TO AMEND THE TENNESSEE VALLEY AUTHORITY ACT OF 1933 WEDNESDAY, JANUARY 31, 1940 HOUSE OF REPRESENTATIVES, Washington, D. C. The committee met at 10:30 a. m., Honorable Andrew J. May (chairman) presiding. The CHAIRMAN. The committee will please be in order. We will resume the hearing this morning on the Sparkman-Norris and other bills relating to the Tennessee Valley Authority. I believe the witness this morning will be Mr. Krug. We will be glad to hear you at this time, Mr. Krug. We want to hear you on the advisability of reporting for enactment a bill in respect to the tax situation in the State of Tennessee, and I hope you will confine your general statement-of course, make any statement you wish about it, but confine it as nearly to the tax issue as possible. Now, will you state your name and position for the record? STATEMENT OF J. A. KRUG, CHIEF POWER ENGINEER, TENNESSEE VALLEY AUTHORITY Mr. KRUG. My name is J. A. Krug. I am chief power engineer for the Tennessee Valley Authority. In the beginning let me say I have not prepared any formal statement on this question. I agree generally with what Mr. Fitts said here the other day. I do not pretend to be an expert in tax matters, but I am thoroughly familiar with the T. V. A. power operation, and I would be pleased to answer any questions the committee may wish to ask, relating to the facts on the T. V. A. power program. Before we get into those questions I would just like to take a minute or two to clear up a little confusion that resulted in the sessions of last week, as to just what the T. V. A. rates mean to the area generally. Mr. Fitts made the statement, if you recall, that the rate savings in the area would amount to something on the order of $8,000,000, of which over $7,000,000 is in the State of Tennessee. After that, in the course of the following days, several representatives of the counties made statements that they did not think they had any material benefit whatever. The facts are something like this: The T. V. A. rates are substantially below the rates of most of the power companies in the area, and very much lower than the rates that were in effect back in 1933, when the Authority started operations. For the Tennessee Electric Power Co., however, certain brackets of the residential rates and certain brackets of the commercial rates were very close to the T. V. A. rates at the time the properties were taken over. The company had made, I think, five rate reductions since 1933. I do 206121-40- -17 253 not want to get into the detail of this, but I would just like to give you an example of how it works out. Mr. Raulston, county attorney of Marion County, Tenn., appeared before the committee and said that, to his knowledge, his bill was no lower now than during the time the power company was serving him. The facts are that in October of 1938, under power-company operation, Mr. Raulston's monthly bill was $12.99. For October of 1939 The CHAIRMAN (interposing). Pardon me there. What is that first bill? Mr. KRUG. $12.99 for October 1938. For October 1939, under the T. V. A. rate, he paid $8.12 for service and $1 as a contribution toward the investment in the properties. That represents his own equity in the cooperative association which serves him. Of course, comparisons of that kind are confusing, because they do not take into account how many kilowatt-hours you use in a month. In October 1938 he used 874 kilowatt-hours, and, as I said, he paid $12.99. Under T. V. A. rates that same bill would be $8.40, and he would pay, in addition to that, $1 to create his equity in the corporation which serves him. The CHAIRMAN. And use how many kilowatts? Mr. KRUG. That is 874 kilowatt-hours in both cases. The CHAIRMAN. Now, will you state that again, please? Mr. KRUG. For 874 kilowatt-hours, the consumption in October 1938, the bill was $12.99 under the company rate, as compared to $8.40 under the T. V. A. rate. I do not mean to give the impression that Mr. Raulston was trying to mislead the committee. I do not think he was; but the average citizen is not truly conscious of just what his bill is, and he assumes that the thing runs along and he does not realize that there has been a change. The fact is that there has been a substantial change. The same thing pertains to Mr. Farquaharson, from Fannin County, Ga., who appeared before the committee. I am not going into the details of his power bills, but he also received a saving in rate. I also have the bills here of Mr. Schaeffer, the county attorney for Polk County. The same situation is true there. Along this same line we had a letter just the other day from Mr. William Butt, of Fannin County, saying that he had read that the Authority claimed savings to Fannin County of some $7,000 a year, and that he knew that was not the case, and he was going to come before the committee and tell them so. He wanted to show us the courtesy of letting us know in advance, so that we could answer his position if we care to. We have rechecked our figures on Fannin County, Ga. The facts are something like this: Mr. Fitts indicated to the committee that the savings in Fannin County, Ga., were $9,382. That is correct for commercial and residential customers. It did not include the streetlighting bills, which we did not have available at the time Mr. Fitts testified. When you add in the savings there, the total savings become $10,067 for Fannin County. The CHAIRMAN. What would that make the savings on the street lighting? Mr. KRUG. That is about $600 or $700 on the street lights. It is just small towns in Fannin County. Mr. SPARKMAN. $685.70, I believe. Mr. KRUG. Yes. That saving is before taking into account the amortization charges which the citizens of Fannin County, Ga., are paying. They amount to $5,400, roughly, a year. So you might say, if you do not want to take into account the fact that a man is creating an equity in the business, that the net saving is the $10,000 indicated, less $5,400. That means you are ignoring completely the fact that the citizens there are building up an equity in the business. As a matter of fact, the Authority still owns the properties in Fannin County, and the way we handle it in that case is that when the properties are finally sold to a local distribution agency we will deduct from the purchase price the total collections for amortization. That means that every dollar that is collected in Fannin County for amortization is subtracted from the purchase price for those properties when they are turned over to a local agency, and of course, that is what we plan to do as soon as we can find an agency that can adequately handle the service problem there The CHAIRMAN (interposing). I dislike to interrupt you, Mr. Krug, but I probably overlooked something. You stated that this man's bill was $12.99 in 1938 under the Tennessee Electric Power Co., and in 1939 it would be $8.12 under T. V. A. rates, and that there was $1 amortization charge on the $8.12? Mr. KRUG. Yes, sir. The CHAIRMAN. Is that charge imposed every month on his bill? Mr. KRUG. It is worked out in this way: The amortization charge is one cent per kilowatt-hour but not less than 25 cents nor more than $1 per month for each customer. If your bill is for 25 kilowatthours, you would pay 25 cents on that charge. If your bill is for 75 kilowatt-hours, you pay 75 cents. If it is over 100 kilowatt-hours, you pay $1. You will keep paying that until the investment in the facilities has been liquidated. At that time the customers own the corporation, just the same as anyone else that buys stock in a corporation. The CHAIRMAN. That is one of these cooperatives, a nonprofit organization? Mr. KRUG. Yes, sir; that is right. The CHAIRMAN. In other words, it is a real public ownership institution, owned by the public without operating to pay dividends, taxes, or anything else? Mr. KRUG. They do pay taxes and are subject to taxes in Tennessee, just like any other corporation. The CHAIRMAN. That is on their physical properties, but they do not pay any taxes on their electricity? Mr. KRUG. They do not pay any profit tax, because they do not try to earn a profit. They are interested in lower rates rather than profits. On most of them when they have reached the point where they have the debt paid off, they start paying back the members for their contributions to the business. For example, the cooperative down in Alcorn County, Miss., worked up to a point where many of the members had a $100 interest in the corporation. At that point they were making so much money that they decided to refund, and they gave back $25 to everyone that had invested $100, and reduced all of them to a maximum investment of $75. Mr. RUTHERFORD. Eventually they will be getting electricity for nothing? Mr. KRUG. They will always have to pay the cost of the power and the cost of service and taxes, maintenance, operation, and that sort of thing, of course, but as long as they have their own money in there and they don't want interest on their money, they will not have to pay anything in the rate for cost of money, which may be 10 percent of the total cost of service. Mr. SPARKMAN. Mr. Krug, that extra charge would not apply, of course, where the municipality owns its own plant. That is only where you have these cooperatives? Mr. KRUG. Yes; I should make that clear, that amortization charge applies only where the customer himself is building up an equity in the business. The CHAIRMAN. That is in the rural communities? Mr. KRUG. Yes; we do not ordinarily permit the charge in the cases where the municipality owns the system and the citizen has no direct ownership. I have here a comparison of the T. V. A. rates and the Tennessee Electric Power rates for various services, residential and commercial service. I would like to file it with the committee for your reference, if you want to check up on it. The CHAIRMAN. Yes; let it go into the record. (The statement referred to follows:) Residential rate comparison-Tennessee Electric Power Co. and Tennessee Valley Authority |