Freeman

ARTICLE

TVA Reports

MAY 01, 1965 by HANS SENNHOLZ

Dr. Sennholz is head of the Department of Economics, Grove City College, Pennsylvania.

Suppose that an entrepreneur with a sense of scenic beauty builds a million-dollar motel on the down­stream side of a dam that harness­es a wild river for the needs of man. Shall the dam’s owners, by reason of that motel, henceforth claim credit for $1 million of an­nual flood damage prevention, and thereby justify further investment in the dam?

The Tennessee Valley Author­ity seems to figure that way. From the Report of the Chief Engineer for 1963 we find that "at June 30, 1963, the estimated cumulative benefits from flood reg­ulation of the Tennessee River system amounted to $461 million. The total TVA investment allocat­ed to flood control was $184.8 mil­lion, and the cumulative expense of the flood control program was $53.1 million." (p. 90)

The annual flood damage figure is calculated with the help of an appraisal curve that shows the recorded floods and the economic damage they would do if they oc­curred today without regulation by TVA dams. Every few years the curve is lifted to reflect new construction and higher values. Thus, the curve informs us that, according to 1961 values and state of development, damages averted in fiscal year 1963 amounted to some $113 million at Chattanooga and other locations at the Valley and to $4 million along the lower Ohio and Mississippi Rivers. Thus, multibillion-dollar spending by the Federal government is "justi­fied."

The 1963 edition of Facts about TVA Operations further reveals that "the Federal government is sole proprietor of an electric sys­tem which at the end of the fiscal year 1962 had a net worth of $1.8 billion, well over half a billion more than the $1.2 billion Treas­ury investment in the system." (p. 2) The adjoining income statement reveals a net income of $56.2 million for 1962, and $51.6 million for 1961.

Let us assume that this net in­come figure is correct, although the statistical and bookkeeping procedures cast grave doubt on its reliability. Every student of accounting and every investor knows that the capitalized value of a company with $56.2 million net income usually is less than $1 billion. Even with an assumed yield as low as 6 per cent, the market value of the TVA power system would be only $937 million. Yet, bear in mind that TVA’s to­tal investment for all programs amounts to $2,581 million, includ­ing a "nonpower investment" of $652 million. (p. 2)

A bit later in the same report we find that "in the Tennessee Valley the operating costs per kil­owatt-hour for producing, trans­mitting, and distributing electri­city are about half the average for the Nation’s private utilities. These costs are unaffected by taxes and interest—factors some­times given as the reason why rates are low in the Tennessee Valley." (p. 5, italics added)

The preceding page, however, had seemed to say the very op­posite in enumerating the TVA benefits to the Federal govern­ment: "Despite the fact that most of the power systems in the Ten­nessee Valley region are exempt from Federal income taxes, the to­tal financial benefits the Federal government receives from power operations are probably greater in this area than any other. Nearly half of all the power TVA sells goes to agencies of the Federal government, primarily the atomic energy plants at Oak Ridge and at Paducah. TVA’s low rates, and the exemption of these Federal power sales from taxation by the states and counties of this region, result in large savings to the gov­ernment and to taxpayers in all parts of the Nation who support these agencies." (p. 4)

Taxes and Costs

But the main reason for TVA’s low operating costs, we are told, is yet another: the wisdom of its managers to charge low rates which in turn reduce costs! Here is the explanation by TVA’s Di­rector of Information: "The re­gion does, of course, have low-cost hydroelectric power. And large amounts of coal in or near the area. But more important are the economies that TVA and the distributors accomplish through the mass production that is achieved by giving primary con­cern and constant attention to keeping rates as low as possible to encourage the widest and most abundant use of electricity. It is generally accepted that low costs can produce low rates. The oppo­site also is true: low rates can produce low costs." (p. 5)

There follows a table of com­parison of TVA costs with inves­tor-owned utilities. In operation and distribution TVA costs are said to be 45 per cent of investor-owned utilities; in transmission and distribution, 35 per cent; in collection and customers account­ing, 30 per cent; sales and demon­stration, 25 per cent; administra­tion overhead, 30 per cent; and finally, depreciation, 70 per cent. Altogether, TVA claims to oper­ate at 45 per cent of the costs of investor-owned utilities.

To discover what accounts for this amazing comparison, we must understand the TVA method of cost allocation. TVA announces construction of "multiple-use dams" and then charges 22 per cent of the construction costs and 27 per cent of its common costs to "navigation," 14 per cent of con­struction and 31 per cent of over­head to "flood control," and only 64 per cent and 42 per cent re­spectively to "electric power." (p. 10)

Investor-owned companies, how­ever, have no way to remove mil­lions of dollars from cost account­ing. They build dams whose pur­pose is flood control, and yet every penny spent constitutes power cost.

"A Competitive Challenge"

This competitive challenge to individual enterprise is empha­sized throughout the pages of Facts about TVA Operations. The following passage is indicative: "The effects of competition by comparison are apparent beyond the limits of the Valley region. Adjacent utility companies found that rate reductions which they initiated because of TVA’s influ­ence helped to bring rapid in­creases in the home use of elec­tricity. The closer private utilities are to the Valley area the lower their residential rates tend to be. Similarly, rural electric coopera­tives pay lower wholesale rates for electric power the closer they are to TVA and to the most near­ly comparable other area, the Pacific Northwest. Federal Power Commission figures show that the private utilities have been helped, not hurt, financially by low-rate policies. The common stock earn­ings of all the large privately owned utilities in the U. S. multi­plied about 4 times in the years 1937 to 1960; in the same period, nine large private companies ad­joining the TVA area multiplied their common stock earnings more than 10 times." (p. 7)

The truth is that in recent years most privately-owned utili­ties have reduced their rates be­cause of improved technology and rising productivity. Even in states where coal, oil, or gas have re­mained the most economical fuel, electricity has become an effective competitor. And it should not be surprising that despite such rate reductions, most utilities now show higher earnings than pre­vailed in the depression years of the late thirties. Yet, TVA would take all the credit!

Perhaps the most enlightening of all the Facts about TVA Opera­tions is to be found in the con­cluding passages. While the report claims exceptionally economical operation in all TVA endeavors and thus "justifies" the Federal expenditures through extraordin­ary returns and benefits, it con-eludes that the Tennessee Valley is entitled to this expenditure in the distribution of Federal funds. Why should New York, Pitts­burgh, California‘s Central Valley enjoy Federal funds, and the Ten­nessee Valley be without them? In fact, the Tennessee Valley is said to have received less than its proper share in the redistribution of wealth and income. "Is it fair," the report asks rhetorically, "that such states as Texas, Oklahoma, and Louisiana should enjoy low-cost gas and oil, simply because their states are richly endowed with such resources, while people farther away must pay more dear­ly?" (p. 14) This, presumably, is why the people of the Tennessee Valley deserve TVA. The princi­ple of sharing-the-wealth through redistribution could not be stated more succinctly.

 

***

Socialized People

In the final analysis, this study concerns persons, and not things. When we speak of the socialization of the electrical industry, we are, of course, referring to persons. Electricity doesn’t care who or what produces it. In a like manner, when we speak of controlled production or controlled prices, we really mean controlled persons. Under a controlled economy, it is persons—not things—who are told by government what they must or must not do. This coercion of individual citizens is the vital issue. And in the long run the individual consumers of electricity have just as much at stake in this matter as do the private producers of electricity.

Dean Russell, The TVA Idea

ASSOCIATED ISSUE

May 1965

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