Political Power

I

PROLONGED controversy on any subject is apt to engender such bitterness that fair and dispassionate consideration becomes extremely difficult. This is a truth that husbands and wives know well. On a larger panorama, history has frequently demonstrated it — as witness such random examples as the slave issue in 1860, the war debts in 1931, the responsibility of ‘Wall Street’ in the late depression. In their respective periods these important topics were discussed in a highly emotional atmosphere, and solutions found in such situations are apt to be more violent than thoughtful, more punitive than sane.

For nearly a decade now, the forum for the discussion of electric power has had the appearance of a battlefield, with the militant reformers, the publicownership advocates, and the politicians engaging in a no-quarter combat with the utilities. Incidentally, one of the first guns fired was an article by Professor William Z. Ripley, entitled ‘More Light! — And Power Too,’ in the Atlantic for November 1926.

This was a vigorous exposé of the elaborate pyramids which certain financial promoters in the industry had built up for their own profit. It started a series of more or less violent criticisms of the industry, including a long seven-year investigation made and effectively publicized by the Federal Trade Commission.

By 1933 it was clear that the Administration was prepared to take drastic action against the utility industry. Upon his accession to office, President Roosevelt denounced the utilities in no uncertain terms. The Tennessee Valley Authority Act, putting the government in competition with private power companies, was passed in 1933. The Public Utility Act, containing the famous death sentence on utility holding companies and severely regulating all interstate utilities, was passed in the fall of 1935.

To-day there are not only forty-three state commissions regulating the public utilities within state borders; there are also fourteen Federal agencies concerned with power. Of these, the two most important regulating agencies are the Federal Power Commission, principally concerned with utility operations, and the Securities and Exchange Commission, principally concerned with utility holding companies and utility financing.

But that is not all. Several of these agencies — notably the Tennessee Valley Authority — represent government projects which are engaged, or will engage, in the generation and sale of electric power. These agencies are free from restriction and regulation by state or Federal commissions. Thus the utility industry, bound by a network of regulation, must compete with the government as an unregulated competitor of extraordinary wealth and power.

II

Through the Tennessee Valley Authority the government is launching its power programme principally in the five states of Tennessee, North Carolina, Georgia, Alabama, and Mississippi. Since the government has already constructed Boulder Dam on the Colorado River, and is constructing Bonneville and Grand Coulee on the Columbia, and since the President has asked for seven more regional authorities similar to the TVA, presumably the government will extend its campaign to cover the nation.

Like England’s once famous military formation, the British Square, the TVA has had four fronts to present to the public, and it uses the front most suitable to the group which it is addressing. Before the courts it claims that it is not really a power enterprise, but primarily a conservation activity: it is a project to prevent floods, promote navigation on the Tennessee River, and check soil erosion in the great Tennessee Valley. Only before a more sympathetic audience is it frankly an instrument for the electrification of America.

This quadruple picture of the TVA has undoubtedly been helpful to it. The American people have been stirred by stories of what is happening to the soil in the great agricultural areas in the Middle West. Many thousands have seen the huge TVA dams with the water banked impressively behind them, and have seen green life returning to soil that was previously bleak and pitted. They have been told about the plans to make the river navigable, about the plans to prevent floods. They have naturally been as enthusiastic about these objectives as about the general idea of ‘cheap power.’

The TVA has therefore appeared to be on the side of the angels in the controversy between it and the utilities. But the conservation programme of the TVA is only a masquerade. It has no functional connection with the power programme of the Authority, and the amount spent on it is only an insignificant portion of the Authority’s total expenditures. Other departments of government, both state and national, are charged with the duty of caring for soil erosion and are doing such work effectively without the building of dams and power facilities. The TVA dams are obviously useless for soil erosion. And if they were really designed for navigation and flood control, then the government has seldom engaged in a more wasteful and less effective operation. The TVA plan calls for constructing eleven dams at a present estimate of $520,600,000. On the basis of such information as has been given in committee hearings, it appears that about $190,000,000 of this will be allocated to power facilities. The difference — $330,600,000 — is apparently for navigation and flood control.

But the Army engineers had reported (House Document 328, March 4, 1930) that for the purposes of navigation low-head dams could have been built on the river, with the same size and depth of locks, at a cost of $74,709,000. This would leave a remainder of $255,891,000 for flood control. The engineers also estimated that the average annual loss from floods on the Tennessee River was about $981,000. Thus the expenditure for flood control would be about 250 times the average annual loss from floods.

These conclusions have been quite disturbing to the Directors of the TVA. In testimony before committees of Congress, they have questioned the conclusions of the Army engineering corps, which is considered by many the ablest engineering group in the country and particularly expert on the subject of inland waterways.

Obviously, also, flood control could not have been the principal purpose of the TVA, since a flood-control system would call for empty reservoirs having no power value, while the apparent plan is to fill a portion of the reservoir at certain times of the year, although damaging floods may occur in any month of the year. These obvious facts were recognized when the Miami, Ohio, Conservancy flood-control dams were built by Dr. Arthur E. Morgan. There is a large plaque on these dams which reads: —

THE DAMS
OF THE MIAMI CONSERVANCY DISTRICT ARE FOR
FLOOD PREVENTION PURPOSES
THEIR USE FOR POWER DEVELOPMENT
OR FOR STORAGE
WOULD BE A MENACE TO
THE CITIES BELOW

Outside of the courtroom, the advocates of the TVA have been less guarded in their statements. Mr. David E. Lilienthal in an address at Knoxville, Tennessee, on March 1, 1935, said: —

But there seems to be some inclination to forget that these dams are not being built for scenic effect. These millions of dollars are not being spent merely to increase business activity in this area. These dams are power dams. They are being built because they will produce electric power.

And it seems likely that no one of the three Directors would to-day deny that the generation and sale of power constitute a major function, if not the major function of the Tennessee Valley Authority.

Indeed, although the TVA is only at the beginning of its power operations, these already represent a considerable enterprise. At the present time the TVA transmission lines extend for 1300 miles and parallel and crisscross the lines of the private companies. They reach out into many of the principal markets. They are already serving 17 municipalities, 13 coöperatives, with 30,000 individual customers. The TVA programme contemplates the building of eleven hydro plants. Three of these are completed, two more will be completed in 1939, and all by 1942. They will produce 5,780,000,000 kilowatthours per year, which is about one half the total present production of all the power facilities in the seven states in the Tennessee Valley.

The American people, therefore, are paying more than half a billion dollars for eleven dams, chiefly designed to supply power to one area. But this power, as will shortly be demonstrated, is to be supplied to this area at less than cost. In other words, the TVA will operate annually at a deficit, and these annual deficits must, of course, be paid for out of the pockets of the taxpayers.

III

The sponsors of the TVA maintained at the beginning that this vast programme was not designed to create a competitive power system, but to set up a yardstick by which the rates of the private companies could be judged. The yardstick idea was undoubtedly attractive, since, after all, the average consumer did not understand much about electric rates and had no way of personally checking their relative highness or lowness.

Unfortunately, the yardstick is rubber from the first inch to the last.

From the generation of power at the beginning to its distribution to the ultimate consumer at the end, the TVA enjoys privileges and exemptions which are denied to the private utility, which conceal the true cost of TVA power, and the cost of which come out of the pockets of you and me as taxpayers. These can be best illustrated by a direct comparison between the TVA and the Tennessee Electric Power Company, one of the typical companies in the Commonwealth and Southern System operating in that area.

The first advantage given to the TVA is exemption from practically all taxes. For the fiscal year ended June 30, 1936, the TVA paid only $45,347 in taxes. The Tennessee Electric Power Company (with approximately the same capital investment) paid $2,339,284 in taxes. Here is a difference in this item alone of $2,293,937.

Let us turn to the item of depreciation. This is an expense, a cost of operation, just as much as labor and fuel. This cost to the Tennessee Company, fixed and determined by the Tennessee Railroad and Public Utilities Commission, amounts to $1,260,000 per year. The books of the TVA, however, carry no item for depreciation.

The same is true with respect to interest charges. The Tennessee Company properties were built only in part with borrowed capital. During the twelve months ended June 30, 1936, this company paid interest and preferred dividends amounting to $4,299,022. On the other hand, the property of the TVA is built entirely with borrowed capital. The United States Government is paying interest and will continue to pay interest on such borrowings. The TVA books, however, show no item to cover this interest. It got its property from the Federal Government, which in turn, of course, collected its money from the taxpayer.

With our comparison limited to the items of taxes, depreciation, and interest charges, the yardstick fails to be a fair comparison for the Tennessee Company by $7,852,959 per year. This is twice the amount which the residential customers pay the company annually for all the electricity they use. It is 65 per cent of the entire electric sales of the company, including sales to power users and street lighting. Or, to put it in another way, the Tennessee Company, if given the same ‘special arbitrary advantages ’ given the TVA, could sell electricity at rates much lower than those the TVA has set up as the yardstick.

But these constitute only part of the subsidies. They have to do only with the operation of the TVA system, largely devoted to generation of the power at the plant and with transmission up to the point of distribution. It is the objective of the TVA to sell its power to municipalities and to get these municipalities to erect their own distribution systems. For this purpose tiie municipalities can obtain an outright grant of funds to an amount of 30 per cent to 45 per cent of the cost of the system. They can borrow the balance from the United States Government at a low rate of interest.

Curiously enough, the method by which the TVA pursues its ends — namely, duplication of facilities — has been condemned by all students of the power programme on whatever side of the line they may belong. Mr. David Lilienthal, one of the Directors of the TVA, has frankly acknowledged this method, stating, ‘The Authority is under duty to acquire a market for its power. It is authorized to compete with existing utilities, and for this purpose is expressly empowered to erect duplicate facilities.’

But, with few exceptions, publicownership men and utility executives both agree that duplication of a private system by a government power system is directly contrary to public interest and means higher rates paid by the consumer and higher taxes by the taxpayer. So generally accepted is this opinion that it should be necessary to quote only from Mr. J. D. Ross, recently appointed by President Roosevelt to the Securities and Exchange Commission and for some time superintendent of the municipal power plant in Seattle, Washington. In his report for 1935, Mr. Ross stated that as a result of competition between the city power plant and a private company, ‘the cost of distribution, which is far the larger part of the total cost to serve, is doubled, while the revenue is cut in two. The customer must, in the end, pay the cost.’

Since the TVA is apparently selling its power at less than cost, it should say so. If people who live in New York City, for example, are to pay part of the electric bill of people who live in Corinth, Mississippi, the people in New York should know about it. Perhaps they will not object. On more than one occasion the American people as a whole have contributed, through taxes, to a development designed to serve only a limited area. Often that is socially desirable. But if we are to pay part of the electric light bills of the Tennessee Valley, the TVA should honestly tell us so.

Also, if the TVA is attempting to force the utilities into public ownership, it should employ means that will neither deceive nor injure the public and will not jeopardize the interests of utility investors. It should announce its intention and proceed, by condemnation proceedings duly instituted in the courts of the land, to take over utility properties with fair compensation to the owners. This is both the honest and the humane method of action. Also, it gives the people a fair chance to protest if they don’t like the change; or if they are still skeptical of political management of a major industry; or if they are a little worried about adding to the national debt the twelve billion dollars necessary to replace the present private investment in the industry.

IV

As can be imagined, the utility companies operating in the Tennessee Valley have been helpless to meet the subsidized government competition which the TVA has presented. The first immediate effect is seen in their inability to finance their capital requirements.

The problem of financing is a particularly serious matter for a utility company, because of two peculiar characteristics of the business. First, the utility company is required by law to supply service to anyone who applies for it. Second, it is limited by law in the rates it can charge and, therefore, in the amount of revenue it can receive. These two characteristics mean that a utility company cannot finance itself out of revenue — as the Ford Company has done with such conspicuous success, and as all great corporations are able to do in part. Also, it can never say, as other companies might say: ‘We have grown large enough and we shall produce now for a limited market.’

In the utility business the property is continually expanding. It expands every time a new customer puts in his order. Whenever a utility man goes to his office, he knows that he will face a need that day for additional capital to meet new requirements for electric service.

Out of every dollar of revenue received by Commonwealth and Southern companies in the Southeast, they expend approximately 26½ cents for labor, 13½ cents for taxes, 39½ cents for borrowed capital, and 20½ cents for materials and supplies. Obviously, these companies should not reduce the wages they pay. They cannot reduce the taxes. They cannot control the present high costs of material and supplies. The only real economy they can achieve is to reduce the cost of capital. The competition of the TVA barred the utilities in that area from borrowing in the money market at the recent favorable rates — even though they had the same normal increase in business during the last three years that utilities elsewhere have had. If these Southeastern companies could have refunded their senior securities on the same basis as that followed in 1936 by the Northern companies in the same system, they could have saved six million dollars a year in interest and preferred dividends. This is equal to 40 per cent of the entire amount they receive annually from their more than 430,000 domestic electric consumers in the South.

The utilities were therefore blocked from their principal opportunity to economize — namely, reduction of fixed charges. They have seen their customers taken away from them, the value of their property seriously impaired, and the interests of their stockholders unfairly injured. Against this they had only one immediate weapon — and that was the law. The utilities took to the courts. The companies in the Commonwealth and Southern System, of which I am president, were active among the nineteen operating utilities which sought an injunction against the TVA efforts to duplicate their lines and take away their markets.

We have been severely criticized for this, but I have no apology for it and believe that none is needed. It seems to me that responsible company executives had no other choice than to seek to preserve the property of their stockholders through every possible legal means. Various decisions have been rendered by the lower courts on the Tennessee Valley Authority Act, but since the cases have not yet reached the United States Supreme Court, the constitutionality of the act has still to be determined.1 This delay has certainly not been the fault of the utilities, which have been more than anxious to have the issue settled. As Arthur Krock stated recently in the New York Times: Such delay as there has been in getting a forthright decision on general TVA power policy appears to be the fault of the government, which for months dodged a submission of the clear issue and has only recently shown interest in getting one.

As I have stated, I believe that the utility companies would have been neglecting their duty if they had failed to resort to the courts to protect their property. But I am under no delusion as to the value of litigation. Courts merely answer questions, but do not solve problems. The fundamental problem in this case is whether or not public ownership of the light and power industry is desirable.

V

As a rule the leaders in this government power programme have avoided the phrase ‘public ownership,’ which still has a harsh ring in many American ears. Occasionally, however, they have frankly indicated that this is the programme’s objective. Clearly, that must be its result. Nor will it be helpful for business men to regard such a result instinctively with horror. It is just another way — to my mind, an inferior way — of doing the job.

But there is nothing sacred about private operation of business. The utilities have no God-given charter for existing. Provided that the government compensates for what it destroys (a provision which, unfortunately, we cannot take for granted), there is no reason why the government should not put the utility companies out of business if the people want the government to do so. The only question which the people are interested in — and this is the issue which bitterness has obscured — is: What is the best way to generate and distribute electric power efficiently and economically?

Amid the claims and counter-claims, amid the rabble-rousing on both sides, amid the efforts to hide the government’s power activities, amid the benign references to ‘soil reclamation, navigation, and flood control,’ let us keep an eye fixed upon this objective. It is of particular importance because electric power in a few years will be far more indispensable to our manner of living than now.

And it is important to us now because we are now determining the policy that shall govern this power in the future. We must make up our minds very quickly as to who shall own and operate our electric power systems — or else we shall wake up some morning in the not distant future and find that the decision has been made for us. It will then be too late to change — at least without great difficulty. The time to decide on the design for a house is before it is built.

Before the government stepped belligerently into the rôle of protector of the people against the power companies, the utility industry had accomplished a rather extraordinary job in America. Interruptions in power service in any community are very rare to-day, and it is significant that, amid the avalanche of criticism poured on the industry, few have had any complaints against its operating efficiency. Between 1913 and 1936, rates in the industry declined 46 per cent, while the cost of living, in general, increased about the same amount. Some 22,000,000 families and farms in America now have electric power at their service at an average cost of about $34 per year, or a little more than 9 cents a day.

Certainly no one would deny that the job cannot be further improved. Utility men, when they are sure no one will overhear them, will occasionally admit that the punitive legislation by the government has spurred them to renewed efforts to lower their rates and put their houses in order. Of course the State Public Service Commissions are supposed to keep a vigilant eye upon the utilities for just that purpose, but the glance of the Federal eye has augmented this optical influence.

Under public ownership, however, there is no one in authority to see that electric service is efficiently handled or to see that the voter is not deceived into thinking that his rates are low, when in reality he is paying for his electricity indirectly out of taxes. The weakness of government ownership was defined for all time in the statement made by Thomas Edison, as follows: —

There is far more danger in public monopoly than there is in private monopoly, for when the government goes into business it can always shift its losses to the taxpayers. If it goes into the power business, it can pretend to sell cheap power and then cover up its losses. The government never really goes into business, for it never makes ends meet, and that is the first requisite of business. It just mixes a little business with a lot of politics, and no one ever gets a chance to find out what is actually going on.

VI

In countries at all comparable to the United States the record of public ownership is not impressive. Of course, Sweden is frequently cited as an example of what public ownership can do in the light and power industry, but the comparison is of little value because the objects compared are so dissimilar. Sweden is a small, compact, homogeneous country, simple in political, social, and industrial structure. In size it would fit along this country’s Atlantic Seaboard.

There are no large countries in which government ownership has finally demonstrated its efficiency on a large scale. Within the United States, government operation of the railroads during the World War was obviously a fiasco f which the railroads have recovered only after years of effort. That may not be a fair illustration, however, since it took place in a war period, and had to be handled as an emergency matter. We have at hand a more apt exhibit in the Postal System, a government enterprise which is usually regarded with approval by public-ownership advocates.

As these last frequently point out, the mail in this country is delivered with reasonable promptness and reliability. Unfortunately for this record, however, the Post Office has been operated at a very considerable deficit ever since it was organized. Complete figures on the costs of the Post Office would have to be tracked down through a maze of government reports of all kinds, both legislative and executive; such figures are not given in the reports of the Post Office Department. But the 1936 report of the Department states that the operating deficit of the United States Post Office in the past one hundred years amounts to $1,601,569,000.

That is simply the operating deficit. It does not include the enormous amounts of money spent on the capital investment in post offices — namely, the money spent for the purchase of land and for the construction of postoffice buildings. These were all taken out of other appropriations and were, therefore, not charged against the Post Office Department — which is one of the ways whereby a government department achieves an apparent cost reduction. There were 13,730 post offices and 1501 classified stations and branches on June 30, 1936. There are no figures for the capital expenditures herein represented, but the total must be enormous and the fixed charges thereon would have to be added to the operating deficit mentioned above.

If a corporation similar to the American Telephone and Telegraph Company should take over the administration of the Post Office, it is my belief that we should have an even more efficient mail service, at present rates, without any deficit at all. It is more than likely that the rates could be reduced. That, of course, is merely a personal opinion which cannot be proved. But the illustration gives rise to this very important question: Would we consider it to be efficient operation if the government were to run the light and power industry as it runs the Post Office?

Let us remember that the Postal System is still the chief source of political patronage and that postal officers have long been appointed on the basis of their party affiliations — despite the fact that every President within my memory has advocated that the merit system should be adopted. Aside from that, however, a business which operates at a loss — a loss which in the end must be paid by the taxpayer — is not a business that is efficiently and economically run. We may well ask ourselves the question, in considering public ownership, whether the power industry should be run in a businesslike fashion or whether it should definitely be a Federal charity.

VII

If we decide that in view of these facts we do not want public ownership, what alternative is there to the present TVA programme? Three of the great dams have already been completed at enormous cost. Obviously we cannot tear them down, nor should we let this investment stay entirely idle. What constructive solution can the utilities offer which would save not only the nation’s investment in these government properties, but also the people’s investment in the utility industry? At the same time, what solution would best serve that objective which we laid down in this article as the real purpose of any power programme — namely, the most economical and efficient generation and distribution of power?

Beginning with 1935, the utilities have made several proposals, but to date they have all been either disregarded or rejected by the government. It was suggested, first, that if the TVA was to be an honest yardstick it should observe the same requirements as those imposed upon the private utilities. In other words, it should pay taxes at the same rate, keep uniform accounts, charge rates so as to produce a fair return, and file its rates with the State Commissions and the Federal Power Commission. This would seem to be a reasonable suggestion, but it did not meet with the approval of the TVA authorities.

In subsequent interviews with TVA and other governmental officials, the Commonwealth and Southern group of companies has made further suggestions, which can be summarized as follows: —

1. To purchase the power produced in the government plants and redistribute it at rates fixed by the Federal Power Commission.

2. To sell to the TVA all our systems in that territory at a price to be fixed either by negotiation or by condemnation proceedings in a court.

3. To enter into a pooling arrangement whereby both government and utilities would pool their power facilities, and these would be used on the most economical basis to fill public or private requirements.

So far not only have all the proposals been rejected, but no substitute proposal has been forthcoming from the other side. Last January, Dr. Arthur E. Morgan, head of the TVA, made a public statement which — although I disagreed with certain parts of it — was so fair in its approach that we hoped a solution was near at hand. While Dr. Morgan is in favor of public ownership, he expressed his belief that the transition should be gradual and only undertaken in so far as experience justifies it. At the same time, he believed that duplication of facilities should be avoided, that public-ownership reports should be factual, and that government yardsticks should be honest. Deploring the bitterness of feeling between utilities and government power spokesmen, he uttered a plea for coöperation rather than violence, warning that ‘the manner in which we achieve our ends may have a more enduring influence on the country than the ends we may achieve.’

The utility industry is naturally opposed to public ownership, but it cannot quarrel with so reasonable an approach to the question. Unfortunately, no echo of Dr. Morgan’s statement has been heard in other government quarters. Official tongues still lash the utilities and recommend no compromise. The President has discontinued his power conference. The TVA is vigorously expanding its competitive power activities. Seven other TVA’s are in process of preparation. As the utilities read the signs, the energies of the government seem to be dedicated to battle rather than peaceful negotiation.

But if that reading is correct, then it is surely the duty of a sovereign government to announce its intentions. The utilities have a right to know, officially and not by guess, exactly what the government plans to do with them. That includes their quarter of a million employees and their four or five million investors. And the American people have the right to consider these plans in advance and to determine whether or not their execution is desirable.

In the September issue Dr. Arthur E. Morgan, Director of the TVA, will present his conclusions about public ownership of the utility industry. — THE EDITORS

  1. In the so-called Ashwander Case, the Supreme Court merely decided that the generation and transmission of power from Wilson Dam was constitutional, but expressly refrained from giving any opinion as to the constitutionality of the act as a whole. — AUTHOR