Public Power and the TVA

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 Jerusalem

In England‘s green and pleasant land.

William Blake 

Shortly before the bill for the creation of the Tennessee Valley Authority came before Congress in 1933, Senator George Norris of Nebraska went to dinner at the White House. As the “Father of the TVA” and the President sat and talked about their pet proj­ect for developing the Tennessee Valley, Senator Norris laughingly asked, “What are you going to say when they ask you the political philosophy behind TVA?” Presi­dent Roosevelt replied, “I’ll tell them it’s neither fish nor fowl but, whatever it is, it will taste awfully good to the people of the Tennessee Valley.”1

“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.

Federal “Competition”

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 Tennessee Valley project. While the federal govern­ment’s power to enter the utility business was, at best, questionable, in the maze of a multiple-purpose project the production of power could be veiled as a secondary by­product of the flood control and irrigation aspects of the undertak­ing. President Roosevelt was, how­ever, not so reluctant to express his views of the federal govern­ment’s right to enter the power field. He justified federal incur­sion into the public utility busi­ness with a rather unorthodox view of federalism:

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 Union…. I would apply the same principles to the federal and state governments.9

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.¹^² 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 2^½ 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.”

George Wythe

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

Questionable Constitutionality

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.

Foot Notes

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).