for the general substitution throughout the southern States of public for private operation at the present time.

A power system, like a railroad or a telephone system, is in some respects a natural monopoly. The Interstate Commerce Commission will properly discourage the building of a new railroad in a region already adequately served. To build two paralleling and competitive power systems in a region is an economic waste, if the "yardstick" idea can find expression otherwise. The private utilities compete with each other in occupying virgin territory, or inacquiring independent systems, but they very properly refrain from paralleling each other's lines and from competing for the same customers in the same area. Only technical difficulties of transmission and interconnection prevent the power systems of the country from gradually becoming in effect a single monopoly like the Bell Telephone System.

(Only inexpertness and inefficiency in Government can justify any such public-service monopoly as a great power system remaining in private ownership. Whether publicly or privately controlled, it is, in effect, a part of the common public life.)

For the Tennessee Valley Authority to best work out a planned economy with reference to power in its area it should have a monopoly of generation and transmission in that area. (If the technical difficulties of transmission can be so eliminated that transmission lines can become common carriers, then transmission lines can receive power from any available source on an equitable basis, and generation need not be a monopoly. The private utilities have recognized this in being willing for the Government to generate power if it did not transmit or distribute power.)

If the Tennessee Valley Authority must establish itself by paralleling the lines of private companies, serving some municipalities along a transmission line, and missing others, then there will be great duplication of plant and personnel, and great waste. The cost of generation and transmission for the Tennessee Valley Authority may be higher than in a territory served by a single system, and the comparison of public and private ownership will be unfair to public ownership. Only by having a substantial monopoly of a territory, as the private utilities do, can a fair comparison be had.

From the standpoint of a planned development of the Tennessee Valley Authority territory in all respects, the same considerations hold good. This territory can be served best by a single system of transmission such as characterizes other areas. If the Tennessee Valley Authority area must experience the warfare of the duplication of facilities and personnel, with the hard feeling and bitterness and other unfavorable developments that would accompany such warfare, then the Tennessee Valley Authority for a considerable period will be less effective, and will be less representative of what -economic planning can accomplish. (If such strife is inevitable, then economic planning should nevertheless proceed as best it can, for disturbance must sometimes precede progress.)

Furthermore, I believe that the Tennessee Valley Authority has a responsibility to those who in good faith have invested in the securities of the private utilities. No unnecessary losses should be incurred by the sheer waste of a struggle for territory if that can reasonably be avoided. A large proportion of those who protested against the Tennessee Valley Authority Act in Congress, and in favor of the Alabama Power Co., were widows or orphans. I do not know whether the Alabama Power Co. specialized in widows and orphans in distributing its preferred stock, or whether it keeps a separate list of widow and orphan investors to circularize when it wants to hide be hind this class of investors. In any case, these people invested in good faith. To whatever extent they invested in watered stock they should take their losses, unless the banking firms that control these companies can be made to realize their peculiar responsibility, and can be brought to protect such investors.

However, so far as these investments represent legitimate expenditures, they should not be jeopardized by any action or attitude of the Tennessee Valley Authority in bringing on unnecessary duplication of facilities if public operation can be established without such duplication.

In my opinion, the policy of the Tennessee Valley Authority with reference to power should be as follows:

1. Our board should approach the management of the Commonwealth and Southern Corp., which controls the Alabama Power Co., the Tennessee Power Co., and the Georgia Power Co., and should suggest that a division of territory be made, the Tennessee Valley Authority to have entire jurisdiction in its

territory, on condition that it will not compete outside its territory. Similar agreements can be proposed to the few other private companies affected. The Tennessee Valley Authority area for power distribution cannot exactly coincide with the drainage area of the Tennessee River, but can largely cover the same area. In order to have a fair "yardstick" for comparison of costs it is probable that one large city should be included in the Tennessee Valley Authority area. Large cities now in the distribution area of the Commonwealth and Southern Co., are Atlanta and Birmingham. Other large cities in reach are Memphis, Louisville, Cincinnati, and Pittsburgh. If these cities should know that the Tennessee Valley Authority would for the time being take on one of them and no more, it is probable that one of them would decide to establish a municipally owned distribution system, since some of them now contemplate such a step.

2. Such a distribution of territory should run for a limited period, say 5 or 10 years. Prior to the end of that period there should be a reconsideration of the situation. If Government operation is proving more economical and satisfactory, its range should increase. If, all things considered, private operation is more satisfactory, then an extension of Government operation would not be indicated. If Government operation should fail to compete successfully for a long period, say 25 years, it probably should be given up.

3. In taking over privately owned systems, the price paid should be on some such basis as the following:

(a) The reproduction cost of equivalent present value should be paid, material and labor costs being estimated on a basis of average costs and wages for a considerable period, say July 1, 1923, to July 1, 1933.

(b) Some percentage should be added to this for the cost of overhead and legitimate development expense.

(c) There might be some other legitimate charges, or some modification of these, which would be approved by a board of disinterested accountants and economists who should make the appraisal.

4. As to municipal distribution systems, they might be taken over by the municipalities, or they might be run by the present owners until they could be taken over, or they might in special cases be taken over by the Tennessee Valley Authority with the same sort of appraisal.

5. One element of policy, suggested in my memorandum of July 28, has already been adopted by the Board. It is that the Tennessee Valley Authority should oppose the granting of further licenses for water power to private companies within the drainage area of the Tennessee River, should acquire by purchase or condemnation any vested rights now existing in large private projects in that area not yet built, and should endeavor to establish the policy that all water power development on a large scale and all large scale transmission in the Tennessee Valley Authority area shall be by the Tennessee Valley Authority. Only a system of considerable dimensions can fully demonstrate the feasibility of public operation.

6. Another policy suggested in my memorandum of about July 5, and reviewed in the memorandum of July 28, was adopted by the Board. It is that the Tennessee Valley Authority shall sponsor a study to develop standard accounting, statistical and administrative methods for the management of publicly owned utilities, so that better standards can be maintained and better comparisons made. This recommendation also included the promotion of an “Institute of Publicly Owned Utility Managers" who would help develop and maintain such standards. and the promotion of a research and consulting staff to advise on fiscal, engineering, legal, and administrative policy.

7. With reference to trying to deal with the Commonwealth and Southern Co. for exclusive occupation of territory, I believe that this should be done very soon for the following reasons:

(a) It has been President Roosevelt's opinion, expressed to me both before the Tennessee Valley Authority bill was enacted into law and afterward while this matter was under discussion by our Board, that the Tennessee Valley Authority should limit the area of its activities in power transmission, and should, if feasible, maintain harmonious relations with private utilities, so that wasteful duplication may be avoided.

(b) The present course, of discussing the sale of power with all inquirers, but with no suggestion of policy to the private utilities, is equal to a declaration of war, and tends to result in attitudes which will lead to competition through duplication of facilities over a wide area. The present course if persisted in will surely result in an attitude of strife and antagonism.

8. In case no agreement can be reached with the Commonwealth and Southern Co., then the Tennessee Valley Authority should proceed vigorously to establish itself in the field of power generation and distribution. There can be no comparison of the relative merit of public and private power supply except by actual cases, and the loss incident to establishing a system of generation and distribution will be justified by the need of having a demonstration, if peaceful means to the same end cannot be found.

I find myself embarrassed in the following manner. Mr. Willkie, president of the Commonwealth and Southern Corporation, asked to see me to discuss our relations. After a discussion with the Board I did so, and endeavored to limit information or commitment to points agreed upon in that discussion with the Board. I told Mr. Willkie that it would be the policy of our Board to endeavor to work out some harmonious arrangement with the Tennessee Power Co. which would protect the interests of the Tennessee Valley Authority. I told him that we should undertake to deal directly and in a straightforward manner with him, and to find some common ground for procedure on the assumption that the Tennessee Valley Authority will generate and transmit power. I told him that in case of misunderstanding we should take them up directly and at first hand.

Our present course leads to uncertainty, misgiving, and perplexity on the part of the Commonwealth and Southern Co. The proposal that we try together to work out a program is not being followed up. I am put in a position of either having made false representations, or of having been irresponsible. I consider it necessary that Mr. Willkie understand that I was acting in good faith, and so I propose to send him the following letter, unless there are good reasons for my not doing so:

"DEAR MR. WILLKIE:

"At the time of our conversation in June, I expressed the hope that the Tennessee Valley Authority and the Commonwealth and Southern Co. could work out a program that would result in the Tennessee Valley Authority exercising the function of generating and distributing power, under conditions that would be understood and recognized by both parties.

"The Tennessee Valley Authority is in process of working out its policies with reference to power and has not yet completed the formulation of a policy. In order to facilitate the work of the Authority, it has been found desirable to assign the various functions among the directors, though policies are to be decided by the Board as a whole. The execution of policies with reference to power have been assigned to Mr. David Lilienthal, and I suggest that you get in touch with him in reference to relations of your company with the Tennessee Valley Authority. In case you desire, meetings can also be arranged with the Board as a whole.

"Sincerely yours,

"ARTHUR E. MORGAN, "Chairman of the Board."

In conclusion, I believe that postponement of the formulation of a policy with reference to power, and a continuance of present methods of approaching municipalities who consider purchasing power from the Authority, is in effect the establishment of a policy, one that is contrary to that which the Administration had in mind in promoting the Tennessee Valley Authority bill in Congress, and one that may be contrary to the interests of the Tennessee Valley Authority. ARTHUR E. MORGAN.

To this memorandum Mr. Lilienthal replied by the following memorandum on August 16, 1933:

Memorandum in opposition to proposal of Chairman A. E. Morgan for territorial division agreement and cooperation between Tennessee Valley Authority and private utilities, submitted by David E. Lilienthal, director in charge of

power.

CONCLUSION

No agreement should be entered into with private utilities looking toward a wholesale division of territory whereby the Authority would agree to stay out of any area from which an application for Government power may be received, where the public interest and the economics of the situation call for such service.

REASONS

1. It is an unscientific proposal.-Such delineation of an area calls for a thorough knowledge of every phase of the business, community, and economic

life of the Southeast, and an understanding of all the complex factors of politics, personalities, family connections, local jealousies, prejudices, and a thousand other pieces of pertinent information. This information the private utilities through many years of operation in this area know intimately. For the Authority to sit down to negotiate a blanket territorial agreement at the very outset of its operation without being equally well advised would be manifestly an unscientific policy and an injustice to the public we represent.

2. Chairman Morgan at a board meeting on August 5 proposed, tentatively, the taking over by the Authority of a vast area including a large part of the State of Tennessee and parts of Mississippi, Alabama, Virginia, Georgia, and North Carolina. To buy out the power companies in such a vast area, on a basis (as Chairman Morgan urges) which gives dominant weight to the high price period plus "going value" (as proposed by Chairman Morgan) is wholly impractical and merely "bails out" the utilities at public expense. (An incorrect inference. A. E. M.)

It is urged that such an agreement be made very promptly and yet it is obvious that this Authority has not even a fraction of the necessary funds to consider such a proposal seriously. The investment in Tennessee alone is not far from $200,000,000. Our present source of power supply, even with Cove Creek added, would be totally inadequate and a large investment of generating equipment would have to be acquired.

The proposal is impracticable because it overlooks the untold difficulties of working out an agreement involving action by third parties, particularly where those third parties are governmental agencies, namely, municipalities. The chairman's latest proposal means that hundreds of communities involved would have to proceed to acquire their local distribution systems (this statement is incorrect. A. E. M.). Some of them are interested in doing so; others are not. Some few can finance the purchase; many cannot. The time required in carrying through these transactions would run into many years under the best circumstances. Public opinion on the subject of municipal ownership varies in various communities and at various times. The suggested agreement presupposes that in some undisclosed fashion the Authority can unify public opinion in hundreds of diverse communities. (My statement makes no such assumption. A. E. M.)

The chairman's suggestion that the transfer to public power be "for limited period, say 5 or 10 years," shows the impractical character of the idea. (This statement is incorrect. It is clear from my memorandum that I made no suggestion for transfer "for a limited period, say 5 or 10 years." A. E. M.) The cost itself of making the transfer, covering hundreds of millions of property and many agencies, would make such a short-time experiment prohibitive. The appraisals and legal proceedings alone would probably cost several millions of dollars. Five years is a short time even to accomplish the transfer in one large city, much less to test out a complicated business and social issue.

3. The proposal serves no public interest.-I am unable to see what public interest is served by the Authority's urging the private utilities to negotiate an agreement of such far-reaching implications on the very threshold of the Authority's activities. There is not the least suggestion in the statute or in any of President Roosevelt's utterances which requires such a policy. A policy of minimizing duplication does not require such a territorial agreement.

4. The proposal endangers the project.-As the chairman of the Board has pointed out, his proposal presupposes a desire by the private utilities “to cooperate" to carry out his proposal. Unless it would work to their advantage no reason for such “cooperation" is suggested. Every realistic person will agree that no group of business men would genuinely "cooperate" in the loss of a lucrative business.

The record and standards of the public utility industry, generally speaking, are such that all informed persons would immediately say that it is beyond any reasonable expectation that they would genuinely cooperate in losing their firm hold on so profitable a business in so large an area.

It is the worst kind of strategy to base one's policy of procedure upon a premise contrary to all past experience and ascertained facts. It is unneces sary to criticize the policies or the personalities in the public-utility industry and I have no inclination to do so. But the Authority would violate its public duty if it based its whole program upon the desire of the utilities to cooperate in a program which is directly contrary to their economic interests. This is painfully apparent when it is recalled that the private utilities, generally speaking, have maintained an antagonistic and litigious attitude toward those

governmental agencies which have been attempting to regulate them. This attitude is a matter of history and fact; why the Authority would expect to be treated differently there is no evidence to indicate.

While the Authority was spending months in negotiating an impractical agreement, not required by the public interest, upon an assumption of "cooperation" contrary to all experience and the evidence, the project itself would be exposed to grave danger at the hands of its enemies and the enemies of the President.

5. The proposal opposed by time-tested public men.-On July 21st, I wrote a letter to Chairman Morgan reviewing our differences in point of view respecting this proposal, and indicating my reasons. The issue being a public and not a private one, I indicated in that letter the necessity for our securing as much light as possible on the question, from public-minded men. Accordingly, I visited personally or submitted a memorandum to the following men: Senator George W. Norris.

Morris Llewelyn Cooke, appointed to the New York Power Authority by President Roosevelt.

Felix Frankfurter, of the Harvard Law School.

E. F. Scattergood, general manager of the Los Angeles Power Bureau. Chairman Frank R. McNinch, designated Chairman of the Federal Power Commission by President Roosevelt.

Senator Robert M. La Follette, Jr.

Every one of these men took the position that it would be a grave mistake for the Authority to try to negotiate a blanket agreement with private utilities and would result in severe and justified criticism.

A quotation from a letter from Mr. Morris Llewelyn Cooke, dated July 26th, follows:

"I have read and reread your memorandum dated July 21 with its enclosure. All my experience leads me to think that you have discussed this situation very gently, and that the position you take is thoroughly sound.

"You appear to be opposing a position which is all too frequently assumed by laymen in these matters, i. e., that public and private interests are on a parity rather than of a distinctly different order. Further, while you do not mention it or base your argument upon it, nevertheless the necessity for practicing strategy in this task is a part of your obligation. You, of course, recognize that if you are to accomplish the administrative purpose assigned to you as the result of a long-continued and successful legislative struggle, it will be only as you utilize every resource to defeat 57 varieties of machination which the bitter experience of the past teach us will be used by a Nation-wide, well-financed, and resourceful band of brothers. In the face of the record it would be criminal to waste public funds in trying the suggested experiment. You will gain nothing by attempting to reach any understanding with these people. Go ahead and do Uncle Sam's job without promising any private interests anything.

"I am wholly in agreement with the position you have taken and am so sure that the policy you are opposing will bring failure and essential disgrace to anyone who seeks to carry it out that further words are unnecessary. question you have posed is not debatable."

The

A quotation from a letter of July 29 from Felix Frankfurter: "The chairman's proposal is fraught with every kind of danger, is wholly unscientific in proposing commitments at this stage of the development, disregards past experience and the social purpose back of the legislation that created the Authority. Does he realize what a first-class row he is precipitating? Don't deviate from your position and be sure that no commitments whatever are made by your chairman even provisionally without prior consultation formally with the Board."

The comments of Senators Norris and La Follette, and of Chairman McNinch and Mr. Scattergood were oral. They were uniformly against any such commitment and against the policy which underlies such a commitment. I call attention to the fact that the two leading exponents, among public officials, of "cooperation" with private utilities have been Chairman Prendergast of the New York Public Service Commission and Chairman Smith of the Federal Power Commission.

Respectfully submitted,

KNOXVILLE, TENN., August 16, 1933.

(Signed) DAVID E. LILIENTHAL.