The Federal Government usually subsidizes completely whatever benefits occur in Government projects classed as "recreational," or for fish and wildlife, or pollution abatement.

With respect to navigation and certain types of flood control, local contributions average only a few percent of Federal expenditures. No contribution is required from local sources for flood-control dams and storage reservoirs.

A study was made of a large sample of flood-control projects representing 75 percent of cost of $1.4 billion and listed as currently active by the Corps of Engineers. The check showed that for active projects in the categories that call for local contributions, the average of such contributions was about 12.6 percent of total costs. For all active flood-control projects of all kinds, a total of $3.18 billion, the local contributions total 6.1 percent.

For navigation programs, cash contributions of local beneficiaries total about 2 percent of the total costs of projects for which the Federal Government appropriated $2.5 billion.

An analysis of watershed flood-control projects of the Department of Agriculture shows that for a total program of 212 completed dams, the Federal investment will total 98.8 percent of construction costs.

From an analysis of the projects studied by the task force it is fair to conclude that the Federal Government has planned, constructed, and paid for water, resource and power-development projects which are economically unsound and, hence, waste the national wealth. It is quite evident that project costs are frequently underestimated, that benefits advanced by various Federal agencies as justification for projects are often exaggerated; that unsupported and unsupportable claims are made for indirect benefits; and that benefits produced by economically sound features are used to compensate for uneconomical features, either by combining purposes of multiple-purpose structures or by combining projects, or both, in a single economic evaluation. In some instances, projects have been recommended and authorized without economic justification of any kind.

Flagrant examples of underestimation of costs are cited in the task-force report. But this is only part of the problem. Overestimating benefits, which is less easy to detect, is the other. The evaluation of so-called indirect benefits can, in many instances, be properly described as pure fantasy. When the skilled evaluator of secondary benefits hits his stride the sky is the limit, and he finds no difficulty in arriving at evaluations for mental, moral, physical, intellectual, psychic, and social satisfactions which will be derived by individuals and groups from the project he is justifying, nor does he have any difficulty in assigning specific dollar values to each of these so-called benefits.

The task-force report cites chapter and verse of flagrant examples of such overestimations of benefits. I shall not attempt to repeat them here. However, there is ample evidence to warrant the conclusion that the desire of rival Federal agencies to enhance their prestige by construction of large projects, plus the fact that congressional committees often accept the agencies' economic evaluations without thorough scrutiny, have resulted in the construction of projects which are of little worth to the Nation and, in some instances, even to the local communities.

Another conclusion which might well be drawn from the data compiled by the task groups is that Federal water resource and power projects which produce, or could produce, revenues are not operated according to sound business principles and do not produce a return fairly related to their value.

Even though capable of fully paying their way, all Federal power projects now contain some subsidy which is paid for by the taxpayers of the country and redounds solely to the benefit of local consumers; similarly, for other waterresource projects, such as flood-damage abatement, river improvements, and reclamation. All beneficaries should make contributions commensurate with the benefits they receive. There is no other way to achieve an equitable adjustment between benefits received by the few and costs paid by the many.

The task force devoted considerable time to the study of the Federal Government's organization for carrying out water resource and power projects. There is every indication that there is a lack of coordination which fosters competition among the agencies, causes controversy, confusion, duplication, and waste, and encourages bureaucratic ambitions. Nor is there at present any provision for effective procedures for accomplishing an independent and objective review of water resource and power projects which are proposed by the various agencies. It is quite obvious that the two most important organizational matters now are, first, effective coordination and, second, independent review. The task force has made specific recommendations relative to both of these matters.

It is obviously impossible to effectively condense the content of some 1,800 pages of data in a brief commentary of this kind. I recommend to those who are interested in this vital subject that they obtain a copy of the task-force report, from which they will be able to cull detailed supporting data on the findings and recommendations cited by the task force.

The last part of my assignment has to do with the methods of implementing the Hoover Commission recommendations to the Congress.

I do not propose to enter upon a detailed discussion of this subject. I invite your attention to the statement I made previously; namely, that the second Hoover Commission is operating in the field of policy and that when one enters the field of Government policy, he is inevitably involved in politics. Because of the reluctance of political administrators to deprive anyone of a favor which he now enjoys, it is my firm conviction that the only way the reform measures recommended by the Hoover Commission can be made effective is for the citizens of this country to get behind them and to make their voices heard in the halls of Congress, through the medium of their elected representatives.

Many years ago I was told by an old-time Member of the United States House of Representatives that his formula for a successful political career was to vote for every appropriation measure and against every tax measure. Obviously, his decisions were based on purly political judgments. When purely economic judgments are to be made, it appears that it will be necessary for the electorate to make them and to become vocal in their insistence that action be taken by their legislative representatives.

I am sure you will find among the Hoover Commission recommendations some with which you are not in agreement and which you would not wish to support. This is inevitable. The Hoover Commission is a bipartisan organization, designed to represent both political parties. I believe it is fair to state that, in many instances, the Commission's recommendations represent compromises between sound economic judgments and political expediencies. When such compromises are made, the end result is usually not entirely satisfactory to either party. Í am sure that some of the Commission recommendations with respect to the work of our task force will be such that I cannot support them. I am equally sure that, on balance, the total of the Hoover Commission recommendations, if made effective, would constitute a great advantage to the Nation.

It is my firm intention to do all in my power to mobilize effective public support for those recommendations of the Hoover Commission with which I agree. If this were done by all citizens, the result would be reflected in remedial action by the Congress. I, therefore, urge you to consider the recommendations carefully and to support those which the dictates of your conscience indicate are acceptable to you.

ADDRESS BY JOHN JIRGAL, CHAIRMAN OF TASK GROUP ON POWER GENERATION AND DISTRIBUTION, HOOVER COMMISSION TASK FORCE ON WATER RESOURCES AND POWER, TO AMERICAN SOCIETY OF CIVIL ENGINEERS' CONVENTION, ST. LOUIS, Mo., JUNE 15, 1955

Mr. Chairman, ladies and gentlemen, the subject of my talk today is the Federal Government's largest and most rapidly expanding business venture: the generation and sale of electric energy.

As Admiral Moreell has told you, I was chairman of his Task Group on Power Generation and Distribution. The other members of this group were C. L. Andrews, of the C. L. Andrews Cotton Co., of Memphis, Tenn.; A. C. Mattei, president of the Honolulu Oil Corp., of San Francisco, Calif.; J. W. Reavis, an attorney of Jones, Day, Cockley & Reavis, Cleveland, Ohio; Judge Robert W. Sawyer, former president of the National Reclamation Association and former editor and publisher of Bend, Oreg.; and W. D. Shannon, consulting engineer of Seattle, Wash.

As you will note, this is a representative group of business and professional men, none of whom is connected with the operation or management of an electric utility either privately or publicly owned.

The admiral assigned to us the job of examining the Federal Government's power activities in the light of the aims set out by Congress in establishing the Hoover Commission. These aims were to see what could be done to promote economy, efficiency, and improved service in the public business. We were to consider particularly if any power activities not necessary to the efficient conduct of the Government could be abolished and if any nonessential activities in

this field are competitive with private enterprise and could be eliminated for that

reason.

In view of the scope of the Federal Government's power activities, our task involved an enormous amount of work. We were able to complete our extensive investigation only because of the able and conscientious efforts of our hardworking staff, headed by Frank L. Weaver, one of your vice presidents, and George G. Adkins, both competent engineers loaned to us by the Federal Power Commission. We also had the benefit of engineering advice from Col. A. B. Roberts, of Cleveland, Ohio, a member of the task force's advisory board and consultant to the first Hoover Commission, and of the valuable consulting services of Walter J. Milde, an attorney of Jones, Day, Cockley & Reavis, Cleveland, Ohio. The results of our studies and the recommendations we made were set forth in a 600-page report to Admiral Moreell's task force and transmitted as a part of the task-force report to the Hoover Commission. Since the Commission has not yet acted, and the various reports to it have not been published, I am not free to summarize our report for you but I can state the facts we found in the public records and outline the problems these facts present. I will also tell you what I, as an individual, think about the solution to some of these problems.

If I had appeared before you just a little over 20 years ago, I could not have talked to you about my present subject. In 1933 the Federal Government owned and operated less than 1 percent of the total utility plant capacity in the United States. By 1953 its proportion had increased to about 121⁄2 percent and by 1960 it will be about 16 percent. About 78 percent of the total utility capacity was in private utility hands in 1953 and somewhat less than 10 percent was owned by non-Federal public bodies, including cooperatives.

At the end of 1953 Federal generating plants had a capacity of about 11.5 million kilowatts. These utility plants and their transmission systems cost the Federal taxpayers $2.3 billion. Upon completion of the Federal plants now under construction and presently authorized, the total Federal generating capacity will be close to 35 million kilowatts-3 times the 1953 capacity. They will have cost the Federal taxpayers almost $10 billion to construct. There are further projects which have been proposed but not authorized which, if undertaken, will run into additional millions of kilowatts and billions of dollars.

The Tennessee Valley Authority alone operates the largest power-generating system in the United States. On the basis of present plans TVA will, by 1960, have an estimated 8 percent of all of the then utility plant capacity in the United States. Its power investment, including transmission, will be over $3 billion when projects scheduled to commence prior to 1960 are completed. Its generating capacity will then be over 131⁄2 million kilowatts. About 75 percent of that capacity will be steam-electric. TVA deliveries to the Atomic Energy Commission will shortly be about 50 percent of its generation but even without this load TVA will, on the basis of present plans, operate the largest power-generating and transmission system in this country for many years to come.

The Columbia River Basin power properties of the Federal Government make up the second largest Federal system. It also will have an investment of over $3 billion when the plants under construction and authorized have been completed. Its generating capacity will then be over 11 million kilowatts.

These two Federal systems alone will have over 70 percent of the capacity and over 65 percent of the investment of the entire Federal power undertaking.

The other large Federal systems are the Colorado River development, which includes the Hoover, Parker, and Davis Dams, the Central Valley project in California and the Missouri River Valley projects. Together these 5 Federal systems will, when the presently authorized construction is completed, make up about 90 percent of the entire Federal power capacity and generation.

Let it be noted that these five Federal power systems are in a few river basins. Hydroelectric power is unequally distributed throughout the country. Over 60 percent is in the Mountain and Pacific States; over 40 percent is in the Pacific Northwest States of Washington, Oregon, Idaho, and Montana. There are no Federal powerplants in New England or the Middle Atlantic States, and none of importance in the East-Northcentral States. As an example of this unequal distribution, the States of New York, New Jersey, and Pennsylvania, which do not have a single Federal power project, have only 7 percent of the Nation's potential hydroelectric power but account for 29 percent of the Federal income taxes paid, have 20 percent of the population, and presently use 19 percent of all the electricity sold.

The billions invested in Federal power to which I have referred do not include the $2.7 billion of Federal loans approved by the Rural Electrification Adminis

tration. These additional billions have furnished over 90 percent of the investment in rural lines, powerplants, and transmission systems made by REA's borrowers.

In view of this large investment it is obvious that Federal power activities are big business. Actually the Federal taxpayers will shortly after 1960 have invested in this large-scale commercial undertaking nearly as much money as security holders have invested in the American Telephone & Telegraph Co. system and from twice to several times as much as they have invested in General Motors Corp., Standard Oil Company of New Jersey, the Du Pont chemical undertaking, or the Pennsylvania Railroad. The Federal investment will then also be several times that of any of the larger privately owned electric systems. Is this Federal power business being run economically and efficiently? Is all of this business necessary? Is any of this business a nonessential activity competitive with private enterprise?

First, let me take up economy and efficiency.

As to engineering work and physical operations it appeared to our group that these were in keeping with the best practices followed by the electric industry generally. We were impressed with the competence of the present field supervisory forces with which we came in contact.

But sound construction, engineering, and proper physical operations are only a small part of overall economy and efficiency in any power business. A welldesigned plant, competently operated, will prove uneconomical and inefficient if the power it generates and transmits is not or cannot be sold at prices which cover the full costs of operation including a fair return on the investment.

Most federally generated power is marketed by the Department of the Interior through four agencies: the Bureau of Reclamation, which disposes of the power generated at the Hoover-Parker-Davis Dams, at the Central Valley project in California and at a number of the smaller and more isolated plants connected with irrigation projects; the Bonneville Power Administration, which sells the Columbia River Basin output; and the Southeastern and Southwestern Power Administrations which market the generation of certain powerplants built in connection with flood-control projects in the southeastern and southwestern portions of the United States. The TVA markets its own power directly.

As engineers, you are familiar with the fact that most of these Federal power-generating plants were constructed as a part of multiple-purpose projects, the primary object, either expressed or implied, being to improve navigation, prevent floods or provide irrigation, or some combination of these. Power development was to be incidental to these main objectives. Since the greater share of the cost of the other phases of these projects were considered to be nonreimbursible, it would seem logical to have sold this surplus product for what it was fairly worth. In this way, the earnings from power sales would have reduced, to the maximum extent, the cost of the entire project and thus relieve the Federal taxpayers of some part of their burden.

Two main Federal policies directly contrary to this concept were adopted, however, and were given effect either by way of expressed statutory provision or administrative interpretation. They were:

(1) That the power was to be sold at the lowest possible rate which would promote its most widespread use, and

(2) That preference in the disposition of the power was to be given to States, municipalities, rural cooperatives and public bodies, generally. No precise standards for fixing rates were provided in any of the statutes. The statutory directions were very general and indefinite. Rates were to be fixed by the agencies so that the project would be "self-supporting and self-liquidating" or at the lowest possible rates which would promote widespread use. only one statute, the Flood Control Act of 1944, were the rates to be fixed at the lowest possible amount consistent with sound business principles, and in this case the latter half of this requirement was nullified by administrative interpretation.

In

In some statutes an attempt was made to set up cost standards for fixing rates but in all of them important elements were omitted. Only operating and maintenance expenses, which are a very minor portion of the total cost, were provided for uniformly in those statutes where rate standards were established. In some cases, it was specified that in addition amortization of the investment be provided for, but no mention was made of interest and in other cases the reverse was true, i. e., interest was to be provided for but amortization was not mentioned. Only in the case of the Bonneville Power Administration has

an attempt been made by any agency to include in expenses the administrative and supervisory charges incurred by other governmental agencies for the benefit of these power systems.

In none of the statutes dealing with ratemaking is specific provision made for Federal income taxes. Only in the case of TVA is there a separate statutory In TVA provision for the payment of a certain amount in lieu of local taxes. the payment of local taxes was designed to protect local governments from loss of revenues formerly received from taxpaying private utilities whose property TVA had acquired. There was no thought of paying local taxes on property which TVA had built or would build.

In the case of the Hoover Dam project the original statute apportioned the profit from the sales of power at competitive rates to the States of Arizona and Nevada and to the Colorado River Dam fund (a Federal fund) and when the rates were lowered by statute in 1940 these States and the fund were given certain specified "in lieu" payments of lump-sum amounts to compensate them for the change in the rate formula. These "in lieu" payments can be considered as a partial offset to taxes, but they are in no way comparable with what a private utility company would pay if it owned and operated the same property.

So what we have had up to now is a very large Federal power business, involving the investment of billions of dollars, with Congress in effect acting as a board of directors without, however, establishing a definite policy as to the price to be charged for the products of that business or even seeing to it that the prices charged cover fully all of the costs incurred in their production.

It is always easy in any business-and popular with the customers-to sell a product for less than it is worth and less than it actually costs to produce it. The various Federal power agencies, therefore, have found it easy to adopt this low-rate philosophy.

Their concept of cost seems to be that it includes any item of expense specifically provided for by statute or involving an actual cash cutlay, as, for instance, payroll or fuel payments. Under this concept, the payment of taxes not being specifically provided for by statute is not recognized either for ratemaking or annual accounting purposes. Similarly, if, under some statutory provision, interest is not actually paid, it need not be recognized in the accounts. The TVA, for instance, pays only a relatively nominal amount of interest-$679,439 in fiscal 1954-even though its present net power investment is nearly $1 billion. This, at a 3 percent rate, would call for annual interest payments of upward of $30 million.

The result of all this is that Federal power is sold at less than it is fairly worth. Using fair power values in the various areas of the country where the Federal systems operate, we find that in fiscal 1953, for example, the Government sold the power it generated for $110 million to $130 million less than it was really worth. Unless present rate policies change, when presently contemplated projects are completed, this annual subsidy to consumers of Federal power could amount to $400 million a year.

Personally, I have never been able to see why the Federal Government, if it engages in any business, should sell its products for less than they are fairly worth. This is not a new idea. The Federal Government itself adopted this policy when it built its first large-scale power project-the Hoover Dam. It should never have abandoned it. No stockholder of a private company would stand for long selling power on any other basis. In the Federal power business the Federal taxpayers are the stockholders. They have supplied all the money. They have a right to demand that this price policy be adopted.

It is often contended that the rates for Federal power should, in addition to covering other cost elements, provide as a return on investment only interest at the rate paid by the Government. I do not share this view, especially where the Government enters a field which is competitive with private industry. But even on this basis, using a long-term interest rate of 3 percent computing Federal, State, and local taxes on the basis of payments made by nongovernmental producers on production of an equivalent amount of energy the Federal power revenues during fiscal 1953 were $75 million below the amount required to recover costs according to this standard. Of the Federal power activities prior to June 30, 1953, operations failed to recover these costs by over $330 million. There can be no question that this deficiency-a subsidy to users of Federal powerhad to be made up by Federal taxpayers.

Now it would also be logical to assume that the Federal Government, having built these hydroelectric powerplants as incidental to the main objectives of