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The Project Act, as adopted in 1928, contains three standards for rate fixing. These three standards are not, under all circumstances, consistent. In the first instance, the standard heretofore mentioned is suggested; that is, amortization within 50 years. But the act and contracts made thereunder provide that at the end of 15 years, following the date of the contracts, that is, in 1945, and at 10-year intervals thereafter, the rates, upon the demand of any party, may be adjusted upward or downward as the Secretary of the Interior may find to be justified by competitive conditions at distributing points or competitive centers. Obviously such an adjustment might accelerate or retard amortization. The present trend of cost of competitive energy, that is, generation by steam, is markedly downward. At present it seems highly probable that a rate fixed upon a competitive basis would not amortize the works within 50 years.

As a third standard, the Project Act indicates contracts made pursuant to the act shall be made with a view to obtaining “reasonable returns.” If that language means a reasonable return on invested capital, it sets up a standard which might be entirely inconsistent with the competitive standard.

In the contracts, however, it is definitely provided that the competitive rate should govern after 1945, and that under no circumstances should the cost of Boulder energy exceed its value as measured against competitive sources of energy. The rights of the power contractors are and must be determined, therefore, by the competitive standard at least after the first adjustment in 1945.

As will be hereafter more specifically pointed out, Arizona and Nevada, and the States of the upper basin of the Colorado, are affected by the energy rates at Boulder, and unless clarified as now proposed, there will be unending controversy as to rates between the States and the power contractors.

Senator KING. Mr. Chairman, I would like to ask a question, if I may.

Do you take the position, Judge Stone, that in assessing competitive rates they must not be reasonable, that a reasonable profit cannot result from competitive rates?

Mr. STONE. A profit to whom?

Senator King. To those who furnish the capital for the construction of the plants.

Mr. STONE. It seems to me that the contracts which have been made under the present Project Act, and in accordance with the specific provisions of this act, that these rates must be on a competitive basis with steam energy. There is nothing in the act, or anywhere else, and I have studied very carefully, which indicates a certain profit. It definitely says it must be on a competitive basis.

Senator King. Pardon me. You stated in the beginning of your statement there that the first proposition was that there should be a reasonable return, and then you state that that was inconsistent with the competitive proposition.

Mr. STONE. That is right.

Senator KING. So I imply from your statement that when assessed a competitive rate it did not anticipate there would be any reasonable returns at all upon the investment.

Mr. Stone. That is one of the difficulties of this present Project Act. The act contains so many ambiguities and uncertainties as to


construction, it is very hard to tell what it does mean. That is what I am trying to do, to point out the ambiguities.

Senator O’MAHONEY. Does the bill attempt to cure any of the ambiguities?

Mr. STONE. The bill which is proposed here attempts to cure all the ambiguities, yes.

Senator O'MAHONEY. This ambiguity with respect to the basis of the rates to be charged, in what part of the bill is that ambiguity cured?

Mr. STONE. I touch on that later on in this statement.

Senator O’MAHONEY. That probably will not interfere with the continuity of your presentation, if you will just indicate the section of the bill that deals with that.

Mr. STONE. The very first section of the bill, which puts the rate structure on an amortization basis rather than a competitive basis. In other words, the Secretary of the Interior is authorized and directed that he shall fix the rates on an amortization basis, so that the return from the sale of electrical energy will be sufficient to take care of the specific items mentioned in this bill.

Senator O’MAHONEY. In other words, in subsections (a), (b), (c), and (d) of section 1 is set up the objectives which are to be attained concerning the charges which are to be levied ?

Mr. STONE. That is right. It fixes a definite rate basis, sufficient to take care of the objectives that you mentioned.

Senator King. Competition must not be so severe as to prevent the receipt of funds for amortization and to meet the objectives stated ?

Mr. STONE. That is right. The rate must be sufficient to amortize the loan out in 50 years, and to pay the amounts specified in these objectives set forth in the act.

The CHAIRMAN. The committee, without objection, will adjourn until 10:30 tomorrow morning.

(Whereupon, at 12 o'clock noon, the committee adjourned until 10:30 a. m., Wednesday, May 29, 1940.)




Washington, D. C. The committee met, pursuant to recess, at 10:30 a. m., in room 101 Senate Office Building, Senator Pat McCarran (presiding).

Present: Senators McCarran (presiding), Pittman, Ashurst, O'Mahoney, Chavez, Clark, McNary, and Johnson.

Senator McCARRAN. Gentlemen, the ranking members of the committee are detained in other committees. Senator Bankhead is in an important committee; Senator Sheppard in another important committee; Senator Pittman is also detained in the Foreign Relations Committee. Unless there be some suggestion to the contrary, I think in view of the time necessary we had better proceed.

Senator McNary, do you have any objection to that at this time?
Senator McNARY. No, indeed.
Senator McCARRAN. Senator Chavez?
Senator CHAVEZ. No.

Senator McCARRAN. Judge Stone, commencing where you left off yesterday, it might be well to proceed.


Mr. STONE. I believe that yesterday I had proceeded to about the bottom of page 3 of my prepared statement. I stated yesterday it would be necessary to make certain additions and deviations from the statement.

The Project Act of 1928 contains a further provision to the effect that if during the period of amortization the Secretary of the Interior shall receive revenues “in excess of the amount necessary to meet the periodical payments to the United States as provided in the contract or contracts executed under this act," then, immediately after the settlement of such periodical payments, he shall pay to the State of Arizona 1834 percent of such excess revenues and to the State of Nevada 1834 percent of such excess revenues. Inasmuch as the contracts with the United States call for periodical payments for the energy as delivered and made no provision for any excess, it is not clear what is meant by the phrase "excess over the amount necessary to meet the periodical payments to the United States as provided by the con


Senator McCARRAN. Judge Stone, in that expression you are referring to the present law?

Mr. STONE. The present Boulder Canyon Project Act.
Senator McCARRAN. Yes.


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Mr. STONE. In this section I am discussing the present act.
Senator CHAVEZ. That is the 1928 act?
Mr. STONE. That is the 1928 act.

It is argued, however, that it was the intent of Congress to provide that any excess over amortization requirements received under the contracts should be subject to such division. This is one of the points of controversy proposed to be clarified by the pending legislation.

The Project Act of 1928 also states that after all moneys advanced by the United States have been repaid, revenues from the project shall be kept in a separate fund to be expended within the Colorado River Basin as prescribed by the Congress. This provision gives the States of the basin an interest in early amortization and consequently in high energy rates. This section, too, has been the subject of extensive discussion and controversy.

It might be said, deviating from the statement there, that the Committee of Sixteen came to the conclusion and in that we are supported by many who have carefully studied the act, and I personally think there is no quetsion about it—that there will be no accruals to the separate fund for development within the basin until after the amortization is completed; that is, under the Project Act of 1928.

The pending bill proposes to remove these uncertainties and ambiguities as to rates and the application of revenues. It is proposed to eliminate entirely the competitive rate base and place the dam definitely on an amortization basis, all advances made prior to 1937 to be repaid with interest prior to June 1, 1987. Later advances will be repaid on the basis of amortization within 50 years from their respective dates.

The Secretary is directed under the pending bill, that is, the bill now before you, to promulgate rates sufficient, first, to meet the cost of operation and maintenance to provide for replacements; second, to repay to the Treasury with interest the advances to the Colorado River Dam fund for the project as above indicated; third, to provide $300,000 a year for each of the States of Arizona and Nevada in commutation of their rights under the old Project Act, and, fourth, to provide for the transfer of $500,000 each year during the period of amortization to a new fund to be designated the “Colorado River development fund.” Authorization is provided so that the Secretary, in promulgating rates, may provide for the periodic adjustments.

Senator McCARRAN. Now, in that respect, Judge Stone, if you do not mind the interruption, is it your construction of the language that the Secretary may promulgate rates to meet, first, second, and third, that they are all-inclusive, and that this promulgation of a rate must contemplate those items as a whole, or, rather, could it be construed that he may promulgate a rate which would meet, say, the first two and eliminate the remaining conditions!

Mr. STONE. According to the proposed bill, the bill is intended, and we believe clearly shows, that the Secretary must promulgate rates sufficient to meet all of these objectives.

Senator McCARRAN. Inclusive!
Mr. STONE. Inclusive; yes, sir.

It is obvious that if rates were to be fixed with amortization as a sole guide, there would be no excess revenues for Arizona and Nevada,

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