennessee Valley Authority for power, due to increased residential sales, the Authority spent $1.04 for known sales-promotion expenses in the fiscal year 1937, and in the fiscal year 1938, $0.87 as shown below: SERVICES CONTRIBUTED BY TENNESSEE VALLEY AUTHORITY TO "YARDSTICK" POWER DISTRIBUTORS The relation of the Authority to "yardstick" community public ownership projects corresponds to that of a privately owned utility, since the Tennessee Valley Authority performs the functions of both holding company and operating company. The public has been given to believe that these "yardstick" distribution systems are paying all costs of operation. This is not the case. Services contributed by Tennessee Valley Authority begin with the assistance of Tennessee Valley Authority staff members in campaigns for public ownership, followed by financial assistance and legal, accounting, engineering, load building, publicity, and all such services necessary to launch and maintain the community in the business of "yardstick" distribution of Tennessee Valley Authority electricity. Supplying such services is one of the substantial elements of cost in delivering electric power to the ultimate consumers, and the cost of such services is a real and important part of the cost of retail power. The Tennessee Valley Authority has supplied these services to the "yardstick" communities substantially without cost to those communities. At the same time it has repeatedly reported to the Congress and the public that these "yardstick" power distribution organizations were entirely paying their own way. Some indication of the range and extent of these contributed services is given in the following typical excerpts from the monthly reports of the Tennessee Valley Authority department of electricity. September 1935 From Report of Progress of New Contract Committee (p. 13): "North Alabama area: A study is being made regarding possible assignment to the various municipalities of such lines in north Alabama as may be conveyed to the Tennessee Valley Authority. "Several counties, including Lauderdale, have P. W. A. applications for cold storage plants. It has been suggested that we urge P. W. A. to grant these requests." October 1935 From A. H. Sullivan's transmittal memorandum (p. 1): "Distribution: The Lincoln County Electric Membership Corporation formally took over the completed portion of the rural system in Lincoln County on October 1, but it was subsequently decided to operate this property as a Tennessee Valley Authority power district for a few months until the necessary organization could be established. As soon as this operation begins to function smoothly, it will be again turned over to the Lincoln County Corporation." |