Your Electricity and Your Money

by CHARLES W. KELLOGG

— THE EDITOR

1

IT is hard for me to understand why those who believe that the public credit should be tapped to diffuse blessings on all should have picked out electric service as the particular channel through which to pour out the largesse. In the first place, electricity is one of the smallest of the generally identifiable expenses; it forms about 1 per cent of the average family budget in the home and about 1.4 per cent of the value of product in the average industry. It is a smaller item for the average citizen than cigarettes or candy. In the second place, the electric industry requires seven times as much capital investment per dollar of sales (hydro power about ten times as much) as the average manufacturing industry.

If, therefore, the social planners are really trying to distribute the most benefits from the available money, the electric business would be the last one they would enter, since, by choosing that industry, they can get the beneficiary the smallest amount per dollar spent. Why should this be?

The electric service industry, in which some millions of American citizens have invested about thirteen billion dollars, has to an increasing extent during the last decade been subjected to most unfair commercial competition by the Federal government. In this competition Uncle Sam has the advantage (1) of obtaining capital from the Treasury without interest, and (2) of tax exemption — items which taken together represent nearly 40 per cent of the total cost of any private electric service company.

This practice seems to me clearly contrary to the American sense of fair play. It is high time that the American citizen began to worry about this thirteenbillion-dollar question — first, because it is his taxes alone that pay these subsidies; and second, because the same principles and methods that today are used by the government against its citizens’ investment in the electric service field can be used tomorrow to attack other lines of business.

Water power is a fascinating thing. But this free gift of nature, in the average location, has two serious defects as a source of electricity: its high development cost and its unreliability for continuous service.

Before this gift can be used, it must be harnessed. Dams, canals, forebays, penstocks, and tailraces, in various combinations, must be constructed before the turbines through which the water falls, and the generators that they drive, can be installed. The result is almost always a higher construction cost per kilowatt of plant capacity for a hydro plant than for a steam plant of equivalent size. In addition, hydro power plants as a rule are not (like the Niagara Falls plant) near the place where the power is to be used, so that a heavy burden of transmission line investment has to be made to get the hydro power to the point of use, where the steam station would be located.

Rainfall is a most variable factor, not only as to different seasons but also as between “dry” and “wet ” years. This means that the dependable output of most hydros is a relatively small part of what they can generate for a large part of the time. In order to carry the load during these low periods, a steam station or some other source of power must be available, and in that case an added burden of cost confronts the hydro.

The first hydros developed were naturally those whose physical characteristics produced the lowest development costs. Thirty years ago, when on the average it took 3¾ pounds of the best coal to produce a kilowatt hour by steam, such early hydros were a good investment. Today, however, when most of the cheap hydros have been developed (leaving only the more expensive ones to be developed) and when a kilowatt hour can be produced by steam with f of a pound of the best coal, the situation is exactly reversed and steam is cheaper than hydro. A study I have recently completed shows that in 1920, other things being equal, hydro power on the average cost 41 per cent less than steam, while today the hydro costs 60 per cent more than steam.

2

REGULATION is a subject that has always been familiar to the electrical engineer. The regulation of the speed of the modern steam turbine is so perfect that electric clocks, which run in synchronism with the electric cycles turned out by modern electric systems, remain accurate to the second after years of continuous operation. The automatic regulators or “governors,” as they are called, let in more steam when the machine tends to slow down and less when it tends to speed up; but so far the regulation of electric rates seems to have been a “one way street” — always down, never up. To many people the words “regulation” and “reduction” have come to be synonymous where electric rates are involved.

The argument for municipal ownership runs that the city can raise money more cheaply than the private company, that it has no desire to make a profit but only to furnish its citizens service at cost. These arguments are outweighed by other factors. The discipline, efficiency, initiative, and commercial urge characteristic of private enterprise have given better electric service and, on the average, have given it at lower cost than the government-owned companies in spite of their freedom from taxes and other subsidies.

The verdict of the years is definite. The largest percentage of total electric customers served by municipal plants was in the period from 1907 to 1917. After that it dropped off very substantially. There was a temporary flurry of expansion in municipal ownership from 1933 to 1935 stimulated by Public Works Administration offers of up to 45 per cent of Federal funds as a gift to any city desiring to acquire its own utility companies. It was also affected by the advent of the Tennessee Valley Authority and other such power systems.

Since the start of World War II, the high rate of Federal taxes, from payment of which municipal plants are exempt, has been a further influence to make acquisition of electric service facilities by municipalities attractive, but the record of municipal elections on the subject shows that even the subsidy has not been alluring to the majority of the people. In the past four years, out of 178 elections on this issue, involving an aggregate population of five million, communities having a total of 95 per cent of these five million people opposed public ownership.

During the last decade a more menacing development in governmental competition with the electric service companies has come from the Federal government. Up to 1935 the total capacity of Federal power plants, which, except for Muscle Shoals, were mostly connected with irrigation projects in the Far West, represented slightly over 1 per cent of the national total and less than a quarter of the municipal plant capacity. Since 1935 the capacity of Federal power plants has grown by leaps and bounds, and at the end of last year such plants represented 11½ per cent of the installed electric generating capacity of the nation.

It is recognized that the Federal government has no legal authority to engage in the electric power business, but the Supreme Court has ruled that if the Federal government builds a dam in connection with performing some legal function and, as the result of the operation of such dam, electric power gets generated, there is no legal objection to the Federal government’s selling such power. In the words of the late Senator Norris on the floor of the Senate, this is the “constitutional peg” on which the TVA and other so-called multiple-purpose dams hang.

Under the thin guise of this pious fraud, several billions of dollars (all borrowed money, because raised under an unbalanced budget) have been spent by the Federal government for water power developments on the Tennessee, Columbia, and other rivers. In each case the purpose of the development, as declared in the legislation authorizing it, is some such objective as improving navigation, controlling floods, irrigating arid lands, or what not; but the real purpose, frankly avowed by the governmental promoters, is the production of electric power.

The apparent ease with which appropriations have been obtained for such “multiple-purpose” dams has naturally stimulated Congressmen from other localities to see what they could shake down for their state or district, and scores of additional projects are going through the mill of departmental study or proposed legislation. To show the point this craze has reached, in one project reported on by the Army Engineers, the benefits were found to be slightly over 4 per cent navigation and flood control and about 96 per cent electric power. It was refreshing to read that the farmers in the Potomac River Valley, in which it was proposed to spend $236,000,000 on a “flood control” project, which was, however, to be 92 per cent for power benefits and less than 2 per cent for flood control, descended on Washington in such an outraged swarm that the Board of Engineers for Rivers and Harbors disapproved the report on the project.

In advocating more multiple-purpose dams in our rivers and “valley authorities” for the Missouri, Columbia, Ohio, and numerous other rivers, the standard argument is that the Tennessee Valley Authority (TVA) has been so successful that its method should be applied to produce the same blessings elsewhere. It is important, therefore, to make sure just how good TVA is. This is the more appropriate because TVA has been in existence for twelve years and has published reports of its financial operations.

The principal argument for the TVA, when it was advocated thirteen years ago, was that its operations would furnish a “yardstick” for measuring rates charged by the electric companies. It is a fact that the retail rates charged for TVA electricity are lower than the average company rates throughout the country. On the other hand, if we analyze the $2,895,000,000 spent in furnishing service by all electric companies last year, we find it includes items representing Federal taxes (escaped by TVA) and return to stock and bond holders (corresponding to interest paid by the U. S. Treasury but ignored in TVA’s income statements) aggregating $1,131,000,000 or 39 per cent of the total. In order to make a fair comparison, the electric company’s average rates for all service should therefore be reduced by 39 per cent; and when so adjusted, the TVA rates for all service are found to be 16 per cent higher than average company rates country-wide — that is, after deducting what is paid by private companies but not paid by TVA or its distributors, because this expense is shifted to the Federal taxpayers.

The comparison I have made is still not fair to the companies, because the TVA rates are based on a larger annual consumption per customer (1741 kilowatt hours) than the company national average (1151 kilowatt hours) and it is well known that the rates fall with increased consumption.

So much for the yardstick. Now, from the point of view of the taxpayer, the following brief statement, summarized from TVA published reports and U. S.

Treasury reports, shows the combined results of its operations for the first eleven years — 1934 to 1944, both inclusive: —

Confronted with the foregoing figures, all from unimpeachable sources, the TVA admits that the TVA electric operations are no yardstick for anyone not enjoying the same subsidies and admits also that the TVA overall costs the taxpayers of the country a lot of money, but says: “Look what TVA has done for the Valley!”

This is a fair question and one to which the taxpayers must also want the answer. Taking figures from the Statistical Abstract of the United States, published by the U. S. Department of Commerce, I have compared the performance of Tennessee with the seven adjoining Southern States of Georgia, North and South Carolina, Kentucky, Alabama, Mississippi, and Arkansas. The period covered by the latest published reports is the decade ending in 1939 — and for some items, 1940 and 1942. Compared to the eight-state average, Tennessee was 1 per cent above the average in population gain; it was 5.6 per cent above the average in increase in value of retail trade; it was 2.6 per cent above the average in growth of value of farms.

On the other hand, Tennessee was 4 per cent below the eight-state average in respect to gain in the area of land cultivated; it broke even in the increased value of manufactured products, and was 4.3 per cent below the eight-state average in increased gross income of farms. Surely these are not differences to boast about in view of $750,000,000 of Federal money poured into the valley.

3

GREAT stress has been laid by TVA, both verbally and pictorially, on what it has done for the farmers in its territory. With its low rates and practically unlimited funds, such farm electrical development was to be expected. Here again, however, the figures do not bear out the claims. In this case, with the same eight Southern States, I have taken the gain in per cent of farms electrified during the decade from 1933 to 1943. The average gain in this percentage for the eight Southern States adjacent to TVA was 22.2; Tennessee’s gain was 18.6 — well below the average in gain, although at the beginning of the decade it was at the average. If we consider, for the same decade, the gain or loss in rank among the several states of the Union as to the degree of farm electrification, Tennessee makes the poorest relative showing of all, having dropped six places in rank while five of the seven neighboring states gained.

Let us consider some of the purposes for which the TVA Act was passed: —

1. Flood Control. The greatest flood in the history of the Tennessee River, according to the U. S. Army Engineersߡ report, inundated 666,000 acres. The Tennessee Valley Authority reported that as of June 30, 1944, it had purchased for reservoir purposes 1,046,982 acres, of which 462,700 acres lay below normal pool levels and 128,000 were subject to occasional inundation. These figures, of course, will increase as construction proceeds further.

The Army Engineers reported that the average annual flood damage was $1,784,000 and that three quarters of this damage took place in the Emory River Basin, a tributary which in the plans of the TVA is not to be protected by flood control dams, and that the bulk of the remaining damage occurred at Chattanooga, where, notwithstanding the TVA dams, Congress has appropriated $13,500,000 (out of a $20,000,000 project) for levees to protect the city of Chattanooga from Tennessee River floods.

In hearings on the Douglas Dam (a part of the TVA System) a statement prepared by the president of the University of Tennessee estimated an annual crop loss of $1,250,000 for the area that this dam would drown out. The Tennessee Farm Bureau estimated the crop loss in 1941, due to the flooding of bottom lands in the TVA projects, at about $13,400,000. It seems clear that as a flood control proposition the TVA has been a backward move. Yet, in 1944, $43,000,000 of its construction expenditures had been allocated to the credit of flood control by the Authority.

2. Navigation. In 1943, from a report of the Water Conservation Conference, 194,000,000 ton-miles were shipped by TVA navigation facilities. Navigation cost reported by TVA for that year was $1,249,000. Adding to this the 2 per cent interest on the $75,475,000 allocated by TVA to navigation facilities makes the total navigation cost $2,759,000. This compares with $1,814,000 as the cost of moving the traffic by rail at average United States rates. This recalls Governor Al Smith’s observation some years ago that the State of New York could shut down the Barge Canal, pay to the railroads at published rates the freight on all the traffic moving on the canal, and save money in the process.

3. Fertilizer. TVA reports over $19,600,000 spent in its lifetime in manufacturing fertilizer. This material is given away for test-demonstration on farms, “for experimental purposes,” to 47,000 farmers — in some cases to the same farm for ten years. It is difficult to see what information could result from such a lavish handout that could not be obtained just as well from half a dozen agricultural college farms in a few years.

4

DURING the last thirty years, while the cost of living has gone up about 75 per cent, the unit cost for electricity in the home has dropped more than 50 per cent. I mention the unit cost of home electricity because 85 per cent of the 33 million electric customers of the country are in that category; but the record of unit cost decrease is practically as good for all the electricity sold.

The reasons for this well-nigh unique record of public service are twofold. First, improved design and the greater inherent economy and larger size of generating units has steadily reduced the operating cost of manufacturing a kilowatt hour. Second, and equally important in producing the result, the relatively large fixed capital investment, unavoidable for electric service properties, automatically reduces unit costs with greater use of the service. This fundamental fact of the industry explains why in all modern rate schedules the unit price goes down with greater use. It should be mentioned in this connection that the great modern power stations, which to the eye form such a prominent part of electric service investment, represent in fact but one third of the total — the rest being in the transmission lines, substations, and distribution lines that carry the current to the individual consumer.

During the last thirty years there has been an enormous spreading out of the electrified field, the number of customers having grown from 5 million to 33 million in the period. At the same time, the consumption of electricity has grown much faster than the number of users — in fact about twice as fast. In home use the growth has been three times as fast, and the original essential of light has been overshadowed three or four to one, as an energy consumer, by other uses that have made convenience and laborsaving the great electric task.

In industry the transformation has been equally striking. Some recent figures have indicated that the national income per capita bears a close relationship to the horsepower used per employee in industry. During the last three decades this figure for the United States has grown from 2.82 to 6.40. The stupendous industrial war record was made possible largely by the availability of an adequate supply of electric power everywhere in the country.

The war has demonstrated also the financial soundness of electric service companies. In the face of increases in wage rates and with taxes and fuel cost doubled since 1939, these operating companies last year earned 6½ per cent on $13,000,000,000 of securities outstanding against them, or substantially the same ratio as in 1939, while, at the same time, reducing from 1939 the average unit charge on all energy sold by over 23 per cent.

The facts presented here should demonstrate the unfair basis of the competition of the Federal government with its citizens in the electric service business. The process does not stop with the mere generation of power. Much of the government-developed water power is situated in localities where it has not been needed for the public service. The larger power plants have been loaded up with war contracts, but these have been terminated. Faced with this plethora which the government itself created, it has proceeded to raid the existing market developed through the years by some electric companies, using the 39 per cent of cost which the private company pays, and which the government power project does not pay, to beat down rates or, under the threat of doing so, to force the sale of the property.

The electric companies feel very strongly that simple justice to them and economic justice to the taxpayer require that where electric power is produced by government dams it should be distributed through existing market channels developed by existing electric service companies, with the stipulation that any saving in cost to the companies from buying such power for distribution should be passed on to the ultimate consumer. This is the best and simplest way to utilize such power.

If, however, the government insists on going into the marketing business, then in the interest of fair competition and out of regard to the taxpayer, these government-operated business enterprises should pay the equivalent of Federal taxes, should pay the full equivalent of state and local taxes, and should actually pay interest on the invested capital themselves, instead of having it carried, through the U. S. Treasury, by the nation’s taxpayers. The proponents of such projects have said time and again before Congress that they would not cost the taxpayer a cent, that they would be self-liquidating. Such promises should be effectuated without delay.

The electric service industry, from the earliest pioneering struggles to get started under well-nigh insuperable difficulties to its final triumphant success in powering our war effort, has had a long and honorable record. It has created service standards, both in physical quality and devotion to duty, unequaled in any other land, which have added importantly to the industrial supremacy of the nation and to the safety and convenience of its citizens. It feels, therefore, that it is entitled to the support and protection of its government rather than the unfair and destructive competition it has been encountering from that source in recent years. Given even reasonably fair competition, the electric utility companies can outdo their competitors in every department — lower rates, better service, greater reliability, more promise of new technical advances, and more fruitful and vigorous development of new uses for electricity.