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improving navigation, preventing floods, or irrigating land, would have contracted to sell power only up to capacity of the hydroelectric plants and on the basis that there would be variations in the output resulting from fluctuations in streamflow. This, however, has not happened. The TVA, for instance, requires all of its regular utility customers to take their entire supply from its facilities. This policy, in effect, creates an obligation on TVA to build all the generating facilities ever needed in an 80,000 square mile area which it now supplies. The result is that TVA has built large steam plants and extensive transmission systems and its distributors have no generating facilities of their own. Since TVA has, for all practical purposes, already exhausted all of its hydroelectric possibilities, the only way it can continue to meet the expanding needs of its distributors is to build more steam plants, as it has been and is doing. Much the same undertaking of a permanent utility obligation has occurred in the Pacific Northwest. In 1946 a Department of the Interior brochure pointed out that the Federal Government's power activities had provided the Pacific Northwest with very low-cost hydroelectric power. It went on to say, and I quote:

"This, in turn, has made it impractical and uneconomical, with some exceptions, for electric utilities, both public and private, within the region to develop additional electric generation in small plants. As a result, the Federal Government today has a public utility responsibility for meeting the additional power needs of the region. The program of the Federal Government has, with minor exceptions, become the single source from which all Federal power needs of the region must so far as possible be met."

I think you will agree with me that undertaking to supply power at less than cost to a large area of the country is uneconomic and can only result in a constantly expanding Federal power business with constantly increasing calls on the taxpayers for funds to pay for the necessary facilities.

The second aspect of the Federal Government's power marketing policy is concerned with the preference of one class of customers over another. A special study of the history of this preference policy was undertaken as a part of our investigation. This study showed that the preference policy had its beginnings with the passage of the Reclamation Acts of 1902 and 1906, a period during which the conservation of natural resources was a national issue. The idea in the beginning was that the resources of the Nation should be developed and utilized for the benefit of all the people. Since electric utilities were regarded at the time as monopolies with no restriction on the rates they could charge the consumer, it was concluded that the only way to insure that the benefits of developing these power resources would flow down to the ultimate consumer was to give first call to local public bodies. These public bodies were assumed not to be interested in making a profit on the transactions. Because of the absence of Federal activity in this field during the period, there were few statutes dealing with marketing from Federal power projects between 1906 and the commencement of Hoover Dam construction in 1928, but the Boulder Canyon Act covering the later project and the legislation covering the extensive developments from 1933 to date consistently carried forward this preference policy. This same preference policy was also incorporated in the licensing provisions of the Federal Water Power Act of 1920, which required that public bodies should have first call over private companies in the construction on navigable streams of dams for power purposes.

Not only were public bodies and cooperatives given preference to all federally generated power, but the statutes covering the principal projects also provided that power already contracted for by private utilities could on relatively short notice be withdrawn and transferred to these preference customers, if it were necessary to meet their requirements.

In the administration of the statutes the Department of the Interior until very recently took the position that it was under mandate, not only to contract with public bodies and cooperatives on a voluntary basis, but to seek them out and to actively promote their establishment.

As a result of this former Department of the Interior policy a large number of public utility districts took over the properties and markets of private utilities in the Columbia Basin area. In the 7-State TVA area, except for 2 small privately owned distribution properties, the entire retail distribution passed into the hands of municipalities and cooperatives.

Like so many Government policies which are established under a certain set of circumstances, this preference policy was continued long after the circumstances had changed. It will be recalled that at the commencement of this preference policy there was no regulation of electric rates and no Federal income taxes.

Regulation of public utility rates was first undertaken in two States in 1907, and it was provided for progressively by other States thereafter. It did not become fully effective until Congress, in 1935, gave the Federal Power Commission the power to regulate interstate electric rates and the Securities and Exchange Commission the right to regulate and dissolve holding companies.

This regulation of electric utilities recognized the monopolistic character of their operations. The standards of ratemaking adopted by the regulatory commissions were designed to bring about the same results as would obtain were competitive forces fully operating in this field. In other words, when electric rate regulation became fully effective, as it now is, the ability of electric utilities to fix rates without restriction was ended and the original need for the preference clause disappeared.

The Federal income-tax law was passed in 1913 and the first tax rates were nominal, the highest rate up to the commencement of World War II being 19 percent, while today the corporate tax rate is 52 percent. State and local tax rates have also advanced substantially during this period. They are about twice as high as they were before the war.

As you know, these local public bodies are themselves exempt from all Federal taxes including income taxes, and the income from their securities to the holders thereof is also exempt from Federal income taxes. The latter exemption results in lower financing costs than those met by private companies, the income from whose securities are fully taxable to a large majority of the holders. Accordingly these public bodies already have an inherent advantage over private companies. Thus when the preference policy was first adopted there was very little difference between the tax burdens of privately owned and publicly owned utilities and it made relatively much less difference if taxes were not considered as an element of cost in fixing rates.

Today, however, the cost of Federal power can be 35 to 40 percent lower than the cost of privately sold power if corporation taxes and taxes on the income from securities necessary to finance these projects are not taken into account. For local public bodies this tax advantage is also substantially as great. So we have an entirely different tax situation than when the preference policy was initiated and its impact on power costs and rates cannot be ignored.

Now what have been the results of the enforcement of this preference policy? Starting in 1946 when all of the principal Federal projects were in operation, the preference customers took 38.3 percent of the power available to nonFederal users. This ratio steadily increased until in 1953 it was 52.2 percent. Meanwhile the privately owned utilities in 1946 received 33.3 percent of all the salable power from these projects and in 1953, 18.5 percent, or only about onehalf the relative amount received in the earlier year. The Federal industrial customers, mostly aluminum and electrochemical, received relatively the same amount in each year (28.4 percent as against 29.3 percent).

The trend toward increasing of the supply to preference users has been accelerated in recent years. For instance, in the case of the important Bonneville Administration no firm power whatsoever will be available to privately owned utilities in the Pacific Northwest after 1960 unless Congress authorizes additional projects. In 1953 privately owned utilities received 33.3 percent of all power generated. In the case of the Central Valley project, which until recently sold 95 percent of its output to California private utilities, from now on practically all salable firm power will be delivered to preference customers, leaving the California private utilities with only the secondary power which such preference customers do not elect to take.

Ultimately, of course, under present practices 100 percent of federally generated power will go to preference customers. This preference policy in effect makes any consumer of a privately owned utility a second-class citizen so far as Federal power is concerned. The company from which he buys power is denied Federal power. His neighbor across the road or in the next town served by a cooperative or a municipality gets power for less than true cost and he, in his electric rate, pays local, State, and Federal taxes in a greater amount because his neighbor pays nothing toward these ends.

A dramatic illustration of all this occurs in the Pacific Northwest. In 1953 power users in the State of Washington, in which there are numerous preference customers, received almost 85 percent of the Federal power produced by the Columbia River projects and power users in the State of Oregon, where private power enterprise in electric distribution is more prevalent, received less than 15 percent.

Gentlemen, it is time to get back to the original intent of the preference policy and that is to eliminate the possibility of any markup in the price of Federal power on the resale of the same by the distributor. This can easily be accom plished through rate regulation or by contract and the policy will be much more effective than it now is.

There are many other inequities, inadequacies, and faulty practices in the marketing of federally generated power but time will not permit me to go into them, Failure on the part of the Federal Government to recognize taxes as an element of power cost and rates, coupled with congressional direction to sell preferentially to consumers which are themselves exempt from these levies, can only result in driving out ultimately any private capital, which must assume those tax burdens-large and important as they are. There is no net financial gain to the Nation in following out the present policy because the total cost of producing the power is not changed. The cost is merely being divided into two parts instead of one. One part is borne by the beneficiary of the power in his rates and the other is shifted to the general taxpayers, who in most cases are not the beneficiary. This useless financial effort will, however, if followed to its logical conclusion, destroy private initiative in the power field, and it is not unlikely that it will also confiscate as well, indirectly perhaps, private investments already made.

I believe that thoughtful men, with the overall good of the Nation in mind, will not permit these marketing policies to continue.

Let us consider next whether all of this Federal power business is necessary to the efficient conduct of the Federal Government. Or is some or all of it a nonessential activity competitive with private enterprise which could be eliminated?

I suppose there will always be debate as to whether, and as to the extent, the Federal Government should have gone into the large scale power business in the past. The past interests us only to the extent that the same valid conditions and circumstances exist today which, allegedly, may have once justified Federal entry into the power field.

It has been contended that Government activity in this business was necessary because there was large-scale unemployment; the needs of defense had to be satisfied; the Atomic Energy Commission needed large blocks of power; the hydro developments in connection with multiple-purpose projects were too large for private financing; the private utilities because of overcapitalization and faulty financial structures could not construct all the property that was needed; adequate service was not supplied to the rural areas; electric rates were too high to promote widespread use.

Whatever the situation may have been in the past, there is presently no unemployment problem and there has been none in the last 15 years, there is no world war calling for emergency plant construction for defense purposes, private utilities are contributing to the extensive requirements of the Atomic Energy Commission about as much energy as the Federal agencies themselves are contributing, This is being done by entirely new plants already built or in the process of construction and financed entirely by private capital.

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Large accumulated savings in the hands of private citizens and institutions now enable both private companies and non-Federal public bodies to obtain ample capital for the building of powerplants, toll bridges, toll roads, and other revenueproducing property. In the 13 years to 1953 privately owned electric companies have added $13.2 billion to their investments in properties, a sum $11 billions in excess of the total Federal investment to June 30, 1953. In 1953 alone these companies invested $2.6 billion, or more than the present Federal total. Local public bodies have invested to date over $2 billion in electric properties. These private and public bodies are able and willing to construct all necessary generating facilities.

The Securities and Exchange Commission has dissolved all unnecessary holding companies and sound financial structures prevail throughout the electric utility field. A study of the average rate of return earned by private utilities during recent years shows that it is practically the same as the average rate of return which commissions and courts have decided is necessary to attract capital. The rate level, therefore, has been reasonable.

If there has been any neglect of rural electric development in the past, it does not exist today. REA and the non-Federal utilities have contributed about 5050 to installing electricity on over 90 percent of the farms. There is no longer any necessity for REA to continue making loans in substantial and increasing amounts for enlarging facilities.

It seems clear to me, therefore, that whatever the situation may have been in the past, the private and local public electric enterprises of the country are now of sufficient financial strength, and capital accumulation in the hands of private citizens and institutions is adequate to finance the furnishing of the country's electrical needs on the basis of earnings realized from reasonable rates. The Government's power activities are therefore now and in the foreseeable future will be competitive with private enterprise.

Finally, we might ask, despite this situation as it is now and appears for the future, Are the resources of the Federal Government so plentiful and are the burdens of Federal taxes so light that we can afford to sell Federal power at less than it costs to everyone who may want "cheap" power? I call your attention to the fact that the debt of the Federal Government at the end of fiscal 1933, when its active power program began, was only $22.5 billion; at the end of fiscal 1953 it was $266 billion or nearly 12 times as much. In the 20 years from 1933 to 1953 there have only been 3 years in which the Federal Government has not operated at a deficit.

I think the conclusion is inescapable that Federal financing of the power portion of whatever multiple-purpose construction projects may be undertaken in the future is neither desirable nor necessary. Power generation and distribution is, and essentially always has been, a local problem. Local private and publicly owned utilities presently own the thermal plants which will permit the most economical utilization of hydroelectric power. The Federal Government's deficits are still large and its debt is astronomical. There should not be any further unnecessary calls on Federal taxpayers.

The situation calls for some restraining body in the administrative branch of the Federal Government which will curb the power construction and marketing agencies and which will decide when local interests are in fact wholly unable to undertake hydroelectric plant construction. This body should, I think, be largely made up of nonagency or public members.

It is self-evident from the facts that non-Federal development of hydroelectric power should be actively encouraged by the Federal Government. The partnership policy, under which the Federal Government pays that portion of the construction costs which are attributable to navigation, flood control, or irrigation, and local electric utilities either public or private-pay the portion attributable to power, should be encouraged by all and emphasized and pushed by Federal legislators and administrative officials.

Proper cost and rate standards should also be covered by legislation. There should be no discrimination in favor of one class of citizens or consumers, or of one river or area over another. Rates for Federal power are in urgent need of revision. In order to promote economy in the public business an increase in the existing rate level for Federal power is a must. The accounts should be stated on the same basis as any other commercial undertaking, with full recognition of all costs, including the cost of government. The whole matter of adequate accounting and compensatory and nondiscriminatory rates should, I am firmly convinced, be put in charge of the Federal Power Commission which already has such complete jurisdiction over the interstate rates of privately owned utilities.

Most of these observations apply with equal force to present and future power projects. What specifically should be done with present power projects? $2.3 billion is a lot of money to have invested in a strictly commercial business like selling power. The $10 billion total for plants in being and underway is a lot more. A necessary first step is to bring about the full earning capacity of the existing properties by increasing rates so that they will yield a fair return on the investment. It would be foolhardy to sacrifice any of the present Federal taxpayers' investment because of a low earnings level.

No hard and fast rule can be established as to the disposition of the present Federal power systems. A number of problems must be considered in connection with each one, and no one program will fit all of them. However, some plan for their ultimate disposition is clearly indicated.

I conclude with one final observation on a matter of great gravity. We aré on, if not a bit over, the threshold of development of power by atomic energy. In the not-too-distant future, according to the latest estimates, a very considerable portion of our national power generation will use atomic energy as a fuel. Whatever authority controls in one hand the power sources of an industrial nation can, if it so elects, control all industry. For this reason it seems to me urgent that our national philosophy on power be reviewed and, upon review, directed without deviation to the end that local, non-Federal organizations be

the ones to develop all of our power requirements from whatever energy sourcecoal, oil, gas, falling water, or atomic energy. In the interest of our Nation's future welfare and the perpetuation of our present form of society the Federal Government should as soon as feasible withdraw from this field as based on present energy sources and refrain from entering it based on atomic energy as a

source.

I thank you very much for your attention.

STATEMENT OF CAREY H. BROWN, MEMBER, AMERICAN SOCIETY OF CIVIL ENGINEERS, TO THE AMERICAN SOCIETY OF CIVIL ENGINEERS' CONVENTION, ST. LOUIS, MO., JUNE 15, 1955

IMPROVEMENTS TO NAVIGATION

Whenever Congress, beset with the difficult problem of providing enough money for national defense and for other essential functions of Government, finds funds it can divert to water-conservation measures, it is still confronted with the necessity of selecting a limited number from a long list recommended by the executive agencies responsible for flood control, reclamation, power development, and improvements to navigation.

Current procedures governing those recommendations frequently overlook the paramount public interest and lead to economic waste. A substantial number of navigational improvements currently recommended are obviously "fringe" projects of dubious economic value, having little general or even regional worth. If the water conservation and development program is to go forward, should attempts be continued to distribute projects among as many congressional districts as possible? Should scarce funds be devoted to worthy coastal harbors, the gulf intracoastal canal, the Mississippi-Ohio inland waterway system, and other waters of recognized economic value, or should they go to more or less obscure local projects of little general significance, because of strong cumulative pressures of promotional organizations?

All of us recognize the wisdom of developing and protecting the truly indispensable water resources of this country, but we resent the expenditure of our money on worthless enterprises. Too much is being spent on projects of minor utility; too much on projects inspired by local self-interest; too much in particular on navigation projects that lack both economic justification and national significance; too much to maintain obsolete and useless works: and too much to make navigable at great costs streams which in their natural state are not and never have been navigable, and which are not likely to make a substantial contribution to transportation.

In the planning, financing, construction, and operation of the inland navigation program, the cardinal principles and stated requirements of the national transportation policy, as expressed by Congress in the Transportation Act of 1940, have been flouted to the advantage of the water carriers and shippers, generally to the disadvantage of other forms of transportation, and probably also to the detriment of other shippers.

The present practice of bestowing subsidized facilities carries such appealing advantages to favored beneficiaries that other potential recipients are encouraged to press for extensions and enlargements of the existing system with little regard for the general economic effect.

The basic issues are two: Who is to pay for the improved waterways which are provided at public expense for the shippers and carriers who use them; and what type of service on the part of these users should the public rightfully expect?

The party with the dominant interest is the taxpaying public. The facts, the contentions, and the justice of the case must be examined on this indisputable premise. Is it reasonable to expect the American public to put out vast sums each year to provide free improved inland waterways to be used by a limited number of shippers and carriers for their own profit without any reimbursement to the Federal Government?

Under present policy, almost all river and harbor improvements are provided and operated exclusively at the expense of the Federal Government. Many navigation projects now in use and many more that are being considered for authorization or appropriation, are largely, if not altogether, local in their utility. A large share of financial responsibility, not only for the construction,

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