that the leasing of federally owned sites is a separate and distinct job in itself, which can not be confused or combined with rate making, and that the accounting work done by the body charged with leasing Federal sites should be confined to determining the actual and legitimate investment in the developments on those sites. Now, real determination of the cost of construction work can be made only on the job. An audit of statements and vouchers made up after the work is finished does not carry much conviction to any one who has had charge of work. Cost determination requires not only bookkeeping but such inspection in the field as is necessary to see that the charges made on material bills and payrolls really represent what went into the work. The CHAIRMAN. Do you mind an interruption there? The CHAIRMAN. Well then, you are entirely out of sympathy with this long delay in getting these accounting services completed, are you not? Lieutenant Colonel TYLER. It is my very strong opinion, Mr. Chairman, that if this work had been done in accordance with the law as prescribed by Congress that it would not be now out of date. The CHAIRMAN. And wherein has the commission failed to do the work according to law? Lieutenant Colonel TYLER. The law specified that this work should be done by and through the departments. The CHAIRMAN. And why has it not been done? Lieutenant Colonel TYLER. The Forest Service and the Corps of Engineers of the Army have at all times been able to do a much greater proportion of this determination of construction costs than they have ever been called upon to do. The CHAIRMAN. Do you know the reason that it has not been done? Lieutenant Colonel TYLER. I do not know the reason; no, sir. The CHAIRMAN. Do you know of any request made by the Power Commission to have this work done that has not been done? Lieutenant Colonel TYLER. They have not made any request. The CHAIRMAN. At any time? Lieutenant Colonel TYLER. Of any magnitude. The CHAIRMAN. Well, you heard the statement read by Mr. Bonner this morning with regard to the number of cases or items that they could take care of? Lieutenant Colonel TYLER. That is new. That is recent, since Mr. Bonner came into the office. He has been trying to get this work cleaned up. The CHAIRMAN. You may proceed. Lieutenant Colonel TYLER (continuing reading): Cost determination requires not only bookkeeping but such inspection in the field as is necessary to see that the charges made on material bill and pay rolls really represent what went into the work. Where a project is built by contract and the contractor is entirely independent from the licensee there is a certain presumption that payments made by the licensee to the contractor in accordance with the terms of the contract fairly represent work done. Even at that they should be checked on the job. On the other hand, when the contractor is a subsidiary of the licensee and does the work on a cost plus basis, or the licensee himself does the work, the acceptance of pay rolls and material bills without any field inspection and check currently during construction casts more than a little doubt on the value of results obtained from an audit of papers after construction is completed. Real cost determination must answer two questions. First, were the payments made as claimed? Second, did the things or services paid for go into the work? At least 80 per cent of the cost of any project will be construction cost which must be checked on the work as the work is being done, if the audit is to be of any real value. The district offices of the Army Engineers in charge of river and harbor work and the district offices of the Forest Service have excellent cost accounting systems and personnel for their own work and they can without additional employees make thorough check of the actual field cost of licensed projects in their charge. The CHAIRMAN. That is a point I would like to ask you about. I do not see how they can do this power commission work without additional help. Lieutenant Colonel TYLER. Well, I will give you an example, sir. Here is an account that was referred to the War Department December 13. It is a prelicense statement of an applicant company down in North Carolina. The prelicense statement amounts to four hundred and sixty thousand dollars odd. At my suggestion this account was referred to the War Department for audit. An auditor was called down from the New York district, and had a conference with Mr. King, the chief accountant. He was posted on the kind of things to look for in a public-utility statement of this sort. He went down to Richmond and checked over the account. He then went to New York to the holding company's office and checked the figures there, and his report came in yesterday, in which he takes exception to some two hundred odd thousand dollars of that account, and for excellent reasons. The CHAIRMAN. What is the name of that concern? Lieutenant Colonel TYLER. This is the Virginia & Carolina Power Co. The CHAIRMAN. What was the name of the subsidiary? Lieutenant Colonel TYLER. It is the Stone & Webster Corporation. The CHAIRMAN. And what is the nature of the exceptions he took? Lieutenant Colonel TYLER. Well, he took exceptions to a large number of things. The CHAIRMAN. Well, the principal ones. Lieutenant Colonel TYLER. Well, he took exceptions to some items because the thing was an estimated value of stock that had been paid; a payment had been made of stock, and it was put in at par value. He took exception to a lot of overhead that was charged where 100 per cent was added for the overhead of the holding company. He took exception to services charged by the holding company. The CHAIRMAN. How much were those services? Lieutenant Colonel TYLER. Well, it is a rather long report. It is very clear, sir, but The CHAIRMAN. But I mean the amount with respect to the service. What we are trying to get at is the amount of service that these holding companies make to the subsidiaries. Lieutenant Colonel TYLER. Well, the first exception here is to a land payment of $22,000, as I understand it, because it was a stock transaction. The next one is $60,000 on a land transaction. The services and expenses, Stone & Webster (Inc.) rated, engineers, in connection with the acquisition of land, $37,000. Major portion of lands acquired from private individuals and outside interests shown in items B and D were purchased by representatives of Stone & Webster and billed to the Virginia Electric & Power Co. under the provisions of V (b) of the proposition entered into between the two companies. The costs of this work as billed to the parent company were as follows: Compensation or salaries paid to enginners and others for the time actually on work, $20,000. Travel and other incidental expenses seventeen thousand and odd dollars. Now he finds that the actual expenditures on the ground, where there is $20,000 charged, were $10,000, and that the company for its overhead has added $10,000. He takes exception as an auditor to this payment. Of course, the company will have an opportunity to argue this point and see whether it is legal or not, but as an auditor he takes exception to it. And, as I say, he goes on and takes exception to some two hundred and odd thousand dollars' worth of this kind of stuff. The CHAIRMAN. Just at this point now. Just what is the difference whether the accountant from the War Department does that or an accountant from the Power Commission does that work? Lieutenant Colonel TYLER. Well, the only difference is that this man did this work, and I do not suppose it has cost the Government over $200. He is already employed. He has worked this in with his other business. His other work has not suffered. The CHAIRMAN. Well, what would he have been doing if he had not been doing that? Lieutenant Colonel TYLER. He would have been supervising the cost accounting in several districts of the War Department that are doing a great deal of work by hired labor and direct force accounting. The CHAIRMAN. So they must have a surplus number of accountants if they can pull them off that work? Lieutenant Colonel TYLER. No; I do not suppose he has spent over 10 days or 2 weeks on this work. Now, in the amount of business which the Federal Power Commission has, he probably will not be called on again for a number of months, or would not be, to do any such work. The CHAIRMAN. Well, if the future is to be judged by the past, it will be several years before he is called upon to do it. Lieutenant Colonel TYLER. Well, they never have been called on before, Mr. Chairman. The CHAIRMAN. Well, that is what I say, it will be several years before he is ever called on. Senator PINE. When was this project initiated? When was the construction work done? Lieutenant Colonel TYLER. There is no construction work done yet. This is a prelicense statement, Senator, and under the rules of the commission a license will not be granted until this matter is cleared up. Now when construction starts then the actual money that goes into the work right on the job should be determined as it goes in. The CHAIRMAN. Do I understand that the practice of the commission is not to grant any license until these prelicense records have been agreed upon? Is that correct? Lientenant Colonel TYLER. Yes. The CHAIRMAN. And has that been followed in all cases? Lieutenant Colonel TYLER. No, sir; not in all cases. There have been one or two cases since I have been with the commission where there was such urgency, apparently, for the beginning of the construction work, that that requirement has been waived. The CHAIRMAN. And so the Power Commission has authority to waive that prelicense agreement if in their judgment they think wise? Lieutenant Colonel TYLER. Well; this is not required by the law, sir. The CHAIRMAN. I see. Lieutenant COLONEL TYLER. The law states that upon completion of the project they will file a sworn statement of the cost. The CHAIRMAN. So this is a policy? Lieutenant Colonel TYLER. This is a policy. Not a legal require ment. Senator PINE. What was the total amount claimed by the company, and what was the amount that was rejected by the auditor? Lieutenant Colonel TYLER. The auditor takes exception to those I added them up items. The CHAIRMAN. About $200,000? Lieutenant Colonel TYLER. It is something over $200,000 as I added it. Senator PINE. And what is the total amount of the statement of the company? Lieutenant Colonel TYLER. The total amount of the statement of the company was, I think, $460,000. Now that does not mean, of course Senator KEAN. In other words, if all these items were allowed, why, the public would have to pay on $200,000; that is, 33 per cent? Lieutenant Colonel TYLER. No, sir; that is not quite correct. Senator KEAN. Why not? Lieutenant Colonel TYLER. Because this capital investment under any existing authority does not enter into any rate base. The CHAIRMAN. Is that the same Mr. Stone that has just been appointed to the Smithsonian Institute? Lieutenant Colonel TYLER. Stone? The CHAIRMAN. Of Stone & Webster. Lieutenant Colonel TYLER. I do not know; sir. Senator PITTMAN. Let us get that again, Colonel. You say that the investment does not enter into the rate-making basis? Lieutenant Colonel TYLER. No, sir; the Federal Power Commission has no authority to enter into fixing of rates where a State has its own public-utility commission. Senator KEAN. In the making of the rate base by the Public Utility Commission of Virginia, or wherever this is located, they must take into consideration the values that you, the leasing authority, have practically authorized these people to set up? Lieutenant Colonel TYLER. Yes; in that way it would enter. Lieutenant Colonel TYLER. If the Public Service Commission of Virginia accepts the determination of the Federal Power Commission then they would be using the same figures, that is correct. The CHAIRMAN. Is any of the power in this case transmitted between the States of Virginia and North Carolina? Lieutenant Colonel TYLER. This project is not built, and I do not know where it will be transmitted. The CHAIRMAN. Is it close to the line? Lieutenant Colonel TYLER. It is close to the line, very near the line. The CHAIRMAN. So in all probability there will be power transmitted in interstate commerce? Lieutenant Colonel TYLER. Yes. The CHAIRMAN. So in that case this arrangement of accepting these figures will be very important as a rate base, would it not? Lieutenant Colonel TYLER. Yes. Senator PITTMAN. That is what I wanted to say. Whether the War Department has any authority to fix rates or not is not the question, or whether the Federal Power Commission has. You stated that it was not the subject of a rate basis. You were in error in that? Lieutenant Colonel TYLER. Not unless it is accepted by some other body. Senator PITTMAN. Well, undoubtedly, but it is a subject of rate basis? Lieutenant Colonel TYLER. But what I meant to say is that when there is a State public utility commission the Federal Power Commission is not authorized by the law to go in and fix the rates in the State. Senator PITTMAN. I know. The CHAIRMAN. But it is perfectly apparent that that would be a very strong argument as the rate base, would it not? Lieutenant Colonel TYLER. Yes. The CHAIRMAN. You may complete your statement. Thus, by using those services for field cost determination, at least 80 per cent of the accounting work can be done at practically no added expense and instead of a check of papers we will secure a check of the facts. Not more than 20 per cent of the accounting work consists of checking overhead charges, stock transactions, professional fees, management and holding company charges and the like. Such work should be done by a small headquarters staff of experts with experience in that line of work. SUMMARY As a summary, this witness believes that the licensing of federally controlled water-power sites is a separate and distinct problem from the Federal regulation of rates. Federally controlled water-power sites should be licensed by a board or commission composed of representatives of the Departments of War, Interior, and Agriculture. That the board or commission should be required by law to do its work by and through the three departments and should be allowed only a small headquarters staff. The CHAIRMAN. That concludes your statement? Lieutenant Colonel TYLER. Yes. The CHAIRMAN. Have you had any experience in auditing any account except the one that you just enumerated? Lieutenant Colonel TYLER. I have kept construction cost accounts or been responsible for them for twenty-six odd years. The CHAIRMAN. Yes, but I mean, have you had any experience in auditing holding companies and the other charges such as you just enumerated in the case of the Virginia people? Lieutenant Colonel TYLER. No, sir. I did not audit this. |