THE FEDERAL POWER COMMISSION SURVEY OF TENNESSEE VALLEY AUTHORITY "YARDSTICK" COMMUNITIES Prepared by Arthur E. Morgan for the Joint Congressional Committee on the Investigation of the Tennessee Valley Authority, December 1938 Facts concerning the Federal Power Commission survey of Tennessee Valley Authority "yardstick" communities have been substantially misrepresented to the committee. On May 26, 1938, Mr. Lilienthal testified as follows: 3. A third major charge which Arthur Morgan has leveled against the administration of the power activities of the Authority is that the public representations of the results, the financial results of the sale of power by the Authority and its contractors, the municipalities and the farmers cooperatives, are not honest. Arthur Morgan here yesterday contended that the Authority furnishes surreptitious subsidies to public agencies that purchase power from the Authority at wholesale. "Last summer the Federal Power Commission completed a survey dealing with this very problem. The Commission selected for its study three wholesale customers of the Authority which they regarded as representative, namely Tupelo, Miss.; Athens, Ala.; and Alcorn County Electric Power Association. The Commission sent a staff of engineers into the field to inventory and appraise the physical property. An accounting study was made of the books and accounts of these three customers. The report in two volumes is available to this committee, and will, I am sure, furnish a better basis of judgment as to the accuracy and honesty of our reports concerning the financial results in these communities than anything I could say or anything that Arthur Morgan has said. [Italics supplied.] "This study shows that these public agencies have earned large net profits while meeting all costs, including taxes, and while selling power at rates among the lowest in the country" (p. 448 of transcript of hearings). It is interesting to note that the three projects are not representative of Tennessee Valley Authority "yardstick" operations. Of about 30 "yardstick" towns and associations served by the Tennessee Valley Authority for a year or more, Tupelo and Alcorn County had the best financial records of all, and Athens was among the best, as indicated by recent Tennessee Valley Authority reports. The best communities and not representative communities were reported on. It is my understanding that the communities to be reported on by the Federal Power Commission were proposed and recommended by the Tennessee Valley Authority, so that the expression "which they regarded as representative" is doubly misleading. [Italics supplied.] I was not taken into Mr. Lilienthal's confidence in connection with the Power Commission survey, and was not notified when the survey was undertaken. I therefore wrote to Chairman McNinch of the Power Commission, asking how information was gained in the study concerning Tennessee Valley Authority expenditures. I wish to quote the following from a letter of Chairman McNinch of the Federal Power Commission, dated June 24. 1937: "You also inquire (questions 12 and 13) whether the Commission accepted the figures as to certain expenditures as reported by officials of the Tennessee Valley Authority or whether a detailed examination of the accounts of the Authority were made. I am advised by our staff that, while they examined in detail the accounts of the local distribution systems under investigation, the figures which were furnished in writing by responsible officials of the Tennessee Valley Authority were accepted as stated. This is the attitude which the Commission would have its staff adopt with reference to any coordinate branch of the Government. I am advised, however, that the figures in question are in substantial accord with the totals set forth in the annual reports of the Authority which I understand were published with the approval of your Board. * "Your other questions (numbers 1 to 9) related to promotional and other expenditures of the Tennessee Valley Authority which directly or indirectly may have benefited the three distribution systems under consideration, as well as other municipalities which may now or hereafter be served by Tennessee Valley Authority and in addition private utilities whose sales have been increased by the general activities of the Federal Government in the encouragement of increased use of electricity. Your questions are directed primarily to the extent to which such expenditures are or should be chargeable against the three systems covered by the report. This is, of course, a question which neither this Com mission nor its staff has any authority or obligation to determine [Italics supplied.] It is to be noted that the instructions of the Federal Power Commission for this study, dated July 8, 1936, included the following item: "Analysis of free services rendered to the distribution system by the Tennessee Valley Authority, the Electric Home and Farm Authority, or other governmental agencies." * In accord with the instructions, the Federal Power Commission, in fact, did endeavor to get the necessary information, to report on this matter of subsidies to the "yardstick" communities, but was not very successful. On September 15, 1936, Mr. Morse of the Commission's staff wrote to the Tennessee Valley Authority asking for certain specific data relative to Tennessee Valley Authority promotional costs, saying that information theretofore furnished was not adequate, and that without the data requested the Commission's staff "will not be able * * to prepare a report satisfactory to our Commission." Fragments of information were supplied, but in important and substantial respects this request for information never was complied with. In giving reasons why this information was not furnished as requested, the Tennessee Valley Authority wrote of "the virtual impossibility of keeping an accurate segregation of cost.” and stated that "it was almost impossible to arrive at any formula for allocat ing and recording costs which would not involve a disproportionate amount of time and money.' (Letter from Edward Falck to George H. Morse, October 23, 1936.) As a result, the Tennessee Valley Authority supplied the Federal Power Commission, not the data asked for, but its own conclusions. Under these conditions it is not surprising that the report of the Federal Power Commission in some respects is inadequate and misleading. In view of these facts, let me repeat two sentences from Mr. Lilienthal's testimony: "Arthur Morgan here yesterday contended that the Authority furnishes surreptitious subsidies to public agencies that purchase power from the Authority at wholesale. "Last summer the Federal Power Commission completed a survey dealing with this very problem." (Testimony, May 26, 1938, p. 448.) The fact is that in this respect the report of the Federal Power Commission is largely a restatement of the conclusions sent to it by the Tennessee Valley Authority. The Commission had at its command only the very information I have criticized. It made no independent study of this matter of subsidies. Some of the subsidies by the Tennessee Valley Authority to the "yardstick" communities were not in any way disclosed to the Federal Power Commission. Some were acknowledged in general, but only the conclusions of the Tennessee Valley Authority power department were made known to the Commission. The underlying data was not supplied. The Federal Power Commission, taking the partial data supplied concerning unpaid for services by the Tennessee Valley Authority to these "yardstick" communities, made estimates which are inaccurate and misleading. This inaccuracy may have been due to inaccurate information supplied by the Tennessee Valley Authority. Tennessee Valley Authority "yardstick" rates which have been nationally publicized are almost entirely those for domestic or home use of power. Of the promotional services of Tennessee Valley Authority, 75 or 80 percent, according to the director of promotion, are for increase of residential use. Taking only the gifts of services or subsidies disclosed to the Federal Power Commis sion, it develops that of all revenues received by the Tennessee Valley Authority for domestic power sold to these communities, it made a gift of 73 percent of that income in subsidies or unpaid for promotional services to those communities. Taking into account that the Tennessee Valley Authority sold this power for much less than cost, and that important subsidies were not disclosed to the Federal Power Commission, it is clear that at the time of the report by the Federal Power Commission all power supposedly sold to these "yardstick" communities was in fact given away by the Tennessee Valley Authority. If a complete accounting should be made it probably would be found that the Federal Government at that time not only had given away all power used for domestic purposes in the communities reported on, but in addition had paid those communities a large sum for taking that power. The following is an analysis of the relation between promotional expense and income from domestic service at Tupelo, Athens, and Alcorn County, from data taken from the Federal Power Commission's "Report on the Survey of Electric Systems in the Cities of Tupelo, Miss., Athens, Ala., and Alcorn County, Miss." dated January 11, 1937. The first step is a determination of the approximate amount of revenue to the Tennessee Valley Authority resulting from residential consumption in the three systems mentioned during the fiscal years 1934, 1935, and 1936. The computations are summarized in the following table: (5) Domestic consumption in percent of total (6) Revenue to Tennessee Valley Authority from domestic consumption=(4) X(5) . $12, 436.53 $772.63 $1, 544. 20 40, 230. 48 12, 527.06 22, 700. 72 47, 281. 51 16, 718. 38 36, 161. 53 99, 948. 52 30, 018. 07 60, 406. 45 1 Page 12 of the Federal Power Commission's report. • Page 4 of the Federal Power Commission's report. Based on data in the Federal Power Commission report it therefore appears that the total income to the Tennessee Valley Authority for power sales for domestic purposes in Tupelo, Athens, and Alcorn County in the fiscal years 1935 and 1936 was approximately $56,000. This does not include the very small amount of power sold in March, April, May, and June, 1934, for which the record is not at hand. The total sales of Tennessee Valley Authority power to these three customers for the years 1935 and 1936 was 63 percent of all sales to municipalities and associations during those years. (See the monthly operating and construction report of the Department of Electricity for February 1936, p. 48 and also for June 1936, p. 9.) If the same proportions hold for the entire sales to municipalities and associations it may fairly be assumed that at least 60 percent of all promotion of domestic sales should be charged to these three customers reported on. The Federal Power Commission report lists certain promotional expense incurred by Tennessee Valley Authority, no part of which was charged to Tupelo, Athens, or Alcorn County. These figures are summarized on page 22 of the report as follows: Tennessee Valley Authority Division of Electric Development--- $106, 243. 18 Total___ 5,000.00 142, 867. 33 254, 110. 51 The director of promotion of the Tennessee Valley Authority has stated that of all promotional expense, 75 or 80 percent was for residential and farm promotion, and the remainder was for commercial and industrial purposes. This agrees with the estimate of Mr. Samuel Ferguson of Hartford, Conn., as to the distribution of his company's promotional expense, even in a highly industrial area. Also, this percentage corresponds with usual practice. It also appears that it is general practice of utility companies, and generally prescribed by utility commissions, that all promotional expense be charged against current operation. Since the Federal Power Commission report deals with a period of more than 2 years, it includes some distribution of such expense over more than 1 year. On pages 24 and 25 of the report an estimate of the promotional expense chargeable against Tupelo, Athens, and Alcorn County has been derived. This has been done by first making certain assumptions as to the part of the total cost of the Division of Electrical Development which should be charged to promotional expense. That part is then prorated in relation to the total revenue obtained from the several systems. The resulting break-down of the above item of $106,243.18 gives the following charges against the three systems under consideration: Dividing the above total of $254,110.51 in the same proportion as that derived for the item of $106,243.18, and if certain auditing expenses shown on page 26 of the report are added, the result is as follows: 9.683 Tupelo: 9.95 percent of $254,110.51 equals $25,284 plus $1,961 equals--- $27,245 Total____ 54, 393 Assuming that 75 percent of promotional expense should be charged against domestic power, the resulting amount which could be charged against Tupelo, Athens, and Alcorn County is 75 percent of $54,393 equals $40,795. Thus it appears that the amount of $40,795 should be charged against domestic power, which has given a total revenue of approximately $56,000. On this basis the equivalent of 73 percent of all revenue received by the Authority for domestic power from these three systems was spent by Tennessee Valley Authority and Electric Home and Farm Authority for promotional purposes alone. This does not take into consideration some small known expenditures made by the systems directly, and the relatively large promotional expenses not reported to the Federal Power Commission. In considering the foregoing data the significant point to be carried in mind is the relation between promotional expense and the increase in revenue from domestic consumption rather than the total revenue from the same source, On page 47 of the report it is stated that in Tupelo residential kilowatt-hour sales increased 53.93 percent in 1936 as compared with 1935. The corresponding figure for Athens is given on page 55 as 59.77 percent. On page 98 the corresponding figure for Alcorn is given as 86.44 percent. It is evident that if the figures above shown for promotional expense are correct, the expenditure for promotion reported to the Federal Power Commission has greatly exceeded the increase in revenue to Tennessee Valley Authority during those years. Furthermore, numerous other charges which are not included properly should be included in the item of promotional expense. Some of these are: 1. Further expenditures by Electric Home and Farm Authority. 2. Part of the expense (about $30,000) of installing an auditing system for the customers. 3. A charge for consulting services. 4. A part of the Tennessee Valley Authority general information and publicity expense. 5. A part of the Tennessee Valley Authority general administration expense. 6. Part of the administration costs of the Division of Electricity. 7. Suitable charge for field auditing. 8. The amount which the Tennessee Valley Authority lost by selling its power below production cost. Inclusion of a proper portion of these items would show that the proportional expense for residential and farm use has been much greater than the total reve nue received by the Tennessee Valley Authority for power sold for the use. Thus, a fair allocation of only the promotion costs reported by the Tennessee Valley Authority to the Federal Power Commission shows that of the total income to the Tennessee Valley Authority from residential power, the Tennessee Valley Authority, contributed three-quarters of that revenue to those communities for promotion purposes. This does not take into account the large promotional expense not reported, nor does it take into account the facts that the Tennessee Valley Authority sold this power to the communities at less than cost, and that therefore no part of this service was included in the wholesale cost of power. It is by such subsidies, many of which are hopelessly buried in Tennessee Valley Authority accounts and were never reported as such, that favorable showings have been made in these "yardstick" communities. The chance to make a good showing in these "yardstick" communities depended on a very quick increase of power consumption to make up for loss of revenue due to great and sudden reduction in rates. If the increase had not come very quickly, the loss in income would have made such reduction in rates far more impracticable. Thus this great subsidy for load building purposes helped to hide the fact of the financial nonfeasibility of the type of rate reduction practiced by the Tennessee Valley Authority. It was made to seem feasible largely by these hidden subsidies. Because of the possible claim that the Federal Power Commission study represented only a preliminary stage of the Tennessee Valley Authority program, the following comparison is interesting. During the 3 years 1936, 1937, 1938 the Tennessee Valley Authority collected revenue from the "yardstick" communities in Mississippi amounting to $587,629. About $246,009 was for power sold by Tennessee Valley Authority to "yardstick" communities for residential customers. Taking only those expenses which can be definitely located, it is estimated that Tennessee Valley Authority spent in these Mississippi "yardstick" communities $94,198 for residential load building purposes. This is 38.3 percent of the revenue from residential use. During these 3 years the increase in revenue to Tennessee Valley Authority from increased use by residential customers equaled $71,866, while the load building expense was $94,198 or the expenditure by Tennessee Valley Authority exceeds increased revenue by 31 percent. Therefore, it was not only in the early days covered by the Federal Power Commission report that increased business has been secured by subsidies, and at excessive cost. This condition is indicated in the following table: Estimate of residential revenue received by Tennessee Valley Authority from "yardstick" communities in Mississippi as compared with estimated expenditures by Tennessee Valley Authority for load building in these "yardstick" communities (A) Total revenue received by Tennessee Valley Authority from sales to "yardstick" communities in Mississippi [schedule E-4, pt. V] ' (B) Revenue from residential sales in percentage of revenue from total sales in these "yardstick" communities (percent) (C) Estimated revenue to Tennessee Valley Authority from residential sales in these "yardstick" communities (A times B). (D) Estimated load building expense of Tennessee Valley Authority for residential customers in these "yardstick" communities (pt. V1. (E) Percentage which estimated load building expense for residential customers is to estimated revenue Tennessee Valley Authority received from residential customers in these "yardstick" communities (D divided by C) (percent).. (F) Yearly increases in estimated residential revenue to (G) Estimated load building expense of Tennessee Valley ! These references are to "The Power Operations of the Tennessee Valley Authority" by Arthur E. Morgan. To obtain this figure, residential revenue to Tennessee Valley Authority from these communities during 1934-35 was estimated at 40 percent of the total revenue received (40 percent times $75,792 equals $30,317; $59,324 minus $30,317 equals $29,007. If the increases in revenue were adjusted for those increases due to service to new operations where previous service had already been furnished, and due to transfer of customers from Mississippi power district to "yardstick" communities in 1936 this percentage would be considerably larger. |