Mr. Obenshain, a senior in New York University School of Law, prepared this paper for Professor Sylvester Petro’s seminar on "Government and Private Monopoly in a Free Society."
1. The Dream
I will not cease from mental fight,
Nor shall my sword sleep in my hand,
Till we have built
Shortly before the bill for the creation of the Tennessee Valley Authority came before Congress in 1933, Senator George Norris of
"The Hundred Days"
Thus, blissfully ignoring the questions of political philosophy which its innovations raised, the New Deal set to work to repair the damages of the depression and, as well, to introduce its own new ideas for properly ordering the American society. "The wreckage of rugged individualism," said Arthur E. Morgan, chairman of the board of Tennessee Valley Authority, "has been handed to us with a request that we try to do something about it."2 So, sans political philosophy but with burning evangelical zeal, the administration set about the task of reforming the economy and, in many ways, the social structure.
"Much of the Hundred Days was a frenzied effort to keep the system from falling apart. One event, however, stood out as an earnest of the better America which dedicated men might create. This was the enactment on May 18, 1933, of the Tennessee Valley Authority Act."3 Shocked by the deep poverty and the widespread unemployment of the seven-state area which comprised the basin of the Tennessee River, President Roosevelt, Senator Norris, and the other parents of the project conceived the grand scheme of transforming the region from the backwoods, poverty-striken area it was, into the lush, green, fertile valley it might be with the assistance of the government. While some small power and national defense functions had been previously fulfilled by a federal dam at Muscle Shoals, Alabama, the new idea was much more ambitious. In requesting the Congress to create the TVA, President Roosevelt stated:
It is clear that the Muscle Shoals development is but a small part of the potential public usefulness of the entire Tennessee River. Such use, if envisioned in its entirety, transcends mere power development: it enters the wide fields of flood control, soil erosion, afforestation, elimination from agricultural use of marginal lands, and distribution and diversification of industry. In short, this power development of war days leads logically to national planning for a complete river watershed involving many states and the future lives and welfare of millions. It touches and gives life to all forms of human concerns.
I, therefore, suggest to the Congress legislation to create a Tennessee Valley Authority—a corporation clothed with the power of government but possessed of the flexibility and initiative of a private enterprise….4
Many hard lessons have taught us the human waste that results from lack of planning. Here and there a few wise cities and counties have looked ahead and planned. But our Nation has "just grown." It is time to extend planning to a wider field, in this instance comprehending in one great project many states directly concerned with the basin of one of our greatest rivers.
This in a true sense is a return to the spirit and vision of the pioneer. If we are successful here we can march on, step by step, in a like development of other great natural territorial units within our borders.5
This passionate belief that human society can be perfected through the intervention of governmental authority is essentially a political application of humanistic "religion." Almost religious, too, was the fervor with which its proponents embraced these doctrines as the great hope for rearranging the land for the benefit of the poor and helpless. Like a new psalmist, caught up in a mystical experience, is George Norris as he exults over the passage of his brain child:
It is emblematic of the dawning of that day when every rippling stream that flows down the mountainside and winds its way through the meadows to the sea shall be harnessed and made to work for the welfare and comfort of man.6
2. The Reality
Moreover, all democratic communities are agitated by an ill-defined excitement and by a kind of feverish impatience, that engender a multitude of innovations, almost all of which are attended with expense.
Alexis De Tocqueville
Behind the grand aims of transforming a wasteland into a paradise, of perfecting the nation by central planning, there were some very human feelings and some very real hatreds. Attributing the "wreckage of rugged individualism" to the large businesses of the country, the New Deal went vigorously on the warpath against big, private businesses. And behind the glorious scheme to bring prosperity to the Tennessee Valley was the administration’s fierce dislike of the private power companies. Little time was wasted in putting the private power companies in their proper place by greatly inhibiting their competitive position as against municipal and other publicly owned utilities.
First, the new Congress clamped a 3 per cent tax on the sales of power by private companies, but exempted all publicly owned corporations from this levy. Then a federal law was passed prohibiting the federal courts from hearing any suits by private utility companies to restrain state Public Service Commissions from enforcing confiscatory rate orders. The National Industrial Recovery Act encouraged local and city governments to compete actively with the private power companies. The Public Works Administrator was authorized to make loans and grants to municipalities to allow them to duplicate the efforts of private utility companies where those private companies had not lowered their rates to a "reasonable" level. The purposes were clearly expressed by the Public Works Administrator when he reflected on the operation of this plan:
In all allotments made for municipal power plants, by the Public Works Administration proposed rates have been well below existing private company rates. Consequently, the fact that the companies in some instances have met these proposed municipal rates has been deemed as showing progress toward one of the aims of this phase of the public works program?
Finally, a large number of federal reports were promulgated, charging that private power rates were excessive8 and threatening the private companies with extensive suppression and regulation. The result was vast alarm among the investors in private power. In the first seven weeks of 1935, utility securities’ values fell over one billion dollars at a time when other securities were rising.
Not content with the effects of these measures, the federal government determined to enter directly into competition with the private utility industry. For this purpose, few more advantageous shields could have been afforded than that of the broad, reconstructive aims of the
I therefore lay down the following principle: That where a community, a city or county or a district is not satisfied with the service rendered or the rates charged by the private utility, it has the undeniable right as one of its functions of home rule, to set up, after a fair referendum has been taken, its own governmentally owned and operated service. That right has been recognized in most of the states of the
So the desire to provide cheap power to the people of the Tennessee Valley was accompanied by the determination to force the private power producers, under threat of federal competition, to bring their rates down to a "reasonable" level.¹º
The right of the federal government to go further and to transmit [electric power] and distribute where reasonable and good service is refused by private capital gives to government, viz., the people, that same very essential "birch rod" in the cupboard."
Thus, the "yardstick" concept was developed, providing in the costs of producing power by public plants a standard for "reasonable" rates by private power companies.¹² Thus, while unable to regulate directly the rates of intrastate power, the federal government has found a means of indirectly achieving the same forbidden result by threatening to compete with the private companies.
A Burdensome Bonanza
The result of the utopian experiment in the Tennessee River basin has been a bonanza of cheap power for the residents of that area, a bonanza financed largely by the taxpayers of the entire country. The total investment of United States Treasury funds in the power facilities of the TVA to June 30, 1958, was $1,441,520,896. In that period, payments to the Treasury totaled $250,131,519, leaving a balance of $1,191,389,377, which was borne from the general taxes of the nation.¹³
In view of this tremendous burden upon the general taxpayers, the advocates of such projects attempt to show that they are economically justified. Unfortunately, the two primary methods used are of questionable validity.
1. Allocation o f Construction Costs.
In a multiple-purpose project such as the TVA, some of the aspects of the project, such as flood control and navigation improvement, are not expected to produce revenue. Accordingly, by allocating a large proportion of the cost of the entire project to these nonreimbursable features, a large proportion of the operating and construction costs of the project must be borne by the taxpayers.
The theory is that the large dam constructed, we will say, primarily for irrigation, will be of considerable benefit for hydro power, navigation, and flood control so that under the multiple-purpose title sizeable percentages of the costs are charged off to these other three purposes, materially reducing the cost left to be charged against the irrigation project. Since no cash return to the Treasury is contemplated in government expenditures for navigation and flood control, this furnishes a very convenient method of bookkeeping, making it possible to justify on paper an irrigation or a power project that could not stand on its own economic feet.¹4
Since many construction features of a multiple-purpose project serve more than one function, it is difficult to ascertain clearly how much of the total cost should be allocated to any particular aspect. The result is a wide, unchallenged latitude for manipulating the costs of construction; by allocating a small portion of the cost to power, the power portion of the project might appear economically justifiable, while in reality the burden of the power function was being financed by the taxpayers under the guise of supporting one of the other nonreimbursable functions.
If the allocations of construction costs to nonreimbursable features like flood control are heavy, the reimbursable features like power and irrigation need not produce such large revenues in order to warrant construction."
2. Cost-Benefit Relationship.
Another method used in an attempt to show that a project is economically justified is to compare average annual costs with the estimated average annual benefits. The primary difficulty with this procedure is that it is based on, not the actual revenues which the project will earn, but on the theoretical benefits which will accrue to the entire society as a result of the project. In this calculation, very nebulous considerations are given weight. Irrigation benefit, for example, represents the estimated increase in production on the land to be irrigated. Flood control benefit represents the savings in property values attributable to the decrease in flood damage. Navigation benefit is computed on the basis of the estimated saving to the national economy from water transportation when compared with the cost of equivalent transportation at higher rail or truck rates. It is not surprising that, with such a vague standard, susceptible of almost any interpretation, such a large number of proposed projects are deemed economically feasible.
An interesting example of this method was provided by the justification of the Missouri River Basin project. Of an estimated annual benefit of $168,306,000, only $25,091,000 was expected to be in the form of gross revenue available for the payment of costs.¹6 The taxpayers must gain most of their return in the form of emotional satisfaction at the gratuitous benefits they are providing to the people of the recipient area.
TVA is also benefited by the advantages which its privileged position affords in its competition with private companies. These benefits, in effect, are made possible by the higher taxes and interest rates which the private companies must pay and, consequently, much of the burden of cheap power is borne by the stockholders of the private power companies. In the year ending June 30, 1958, the TVA made payments to the United States Treasury in lieu of taxes amounting to $5,271,907. This amount, an all-time high, was equal to 21/4 per cent of the total operating revenues.17 The private competitors, on the other hand, had to pay much more in taxes. The Southern Utilities Company, one of the leading nearby private power companies, paid taxes amounting to 21.3 per cent of its gross revenues, including a 14 per cent provision for the federal corporation income tax. Middle South Utilities paid taxes totaling 23.7 per cent of its gross revenues. In addition to its tax advantages, the TVA has the additional good fortune to be free from the obligation of paying interest on the Treasury’s investment in its operations. A small proportion of the Treasury’s investment, less than 1/20 of the total funds supplied, was in the form of bonds with interest rates varying from 2 per cent to 2½ per cent. The last of these bonds was retired in 1956 and since that time no interest has been paid. On $1,376,448,396—over 95 per cent of the Treasury’s investment—no interest whatsoever has been paid.
In its approach to the power industry, the federal government has tied both hands behind the back of private power, bought public power a set of diamond-studded brass knuckles with the general tax funds of the country, and benevolently sat back to enjoy the fight.
3. The Mistake
If the whole legislature should attempt to overleap the bounds, I, pointing to the Constitution, will say to them, "Here is the limit of your authority; and hither shall you go, but no further."
In the atmosphere of alarm which gave it birth and in the wide, public adulation which accompanied its sweeping reforms, the New Deal could easily afford to evade the embarrassing questions about political philosophy. But now the panic is long past; no valid excuses remain to lure us from a frank examination of the public power program of the New Deal. And political philosophy must be given its proper place at the center of the discussion. We can understand, if not forgive, the abandonment of political philosophy as a criterion of public action in a time of great public agitation. But when normalcy has returned, the programs which arose when minds were motivated by the prevalent fears and compulsions must be re-examined in the light of the basic constitutional framework of the nation.
In 1816, John Marshall sounded a basic principle of this federal system:
The government of the United States can claim no powers which are not granted to it by the Constitution; and the powers actually granted must be such as are expressly given, or given by necessary implication.¹8
It seems painfully obvious that nowhere in the United States Constitution is the federal government given the power to engage in the production of electrical power. If such an exercise of power by the federal government is, indeed, unconstitutional, it would seem essential that it be declared so immediately. Otherwise, a radical alteration of the basic constitutional concept of limited governmental power would be achieved without interference.
In the first case involving the constitutionality of federal sale of electrical power, Ashwander v. Tennessee Valley Authority," the sale of power produced by Wilson Dam in Alabama was upheld as a valid sale of surplus power created by the multiple-purpose operation. Even if the production of power was not a primary purpose of the Wilson project, it has consistently been a primary aim of much of the Tennessee Valley project. In view of the "yardstick" doctrine, the professed design to force down the prices of private power, and the construction of steam power plants with no necessary relation to multiple-purpose projects, the question of the constitutionality of federal power production remained a burning one. In only one other case, Tennessee Power Co. v. Tennessee Valley Authority,²º was there a clear opportunity for the Supreme Court to rule on this vital issue. The Court passed up the chance. Instead of facing this fundamental question, the Supreme Court held that the complaining private power companies had no right to be free from competition and, consequently, had no standing to sue. By thus evading determination of this question, the Court left the federal government free to pursue its most questionable activity in the public power field. When Congress exceeds its constitutional powers and no one points to the Constitution and says "no further," the Constitution has died in that area. The experimental zeal of Roosevelt and the New Deal, swept on by the temper of the people, gave to the federal government a whole new role as planner and arranger of the public welfare. When the Supreme Court turned away and let the people experiment undisturbed, Constitutional government gave way to unrestrained majority rule.
There are many who say, quite frankly, that this type of government is preferable to constitutional government. The Constitution, they would contend, must change with the temper, the demands of the times. But those who counsel mutability forget that change, in itself, carries no criterion for distinguishing wise from unwise innovations. The Constitution may, in certain cases, be adapted to new situations unforeseen by the framers, e.g., the Commerce clause, the due process clause. But to make the Constitution a mere chameleon, fluctuating with the temper of each new generation, would destroy the framework of permanence and stability which protects the security of all members of the community and makes all change meaningful. Accordingly, permitting the Congress to create the TVA in the absence of constitutional authorization was not only an abdication of the duty to hold the legislature within its bounds, but an offense against the basic American philosophy that the only secure foundation for a permanent society is a limited federal government bound by the law.
1Goldman, Rendezvous with Destiny 263 (1956).
2Schlesinger, The Coming of the New Deal 321 (1959).
3Ibid. at p. 319.
4It is highly questionable if a corporation can, in fact, be clothed with the power of government and still retain the initiative of a private enterprise. When a corporation is shielded from competition and is not required to make its operation profitable, the very heart of private enterprise initiative has been killed.
577 Cong. Rec., 73d Cong., 1st Sess., p. 1423 (April 10, 1933).
6Schlesinger, op. cit. supra note 2, at 326.
7Release No. 989 of Sept. 27, 1934, Federal Emergency Administration of Public Works.
8This would seem to have been a gross breach of propriety since the rates were presumably set by the state utilities commissions. Since the federal government had no power to directly interfere with the legally established rates ordained by the state commissions, it was decidedly improper for federal officials to attempt to alter these rates by the device of publicly attacking and discrediting the state established rates.
9Roosevelt, "Declaration of Policy," 13 Cong. Dig. 235 (1933).
10This is a novel strategem. Unable to regulate intrastate power, the federal government holds the ominous threat of direct competition over the heads of private industry. This activity would appear to be a deprivation of property without due process of law since every threat of illegal federal entry into the public power field lowers the value of the stockholders’ investment in the private companies. In Tennessee Power Co. v. TVA, 306 U.S. 118 (1939), the Supreme Court did not consider this point, merely holding that no private company has a right to be free from competition. But does not a private company have a right to be free from competition by the government not authorized by the Constitution and which enjoys such prohibitive competitive advantages over private power companies that any such competition will seriously damage the private investment?
11Roosevelt, supra note 9.
¹²So long as the federal power projects enjoy the benefits of freedom from taxation and from payment of interest on its funds, and so long as allocative devices permit the large part of power costs to be borne by the taxpayers, the costs of public production of power cannot serve as a realistic "yardstick" for "reasonable" production costs of private companies.
13Tennessee Valley Authority, Financial Statements, p. 5 (June 30, 1958).
14Isaac Walton League of America, A National Water Power Policy, p. 7 (1945).
¹5Roberts, Certain Aspects of Power Irrigation and Flood Control Projects (Report prepared for The Commission on Organization of the Executive Branch of the Government, January 1949), p. 18.
17Tennessee Valley Authority, supra note 13, at 11.
‘8Martin v. Hunter’s Lessee, 1 Wheat. 304,305 (1816).
¹9 297 U.S. 288 (1936).
20306 U.S. 118 (1939).