Association's debt to Tennessee Valley Authority: 1936, $85,994; 1937, $84,502; 1938, $84,893. If all known costs had been charged to operation and only revenue from "yardstick" rates credited, the association would have reported as follows for the last 3 fiscal years: 1936, a loss of $757 instead of a reported net income of $4,870; 1937, a loss of $3,972 instead of a reported net income of $3,246; 1938, a loss of $9,125 instead of a reported net income of $426. For details, see exhibit A, part V (this statement). From an examination of the association's annual reports to Tennessee Valley Authority the following has been noted: In In 1936 depreciation has been understated by $1.693. This is a charge to operations necessary to maintain a 4-percent composite rate of depreciation. 1937 it was $896 and in 1938 it was $580. In 1937 there is an additional tax expense which should be charged to operation. The association did not charge all of accrued taxes to operations. An adjustment was made to surplus in 1937 for line loss to the amount of $259. This should unquestionably be charged to operation. It had previously been carried in suspense. The following table gives details of adjustments on findings of examination of the association's reports: Tishomingo County Electric Power Association, net income adjustments based on findings of examination of association's annual reports to Tennessee Valley Authority, years 1936-38 EFFECT OF ABOVE ADJUSTMENTS IF APPLIEDTO ADJUSTED NET LOSS PER EXHIBIT NOTE.-Figures in parentheses are losses. $1,605 $13 $1,414 1-1.1 1.2-1 1-1 Source: Annual reports to Tennessee Valley Authority by Tishomingo County Electric Power Associa tion for years 1936-38. TOMBIGBEE ELECTRIO POWER ASSOCIATION This association serves only rural customers, there being no towns of any size in its area of operations. Much of the distribution system was purchased from the Mississippi Power Co. by the Tennessee Valley Authority and sold them to the association, along with additional lines which the Authority had constructed. At the present time the association serves approximately 2,600 customers. They are billed for service at the regular Tennessee Valley Authority "yardstick" rates plus a surcharge of 10 percent on all customers except residential, and an amortization charge on all customers. The Tennessee Valley Authority has given considerable assistance to this association both financially and through contributed services. In 1936 the association owed the Authority $336,570, in 1937 the loan was $358,367, and in 1938 it was $390,936. Outstanding loans by Electric Home and Farm Authority to customers of the association remain at about $40,000. If only the definitely known operating costs that the "yardstick" rates should support are charged to operation, and only revenue from such rates included, the reports for the last three fiscal years would indicate the following (details of which are given in exhibit A, page 34 of part V): 1936, a loss of $16,312 instead of a reported loss of $4,685; 1937, a loss of $18,150 instead of a reported loss of $1,683; 1938, a loss of $23,151 instead of a reported net income of $1,551. The table following shows net income adjustments for 1936, 1937, and 1938. On June 30, 1936, a loss of $4,678 resulting from storm damage was set up as a deferred charge. This deferred charge was to be amortized over a period of 5 years. The association has recorded this annual amortization as a charge against the surplus account. Such amortization is an expense properly chargeable to the current operations. Therefore, the amounts of $466 in 1937 and $936 in 1938 have been added to operating expenses. In 1938 the composite rate for depreciation was 3.55 percent. To maintain this at 4 percent it is necessary to charge additional depreciation of $2,307 to the year's operating expenses. The second part of this table shows result of adjustments referred to above are added to losses shown in exhibit A, page 34 of part V. Tombigbee Electric Power Association-Net income adjustments based on findings of examination of association's annual reports to Tennessee Valley Authority, years 1936-38 Net loss or net income as reported by Tombigbee... Amortization of deferred loss from storm damage. This expense has Remainder. Additional depreciation expense (necessary if a minimum composite rate of 4 percent is to be maintained) 1. Adjusted net loss.... 1 Also a possible adjustment here for 1936 and 1937, but from information available the amount of these adjustments cannot be determined. EFFECT OF ABOVE ADJUSTMENTS IF APPLIED TO ADJUSTED NET LOSS PER NOTE.-Figures in parentheses are losses. Source: Annual reports by Tombigbee Electric Power Association to Tennessee Valley Authority for years 1936-38. PART IV. POWER OPERATIONS OF THE UNIFIED SEVEN-DAM SYSTEM THE "INITIAL STAGE" The most significant test of the earning capacity of the Authority's power operations under existing wholesale rate schedules is that which looks ahead to the point when the "initial stage" of development and construction is over and the seven-dam system, with adequate transmission facilities, is functioning. The present expectation is that the point will have been reached at the latest by the beginning of the fiscal year 1942. At that point the 8-year period of construction and development (incidentally, rather a long period in which to wait for profits or a conclusive demonstration of inability to earn) will be completed. The T. V. A. power operations should by that time be a going concern, capable of operating on a basis which will cover all applicable charges. If the adjusted allocated investment figures should be accepted, the potential deficit in 1942, assuming maximum revenues, will be not less than that shown by the following table: Potential operating statement for fiscal year ending June 30, 1942, showing the results of operation on the basis of selling the entire available output of electricity from the seven-dam system Deficit resulting from operations_ 1 See revenue schedule following. $9, 919, 209 2, 256, 974 495, 960 5, 841, 754 4, 103, 509 377, 864 13, 076, 061 3, 156, 852 See operating estimate following. Computed at 3 percent on the investment; also 3% percent of 40 percent of a $1,000,000 working capital. Computed at 2 percent of adjusted allocated investment in hydroelectric facilities, $127,839,057, and 4 percent of investment in transmission facilities, $38,668,212. Annual charge necessary to amortize, over a period of 25 years, the development deficit accumulated to June 30, 1938. INVESTMENT 1. Power facilities of seven dams on allocated basis.-The report of the financial policy committee confines its allocation to only three dams-Wilson, Norris, and Wheeler. It is reasonable to assume, however, that had the committee been endeavoring to assign the estimated investment in the four dams under construction, when completed, similar methods would have been used and similar results obtained. Of the total recorded cost of Wilson, Norris, and Wheeler Dams acknowledged by the committee the amount assigned to power was 52 percent. With this as a guide the allocated power investment in the estimated completed cost of the four dams under construction may be found as shown in the following tabulation. The cost of river channel improvements is deducted before the application of the indicated percentage. The entire cost of transmission facilities at the dams is assigned to power. Adjustments are made for interest during construction and cost of organizing, financing, etc. The estimated cost of transmission facilities added is explained later. The estimated cost of the two additional generating units to be installed at Wheeler Dam, when the "initial stage" has been reached, $3,390,000, with interest and general overhead added, is included in the amount assigned to power. 2. Transmission facilities for seven-dam system. The investment in transmission and distribution facilities, including work in progress, has been increasing at the rate of approximately $5,000,000 per year for the last 3 years, and the estimate for 1939 is $5,760,000. It appears, therefore, that the total investment in transmission facilities completed and in process (exclusive of those at the dams), and with interest during construction and general overhead added, will be well over $23,000,000 by the end of 1939. Assuming that similar expenditures will be required in 1940 and 1941 in developing the network of facilities required to market the full output of the seven dams when the "initial stage" of construction is completed, it is evident that the investment in transmission facilities in 1942 may be expected to total from $33,000,000 to $35,000,000. It is taking a very conservative position, accordingly, to estimate the total investment in the completed transmission and distribution facilities, for the "initial stage," exclusive of such facilities at the dams, at $30,000,000. Allocated investment in power facilities of 7-dam system with necessary transmission and distribution facilities (based on financial policy committee's allocation) Estimate of operating expenses to be incurred in providing for the sale of potential available capacity of 7-dam system in 1942 Estimate of operating expenses to be incurred in providing for the sale of potential available capacity of 7-dam system in 1942-Continued Operating Expenses.-For 1938 the recorded electric expenses were $1,096,407. What these charges will be in the year 1942, when the "initial stage" is expected to be completed, is a matter of estimate. That there will be a substantial increase in all items of cost is incontestable. In order to arrive at a fair approximation of these potential expenses, similar expenses for the fiscal year 1938 have been reduced to a "mills per kilowatt-hour of available capacity" unit and applied to the potential available capacity in 1942. This has been done in estimating production expense, transmission expense, and sales promotion expense. Customers' accounting and administrative and general expenses have been estimated at the actual figure for 1938. Water-control operations.-The estimate for the year 1939, for the four dams completed, is $837,000. Dividing this cost on the percentage basis used in the allocation report, 40 percent will be charged to power. This equals $334,800 and is included in operating expenses. Therefore, the estimated water control expense used for 1942 is the same as estimated for 1939, even though the three additional dams will considerably increase this cost. Working capital.-The nominal figure of $400,000 is again used. This is 40 percent of a $1,000,000 working fund, a very conservative estimate, for with a larger program a larger working fund will be necessary. The annual interest cost at 31⁄2 percent is $14,000. This is included in the interest charge on the table. Taxes.-Taxes were charged in accordance with the Tennessee Valley Authority Act as amended. Section 13 requires the Tennessee Valley Authority to pay the States of Alabama and Tennessee 5 percent of the revenues received from power generated in these States. This is the only tax the Authority is required to pay. Interest. The interest charge used is at the rate of 3% percent of the 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, considering both senior and junior securities, and 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. Depreciation.-Depreciation has been charged on a straight-line basis at the rate of 2 percent on adjusted allocated investment in hydroelectric facilities amounting to $127,839,057 and 4 percent on estimated investment in transmission facilities amounting to $38,668,212. |