Mr. SHORT. Your people down there in that valley wanted these dams built, did they not?

Mr. EBLEN. Well, I think a great many of them did.

Mr. SHORT. Who built them? Who paid for them?

Mr. EBLEN. You gentlemen appropriated the money. I suppose all of us will pay for them.

Mr. SHORT. Where did we get the money?

Mr. EBLEN. It comes from the taxpayers, of course.

Mr. SHORT. In Kentucky and Missouri and everywhere else. Mr. EBLEN. And everywhere. But this question here-as I understand it, our municipalities, their power departments, have set aside 122 percent for the payment of taxes. As to whether that is sufficient or not, I do not know, or whether 10 percent is sufficient. That is a matter for you gentlemen to decide as a legislative policy.

The CHAIRMAN. Judge, will you pardon an interruption there? Let us assume that the Tennessee Valley Authority's statement that they have included in the rate base 122 percent for taxes is correct, and if it is correct, then we pass a bill to refund that 122 percent in taxes to the consumers of electricity and to the credit of your State. Then what becomes of the yardstick theory?

Mr. EBLEN. Well, I do not know enough about it to answer your question.

The CHAIRMAN. You know that a yardstick is 36 inches long? [Laughter.]

Mr. EBLEN. Yes, sir; I heard that several years ago.

The CHAIRMAN. That is our old Army yardstick. What I want to find out is, if the taxes are an essential element in the cost of electricity, and they are taken out, and the consumer pays the taxes and then they are given back to the consumer, where does it help?

Mr. EBLEN. It may be that the yardstick would not be 36 inches then. I do not know about that. I am not so fully informed as to all those matters of legislative policy.

Mr. HARNESS. You do not believe that the people of Missouri and Indiana and New York and these other States should make up this tax deficit, do you?

Mr. EBLEN. I think and they think it should come out of the profits of the sale of electricity.

Mr. HARNESS. Then you think they think they should increase the rates down there sufficiently to pay operating expenses and retire this capital investment and pay the taxes?

Mr. EBLEN. If it is necessary, I think that is a fair way to do it. Mr. SHORT. The recipients of the benefits, of course, should pay for them?

Mr. EBLEN. I think that is a fair method. I think that would be a fair method.

Mr. SHORT. The T. V. A. has taken one-fourth of your tax property down there, I understand?

Mr. EBLEN. Or will, when the Watts Bar Dam is completed; yes. The CHAIRMAN. Thank you very much, Judge, for your statement. Our next witness is the tax assessor of McMinn County, Mr. Ernest Guffey.

Will you please make your statement as briefly as possible, Mr. Guffey?

ས

STATEMENT OF ERNEST GUFFEY, TAX ASSESSOR, McMINN

COUNTY, TENN.

Mr. GUFFEY. Mr. Chairman and gentlemen, McMinn County has a population of around 29,000 people. The countly seat is around 6,000 people.

The assessed valuation for McMinn County for the year 1939 was $8,764,848, and in that assessment there was an assessment to the Tennessee Power Co. of $1,678,890. The taxes that were supposed to or will be paid in McMinn County for the year 1939 were $199,961.04, and of that amount of taxes the Tennessee Power Co. paid $39,034.24, which is about 20 percent of the taxes in McMinn County.

I would say that in McMinn County 30 percent of the people use electricity. We have some land that is being covered up by the Chickamauga Dam, which would also reduce the assessment, but we lose in taxes by property that has been acquired by the T. V. A. and the municipalities, 20 percent of our taxpaying property. That is what we lose. In other words, it will mean an increase of around 60 cents to take care of the taxes that we are losing.

Mr. SHORT. You think that the Federal Government should pay for this punishment it has inflicted upon you?

Mr. GUFFEY. I think they should pay for part of those taxes we have lost; yes, sir.

Mr. CLASON. Have you got any county cooperative association that is furnishing electricity to the farmers?

Mr. GUFFEY. We have in the adjoining county of Meigs; that has a franchise in our country for rural electrification.

Mr. CLASON. When a municipality takes over the distribution of power, it charges in its rates a sum of money to cover the taxes lost to that municipality, does it not?

Mr. GUFFEY. Well, I do not know whether they do or not. They told me the power board told me that they had set aside a certain sum of money to replace the amount lost from the Tennessee Power Co. from August 1 to December 31, $39,000. They paid them a certain sum back of this money that they paid from August 1 to the first of the year.

Mr. CLASON. That is a municipality?

Mr. GUFFEY. Yes, sir; they paid part of that fund.

Mr. CLASON. Now, the big county cooperatives, they do not do that?

Mr. GUFFEY. The county cooperative has never paid anything. Mr. CLASON. The answer to it, then, is this: If you live in a municipality, the rates that you get as a consumer, and which you have to pay, contain within them a certain sum of money which represents a proportionate part of the lost taxes which previously were paid by the Tennessee Electric Power Co.; but if you first buy your power as a consumer from one of these county cooperatives or distributing organizations outside of the municipality, the rate that you pay does not carry, as it would in a city, any sum of money toward paying back taxes in the county?

Mr. GUFFEY. No, sir; that is right. They are nonprofit organizations; but after they replace that amount of taxes I do not know whether they have got anything set aside from now on or not. Mr. BYRNS. What is the tax rate in your county?

Mr. GUFFEY. $2.35. It was $3.30 last year; $2.35 for 1939 and $3.30 for 1938.

The CHAIRMAN. Thank you very much, Mr. Duffy. We are very glad to have had your statement.

Now, we have three of our colleagues here this morning, Representative Gore, Representative Weaver, and Representative Kefauver. These gentlemen are here with us, and Mr. Lilienthal is from the country; and without objection from either of them, the Chair will call Mr. Lilienthal.

Mr. Lilienthal, when you were here last week, or week before, Mr. Brooks, of Louisiana, requested that you return for questioning. You are here in obedience to that request. I understand you have been sick for a few days and that you are now able to be out. We are glad to see you, and if you have some statement you would like to make, preliminary to questioning, you may proceed.

STATEMENT OF DAVID E. LILIENTHAL, DIRECTOR, TENNESSEE VALLEY AUTHORITY

Mr. LILIENTHAL. I have no statement to make, Mr. Chairman and members of the committee, except to say that the Board and the staff have been studying this patently difficult question of fact and problem of policy for something over a year-ever since the acquisition of the Tennessee Electric Power Co. was decided upon by contract. It being a difficult matter and requiring a great deal of research, Mr. Fitts, our general counsel, had delegated to him the job of coordinating all the work in that respect and preparing a statement which he then went over with the members of the Board, and that has been made a part of your record. I may say on behalf of the Board that Mr. Fitts' statement may be taken as a well-matured statement of the Board's position.

In addition, a substantial body of facts have been assembled which we thought might conceivably be useful to the committee in its deliberations. There is also another group of tables that we have, and I would like to confer with you, Mr. Chairman, and see if you would like to have that also submitted in numbers to take care of the members of the committee, or whether you feel that you have sufficient of that sort of material.

The CHAIRMAN. Mr. Lilienthal, the chairman, speaking for himself and without conferring with any members of the committee on the matter I have thought that it might be valuable to the committee if you could submit a list of the municipalities with which you have contracts for the sale of electricity, together with a statement of their earnings up to date, and such other incidental matter pertaining to those things as you may be able to give us. Mr. Krug, the other day, in response to a question which I propounded to him, did give us those facts with reference to Memphis, Nashville, Chattanooga, and Knoxville-four cities. We would like to have that information also as to all the municipalities with which you have

contracts.

Mr. HARTER. Mr. Chairman, is this the witness that was to produce. the statement showing the number of new industries that have gone down into this valley within the last 4 or 5 years?

The CHAIRMAN. I thought that was Mr. Krug or Mr. Fitts, one or the other of those gentlemen. We do not want to get that information in the record twice, and the clerk can examine the testimony Can you give us those things, Mr. Lilienthal?

and see.

Mr. LILIENTHAL. I will do the best I can. Some of these communities have been in operation less than 6 months. We will give you the very latest data we have.

(The data submitted are as follows:)

MUNICIPALITIES (ELECTRIC DEPARTMENTS ONLY) AND COOPERATIVES PURCHASING POWER FROM TENNESSEE VALLEY AUTHORITY

FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 1939-A REPORT FROM THE COMPTROLLER TO THE DIRECTORS OF TENNESSEE VALLEY AUTHORITY

TENNESSEE VALLEY AUTHORITY, January 30, 1940.

To the Board of Directors, Tennessee Valley Authority:

The accompanying statements present the financial condition at June 30, 1939, and the operating results for the year then ended of the municipal electric departments and cooperative associations purchasing electric power from the Tennessee Valley Authority for retail distribution. These statements are based on reports derived from the accounts and have been reviewed, but not audited, by employees of the Authority. The power accounts of the municipalities and cooperatives follow the classification of the Federal Power Commission, in accordance with the Authority's contracts with these organizations.

During the fiscal year 1939, 24 local agencies were added to the list of the Authority's contractors, bringing the total at June 30, 1939, to 40 municipalities and 22 cooperatives.1 Three of the new contractors (two municipalities, Memphis and Chattanooga, and one cooperative) are excluded from this report for the reason that their operations were in a preliminary stage at June 30, 1939. The power purchased by these organizations during the fiscal year 1939 represented 21 percent of the Authority's outside power sales in terms of kilowatthours, and 31 percent of its dollar revenues, as compared with 18 percent and 30 percent, respectively, in 1938. Power is sold to municipalities and cooperatives at wholesale monthly rates as follows: Demand charge, 90 cents per kilowatt demand. Energy charge, first 100,000 kilowatt-hours, 4 mills; next 200,000 kilowatt-hours, 3 mills; next 700,000 kilowatt-hours, 2.5 mills; excess over 1,000,000 kilowatt-hours, 2 mills. A reduction of 0.5 mill per kilowatt-hour is made for energy exceeding 360 times the measured demand, and a reduction to 2 mills is provided where the resale rate to the residential consumer reaches 4 mills. The four communities at Muscle Shoals (Florence, Sheffield, Tuscumbia, and Muscle Shoals village) are given a discount of 10 percent because they furnish their own transmission facilities.

The combined net income of the 59 organizations reported in exhibit I was $591,379.14, after deducting interest on the investment of 21 municipalities (15 had made no investment; 3 had repaid their investment, 1 during the current year), and after deducting losses of $147,206.80 incurred by 4 municipalities and 13 cooperatives. The 38 municipalities, doing four-fifths of the business of the entire group, reported a combined net income of $615,684.21, after depreciation of $299,723.37. The 21 cooperatives reported a combined net loss of $24,305.07, after depreciation of $204,765.38. Cooperatives, for the most part in the early developniental stage and operating in rural areas without much previous electric service, make a relatively poorer showing. Of the 6,850 miles of rural lines in operation, 5,770 miles were constructed after Tennessee Valley Authority service began. Nine of the 17 organizations whose operations did not yield a profit in 1939, as a result of acquiring properties formerly operated by private utilities and because of other factors improving their operations, have earned net profits during the first 6 months of the fiscal year 1940. Only 2 of the 8 organizations which in 1940 are still showing operating losses had been in existence 2 full years prior to June 30, 1939.

The net income of the municipalities included $54,283.82 received from an amortization charge of 1 cent per kilowatt-hour (25 cents minimum, $1 maxi

1 Subsequent to June 30, 1939, 43 additional municipalities and cooperatives entered into power contracts with the Authority, largely as the result of acquiring the distribution properties of the Tennessee Electric Power Co.

mum) added to the basic monthly rates. Cooperatives received $159,035.85 from this source, which was not credited to income but was disposed of as follows: $62,535.25 credited to the membership accounts and $96,500.60 credited to amounts received from customers for retirement of debt, a paid-in-capital account. Municipalities also received $19,684.84 which was credited to the latter account.

Total sales were 262,017,501 kilowatt-hours, which produced gross revenue of $4,196,504.59 an average of 1.6 cents per kilowatt-hour. Other revenues consisted of rents from electric property, $25,338.76; penalties for payment of electric bills after due dates, $41,830.09; and miscellaneous operating revenues, $3,073.03. Exhibit II, containing electric-sales and cost-of-power statistics, indicates that the average yield from residential customers was 2.11 cents per kilowatt-hour (1.97 cents in 1938), ranging from 1.62 to 5.43 cents; the higher averages resulted from the temporary continuance of private-power company rates to nonmember customers of cooperatives and a minimum monthly bill of $2 levied by one of the newer cooperatives (Tallahatchie Valley). The basic monthly residential rate used by the municipalities and cooperatives remained unchanged from the previous year, namely-minimum bill, 75 cents; first 50 kilowatt-hours, at 3 cents; next 150 kilowatt-hours, at 2 cents; next 200 kilowatt-hours, at 1 cent; next 1,000 kilowatt-hours, at 0.4 cent; excess over 1,400 kilowatt-hours, at 0.75 cent, which is the average rate to that point. The Alcorn County Electric Power Association, having paid its long-term debt in full, reduced its first residential rate block from 3 cents to 22 cents and reduced the 2-cent block to 100 kilowatt-hours. It also reduced the commercial rate schedule. Average residential consumption in June 1939 was 82 kilowatthours, varying from 26 kilowatt-hours in Cherokee County to 184 kilowatt-hours in the city of Muscle Shoals. The June average included customers in areas recently acquired, where consumption was below average. The average for the year, including new customers from date of beginning service, was 1,179 kilowatt-hours, 39 percent greater than the national average of 845 kilowatthours reported by the Edison Electric Institute.

During the fiscal year 1939, the average revenues derived from commercial and industrial customers were 1.34 cents per kilowatt-hour and from other customers (principally street lighting), 1.45 cents; for the fiscal year 1938 the corresponding revenues were 1.73 cents and 1.41 cents per kilowatt-hour, respectively. During the year the Authority recommended to the municipalities and cooperatives changes in the standard rate schedule applicable to commercial, industrial, and street-lighting customers; these changes have resulted, where adopted, in reductions to individual customers as high as 10 percent. Most of the municipalities and cooperatives add, and include in revenue, a surcharge of 10 percent to the monthly bills of their commercial and industrial customers which is to be continued during the developmental period.

Cooperatives also collect nonrefundable membership fees which run from $5 to $10 each. Six cooperatives in Mississippi have memberships ranging from $100 to $200, of which all but $10 is refundable when financial condition permits. In these cooperatives the 1-cent amortization collections are treated as membership payments.

The power sold was derived from 297,894,598 kilowatt-hours purchased from Tennessee Valley Authority at an average cost of 4.88 mills per kilowatt-hour, and 1,459,826 kilowatt-hours from Kentucky-Tennessee Light & Power Co., pending connections with the Authority's system, at a cost of 9.34 mills per kilowatt-hour. The cost of power represented 35 percent of the gross revenue and 54 percent of the operating expenses before depreciation. The difference between the kilowatt-hours purchased and sold (12 percent) was accounted for as line losses.

Provision was made for all taxes assessed against the cooperatives, Including estimated accruals in those cases where the application of certain taxes was undetermined. The tax expense of cooperatives shown on exhibit I was net after credit adjustments of $8,206.52 for prior periods, the current year's taxes being $35,072.75, or 4 percent of gross revenue. In accordance with contract provisions

the electric departments of municipalities pay amounts into the municipal general funds in lieu of taxes; these amounts totaled $245,181.81, which was in excess of 7 percent of the gross revenues.

Depreciation was calculated by the straight-line method using composite rates based upon service lives recommended by the Authority. These rates ranged between 3 percent and 4.3 percent per annum. Pending a more detailed classification of its property, the city of Knoxville provided depreciation at the rate of $150,000 per annum plus 3 percent per annum on net additions, the total amount