Public Ownership of Power

I

ACCORDING to utility publicists, electric power is a minor household expense, less than 3 per cent of the family budget. But that does not tell the whole story. For the first time in all history, abundant and cheap power can be made available to everyone, at almost any place, in any amount, always ready to serve, to lighten the age-old burden of drudgery, and to achieve new levels of comfort and convenience.

In addition to lighting the home, electricity will wash and iron the family clothes, heat the water, grind, mix, cook, or refrigerate the food, run the sewing machine, vacuum cleaner, and radio, and cool the house in summer. On the farm it will pump the water, grind the feed, incubate the eggs, sharpen the tools, and refrigerate and preserve the meat, vegetables, and fruit crop. Its full use brings about not just an incidental change in home life, but a domestic revolution. In a workingman’s home well provided with electric service, the power bill, even at very low rates, becomes one of the largest items of the family budget, and the rates paid become an important family issue.

In the TVA town of Norris, in two hundred workmen’s and supervisors’ houses which are fully equipped for electric service, including heating, and are furnished with current at low TVA rates, the average use of current is twenty times that in the average American electrified home. Most American families must do without hired help. In the home of a representative American workman adequate electrical equipment can be a greater relief from drudgery than a full-time servant. At the rates which generally have prevailed, electricity cannot be freely used in the workingman’s home as an all-purpose servant. It is intolerable that this great boon should be withheld or unnecessarily restricted by exploitation.

Law and custom in America recognize some activities as ‘affected with a public interest,’ and as especially subject to regulation or to direct administration by government. In case of banking, the railroads, telegraph, telephone, and radio, the American method has been chiefly that of regulation of ‘private’ industry. With other public services, such as schools, the post office, highways, water supplies, sewers, and fire protection, direct public ownership and operation have come to be more usual.

Electric power, a relatively new public service, has largely taken the place of railroads, street railways, and gas as a rich source of profits. Its development has been subject to similar abuses, and has presented similar resistance to public regulation. There still is a steady drive of propaganda, as, for instance, that of the Alabama Power Company of the Commonwealth and Southern system, to make the public believe that public ownership of power would be a subversive change in government, a first step to Communism, to be followed by public ownership of retail stores and of other business. Such propaganda, if successful, would itself bring about a revolutionary change, by taking away from the American people the longestablished right directly to administer essential public services. It clouds the issue and arouses a spirit of resentment, and in the end increases the difficulty of reaching a conclusion fair to the utilities themselves.

The electric power issue is not a new problem, but a present expression of a centuries-old conflict. Look back through the history of Europe and we see the age-long habit of those in power of seizing and controlling the productive resources of society, and of using them for private advantage. We see the gradually increasing assertion by the common man of the right to his own life and labor, and to freedom from tax or tribute, except that which represents fair compensation for necessary services.

Gradually the principle is being established in law and practice with reference to public services that no monopoly or preferred position can confer the right to levy tribute beyond reasonable compensation for services actually rendered. In case of essential public services, such as electric power, which hold monopolies and are given the governmental power of eminent domain, it is coming to be the recognized duty of management to provide the widest and best possible service at the lowest possible cost consistent with a fair return on money invested, and with fair compensation for services rendered and risk taken, all as measured by competitive rates in the open market. No longer is it allowable for a public service to follow the practice of private business of charging such prices and of serving only such customers as will bring the greatest total of profits.

If the value of services could be exactly measured, the power issue could be more quickly settled. However, there is large uncertainty as to the value of investments and of services, and of incentives necessary to secure them. The aim of society should be not only the equalization of opportunity, but also the increase of the total of wealth and opportunity. Too exclusive attention to equalization of opportunity may bring about a great decrease in the total, with the impoverishment of everyone concerned.

Yet there is ground for encouragement. The railroad industry was long a field of atrocious exploitation both of investors and of the public, with a low grade of technical service. Under increasingly strict government regulation its abuses have largely disappeared, and the technical service has vastly improved. The building and maintenance of public highways and highway bridges was long a field of great incompetence, graft, and political favoritism. It gradually has become relatively clean and efficient, giving the public economical service of high quality. With both public and private ownership of public services there has been progressive reduction of abuses and improvement in quality.

There have been and still are great abuses in the power industry. The lnsull collapse exposed some of those abuses to the public. Probably three or four other large systems are no less vulnerable to criticism. Utility abuses have come about partly through overcapitalization, but perhaps to a greater extent through excessive charges by service companies. A small group of insiders may own various service companies which buy property and sell it at higher prices to the operating companies, or supply legal, engineering, accounting, or management services. Sometimes the ‘compensation’ taken by the inside owners of these service companies is very great, while the public may be paying excessive rates and the general investors are receiving inadequate returns, or no returns at all.

Writing in the August Atlantic, Mr. Wendell Willkie indicates the division of each dollar of income of his companies to be ‘26½ cents for labor, 13½ cents for taxes, 39½ cents for borrowed capital, and 20½ cents for material and supplies,’ these items totaling 100 per cent of utility income. Evidently service charges and very large executive salaries from the bottom operating company to the topmost holding company are included under wages. In such circumstances his statement, ‘Obviously these companies should not reduce the wages they pay,’ requires further light. When we consider that similar complexities are included in holding-company statements under ‘material and supplies’ and under ‘borrowed capital,’ it is evident that such a statement of allocation of income is an extreme oversimplification, which clouds rather than clarifies the issue.

By the method of service company charges and by the manipulations of a maze of holding companies, a few insiders may exploit both the public and the investors. Even the better-managed companies generally have opposed publicity and regulation, and have not greatly helped the public to understand the situation. As a result, good and bad alike tend to come under undiscriminating public disapproval.

The ‘fight to the finish’ attitude which to-day characterizes certain public men did not originate with public officials, but with private utility managements which were determined to suppress the heresy of public ownership of power. About ten years ago the vice president and manager of a large utility system, in chiding the writer for allowing a public discussion of the subject, said that his company had won its territory and intended to hold it by every means in its power; that the question of public and private ownership was a closed issue in that territory, and that ‘the least suggestion of encouragement’ to discuss it in public would be considered an offense by his company. At about the same time writers of small financial means were threatened with expensive libel suits for publishing official evidence of undercover utility propaganda through the secret subsidizing of engineers and educators. That is, there seemed to be efforts to keep the public in the dark as to the methods used in that fight.

Yet the abuses of the power industry should not blind us to the excellent technical work it has accomplished in design and construction of power plants and of transmission systems, and in distribution to the ultimate consumers, with steady decrease in the price of service. The private industry in America has been more progressive and effective than that in England, where public ownership has been much more largely dominant. The larger part of the investment in American electrical utilities is prudent, necessary investment, honestly made, and quite generally by people of moderate means. Some utility overcapitalization has been due to very high prices paid for small companies, the ownership of which was necessary to consolidate systems and to secure operating economies; just as a man needing a city block to build a department store might be forced to buy some small lot at an excessive price.

The problem, then, is how to keep the good elements of the system, to protect the confidence of the American people in industry, thrift, and investment of savings, and to eliminate exploitation, while realizing the full possibilities of universal and cheap electric power.

There are several possible methods for protecting and promoting the interests of the public in electric power. The bestestablished method in America is by means of public regulation and supervision of privately owned utilities. Most states have public utility commissions or their equivalents,which pass on power rates and the quality of services rendered, regulate the issuance of securities, and often supervise capital expenditures. The larger utilities to some degree have been able to evade this state control by influencing the appointment of utility commissioners, by the help of skillful lawyers, accountants, and engineers, occasionally by bribery or favoritism toward commissioners, courts, or legislators, and by a maze of interstate holding companies. The passing of the so-called Holding Company Act by the national Congress was an effort to simplify the complex maze of utility organization, and to bring interstate operation under responsible control and supervision.

These conditions, taken together with the genuine difficulties of measuring the value of services and investments (which difficulties can equally be exploited by the utilities and by self-seeking persons in public life), have led to a search for other ways of working out the problem of protecting the public without injuring honest and useful investments. Among methods in use in this or other countries are combinations of public and private ownership, various forms of ‘ power pool ’ or exchange of power between private or public operators, with unified supplies to public or private distribution systems, and finally the direct entry of government into the business of supplying power to its citizens. Because of the limitations of this article I shall largely confine myself to a discussion of this last method.

II

Public ownership of power may take any one of several forms. There may be a complete taking over of the industry by the government with the elimination of private ownership, as in case of the telephone and telegraph in England. There may be a taking over of small systems by individual communities, as has been the course in thousands of American municipalities, thus dividing the industry into publicly owned and privately owned systems. Another method is that of setting up a large demonstration area of public ownership, comparable to modern large private systems. This method may have the advantage of giving the public a measure of the actual necessary cost of modern large-scale electric service. It may also furnish a laboratory for the development of improved methods and practices.

Under any method there are certain proprieties and decencies of government which should be observed. Where the public has invited private capital to supply an essential public service, there should be no capricious arbitrariness in destruction or duplication of facilities to the loss of honest, necessary, and useful investment. Where bad government and lax administration have allowed inflated securities to be sold to innocent investors, the public is not without responsibility. In case public power is used as a ‘yardstick,’ or as a measure of what the private power industry should charge for its services, then it is imperative that records and accounts be honest and fair and open, and that there be no hidden element of subsidy. The very fundamental element of such comparison is honesty, fairness, and openness in measurement. Take away those characteristics, and the supposed comparison may becloud the issue, rather than clarify it.

One of the largest public projects for supplying electric power is the Tennessee Valley Authority. The TVA is an organization for varied purposes, largely centred around the unified control of the Tennessee River system for navigation and flood control, as well as for power. The flood control and navigation programmes of the TVA are not ‘a masquerade.’ Though the entrance of the government into the power industry was prominent in the minds of members of Congress when the law was enacted, the development of navigation and flood control are valid and very important objectives. If the Tennessee Valley Authority act is fairly interpreted and administered, it can mark a great advance in the planned and orderly development of a great river system.

Inland navigation of the type being provided on the Tennessee River will be of higher quality than any now existing on American rivers, and will play an important part in future transportation. The few high dams of the TVA programme are far more valuable for navigation than the many low dams proposed in earlier plans. The flood control provided by TVA reservoirs is valuable not primarily because of benefits on the Tennessee River. It will be a substantial factor in preventing lower Ohio River and Mississippi River floods. In many cases the same large dam can serve for navigation control, flood control, and for power; though if the operation of such a system is in the hands of persons interested only in power, such a multipurpose project can be abused, perhaps with serious results. The possibilities for combined-purpose dams on the Tennessee are very much greater than on the Miami River in Ohio, because of marked differences in physical conditions.

The completed plan will have installation for about two million kilowatts of hydroelectric power, with an output of a million kilowatts of prime or year-round dependable power. All in all, the completed river control on the Tennessee will be worth probably twice what it cost. It is estimated that in the course of fifty years the entire first cost can be repaid, without interest, from the income from power alone. Because of the existing public controversy over TVA power, it can be taken as an example of the Federal Government in the power industry.

It would be a great public waste for the power supply at TVA dams to remain unused, while private utilities build duplicating and competing power plants. This supply of public power can be disposed of by any one of several methods. It might be sold at the power plants to the private utility companies. This would produce a large public income with a minimum of public entrance into the industry, but that course would make little contribution toward correcting abuses in the private industry. Since all existing TVA dams are in the territory of a single power company, there might be no competition for such purchase of TVA power. By requiring that power sold by the TVA to the private utilities be resold by them at rates agreed to by the government, an element of regulation would be introduced. However, since the actual cost of generat ing electric power is only one sixth to one twelfth of the price generally paid for power to the private utilities by the domestic consumer (the greater part of the expense being the cost of distribution), the utilities might prefer to generate their own power at a slightly higher cost, rather than submit to this increased degree of regulation.

The English Government has made a great advance in the electric power industry by creation of a power transmission pool, familiarly known as ‘The Grid.’ With some modifications, that would seem to be an effective means for making electric power most widely available at the lowest possible cost, and with protection to used and useful investment in the private utility field.

Under such an arrangement the government and the private utilities would incorporate a power transmission organization to take over and operate all transmission lines. This transmission pool would buy power from generating plants where it could be produced at the lowest cost, and would transmit and sell that power at standard wholesale rates to both public and private distributing systems. The advantages of low-cost TVA power then would be available to both public and private distributors, and at any point within the transmission system. With reasonable protection to generating plants already established, power would be purchased by the transmission pool from whatever source could produce it most cheaply, and would be transmitted at cost. Though the establishment of such a power transmission pool would involve many technical and policy problems, the general method offers a practical solution.

In suggesting this method in September 1936, President Roosevelt said: ‘The public interest demands that the power that is being or soon will be generated by the Tennessee Valley Authority and at the Bonneville Dam and other Public Works projects should be made to serve the greatest number of our people at the lowest cost and, as far as possible, without injury to existing actual investment. To this end, I have for several months been conferring informally with representatives of the Federal Power Commission, the National Resource Committee, the Tennessee Valley Authority, and the Rural Electrification Administration, as well as with utility executives, engineers, and economists.

‘These discussions indicate agreement to a remarkable degree that this objective can best be attained by coöperative pooling of power facilities within each region, including those of the Federal projects, the privately owned utilities, and the municipal plants, through the joint use of the existing transmission line networks under the control of the members of the pool. Such a pool, it appears, will smooth out the peaks and valleys of separate system operations, reduce the amount of necessary reserve capacity, and postpone the need for investment in new generating facilities.’

III

There appear to be several other feasible methods for disposing of power developed at TVA dams so as to encourage the widest possible use at the lowest possible rates consistent with good business management, while giving fair protection to actual and useful investment in the private utility industries. If this problem is to be worked out by any of these methods with a minimum of conflict, bitterness, and waste, and with a maximum of usefulness, there are certain principles and methods which should be observed.

First, the private utilities must give up the habit of exploitation, the attitude of taking profits because of monopoly or other privileged position, either by means of overcapitalization, excess service charges, or by undue charges for capital invested. In the end they must acquiesce in limiting their income to fair and moderate compensation for necessary services, fair return on money wisely invested, and fair compensation for risk incurred.

As every experienced person knows, too niggardly allowance of returns may restrict vigorous operations, discourage initiative, and actually reduce the quality and economy of services rendered. On the other hand, in the railroad industry the period of best service and greatest technical advance has been the period of enforced economy and stringent regulation.

Second, the private utilities must come to recognize the right of the people through public agencies to acquire their own power facilities if they see fit. By misleading propaganda, obstructive litigation, and sometimes by more questionable methods, the utilities have tried to obstruct public ownership. Continuation of these methods leads to such bitterness, distrust, and resentment as must impede a fair and coöperative solution of the problem.

Third, having invited the investment of private capital to supply the public with electric power, the public is under obligation to respect actual honest and useful investment, and not to jeopardize or destroy it by capricious and arbitrary coercion. The abuses of the private power industry have bred in some men an attitude of bitter hatred, and a conviction that the only course to take is a war without quarter against the private companies. This attitude may be exploited by other men who have no such convictions, but who will endeavor to ride to political power on the issue. A fair settlement of the question might leave such men without a place in the limelight. In my opinion, for public men to retaliate with arbitrary coercion, to use false or misleading propaganda, and to use other methods than open and impartial processes of government, not only is unfair to legitimate private investors, but tends to substitute private dictation for democratic processes of government. I have no confidence in the supposed liberalism of people who use such methods. Whoever will use unfair methods for the public probably will use unfair methods against the public for his own advantage. The public can have no greater security than the habit in its public officials of fair and open treatment of every issue, no matter who is affected.

In his statement in the August Atlantic, Mr. Willkie did not go so far toward offering a fair solution as he has done in previous public statements. The proposals in the Atlantic, in the writer’s opinion, except for the suggestion of a power pool, do not furnish a reasonable basis for a solution of the issue, and agreement ‘in principle’ to a power pool is too vague to be conclusive. He suggests purchase by public agencies of the entire Southern properties of the Commonwealth and Southern Corporation. These lie in Tennessee, Mississippi, Alabama, Georgia, and South Carolina. The Federal Government probably is without power to make such acquisition, even if it should desire. The prospect for united simultaneous action to that end by five states is so remote as to be negligible. He suggests that the properties be acquired as a whole by condemnation. Such a process in so great an area would be cumbersome to the extent of being practically impossible. Even in a single city, clever lawyers can delay condemnation proceedings for five or ten years.

To consider another of his proposals, sale of the total TVA output of power to his organization, which is the only large private utility now having access to TVA dams, would be entirely unsatisfactory. Since individual communities will insist on deciding for themselves the question of public or private ownership, the real question is whether acquisition can be in such units as will not seriously disrupt reasonable operating units of minimum size, and whether a fair price can be arrived at by prompt and impartial processes.

Specifically, there are certain orderly processes which, it seems to me, are essential in the acquisition by the public of existing private power systems. Any differences of opinion in the determination of costs of properties to be purchased should be settled by impartial appraisal. In the acquisition of private electric power properties for the public, the process of condemnation has come into disrepute because the private utilities, with their specialized and experienced legal staffs, can use that process for indefinite delay while they work in devious ways to bring about discouragement and a reversal of public policy in the communities involved. For private interests to try to force a high price by obstructive litigation, or for public men to try to secure an unreasonably low price by threat of duplication or dismemberment, leads to suspicion, conflict, and social waste.

There should be no arbitrary dismemberment of existing private power systems. For public agencies to take over the profitable large centres of distribution, leaving private companies with dismembered rural fragments, will destroy private investments, and will not serve the public interests in the long run. Private companies are justified in refusing to consider the sale of properties which would bring about such dismemberment. Impartial studies should be made to determine what are the minimum areas of distribution which would allow economy of operation for both urban and rural areas, and which could be acquired by the public as units of operation.

In the operation of public ‘yardstick’ systems there should be no hidden subsidies, no undisclosed government assistance to local public power systems. It is due both to private investors and to municipalities which consider purchasing their power systems that the full actual cost of service be publicly disclosed. If there is government subsidy, it should be in the open.

When private power systems are taken over by the public, the competent and loyal employees, at least below policymaking grades, should be continued in service, and should not be displaced to provide political appointments.

The writer is a minority member of the Board of Directors of the Tennessee Valley Authority, of which he is the Chairman. In important respects he differs from what he judges to be the actual power policy of his associates. This statement therefore reflects his personal views, and not the working policy of the TVA on the power issue. Neither does it undertake to criticize in detail what the writer believes to be the improprieties of that policy.

Public ownership and private ownership as we know them now are not the only solutions of the power question. We still have much to learn concerning democratic processes in industry and in government. This process of education will take time. Both public ownership and private ownership have much to teach us, and neither should be summarily abandoned. No burst of public wrath or no surrender to private dictation will solve the issue. As effective methods gradually are worked out, they may be different from any we now use. They may combine various elements of private investment, private thrift, and the freedom and flexibility of private business, with public control, participation, and coördination. There is needed a continuing process of research, experiment, and education.

The power industry, like all largesized business, reflects the common virtues and vices of men, magnified to a great scale. On that scale these common vices become intolerable evils which must be removed if American civilization is to realize its full promise. Volumes might be written on the technical methods of solving the power issue. What is primarily needed on both sides is common honesty and openness, a common willingness to give up privilege and preferred position. Given that attitude, the technical difficulties soon can be solved. If either side had clean hands and an unspotted record of public service, the public soon would reach a sound conclusion. In my opinion, the best corrective for the improper attitudes of any one party is not a process of ‘fighting fire with fire,’ but rather a persistent fairness and openness which gradually will win public confidence and approval. Both sides have that better resource always at hand, if they will but use it, and with a full use of that resource either side could win. If both sides should use it fully, the issue would largely disappear. Except as that resource comes into use, no solution will be satisfactory.

A letter of rebuttal by Mr. Wendell L. Willkie will be found in the Contributors’ Column of this issue. — THE EDITORS